Assured Guaranty (AGO) 10-Q 2020 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________________________

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2020,

Or

For the transition Period from              to       

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

      

Commission File No. 001-32141 

ASSURED GUARANTY LTD.

(Exact name of registrant as specified in its charter) 

Bermuda	98-0429991
(State or other jurisdiction	(I.R.S. employer
of incorporation)	identification no.)

 

30 Woodbourne Avenue

Hamilton HM 08, Bermuda

(Address of principal executive offices)

(441) 279-5700

(Registrant’s telephone number, including area code)

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 Municipal Holdings Inc. 6-7/8% $100,000,000 Quarterly Interest Bonds due 2101 (and the related guarantee of Registrant)		AGO PRB	New York Stock Exchange
Assured Guaranty Municipal Holdings Inc. 6.25% $230,000,000 Quarterly Interest Bonds due 2102 (and the related guarantee of Registrant)		AGO PRE	New York Stock Exchange
Assured Guaranty Municipal Holdings Inc. 5.60% $100,000,000 Quarterly Interest Bonds due 2103 (and the related guarantee of Registrant)		AGO PRF	New York Stock Exchange
Assured Guaranty US Holdings Inc. 5.000% $500,000,000 Senior Notes due 2024 (and the related guarantee of Registrant)		AGO 24	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒

The number of registrant’s Common Shares ($0.01 par value) outstanding as of August 4, 2020 was 83,534,811 (includes 68,098 unvested restricted shares).

ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q

		Page
PART I	Financial Information	1
Item 1.	Financial Statements:	1
	Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019	3
	Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2020 and 2019	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	1. Business and Basis of Presentation	8
	2. Segment Information	11
	3. Outstanding Insurance Exposure	16
	4. Expected Loss to be Paid	33
	5. Contracts Accounted for as Insurance	44
	6. Reinsurance	50
	7. Fair Value Measurement	53
	8. Investments and Cash	70
	9. Contracts Accounted for as Credit Derivatives	77
	10. Asset Management Fees	80
	11. Variable Interest Entities	80
	12. Income Taxes	87
	13. Commitments and Contingencies	89
	14. Shareholders' Equity	91
	15. Earnings Per Share	94
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	94
	Forward Looking Statements	94
	Available Information	96
	Executive Summary	96
	Results of Operations	109
	Business Segments	109
	Results of Operations by Segment	111
	Insurance Segment	111
	Asset Management Segment	120
	Corporate	124
	Other	124
	Reconciliation to GAAP	125
	Non-GAAP Financial Measures	127
	Insured Portfolio	132
	Liquidity and Capital Resources	139
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	152
Item 4.	Controls and Procedures	152
PART II	Other Information	153
Item 1.	Legal Proceedings	153
Item 1A.	Risk Factors	153
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	153
Item 5.	Other Information	153
Item 6.	Exhibits	154

 

PART I.    FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Assured Guaranty Ltd.

Condensed Consolidated Balance Sheets (unaudited) 

(dollars in millions except per share and share amounts) 

	As of June 30, 2020		As of December 31, 2019
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $8,237 and $8,371, allowance for credit loss of $75 at June 30, 2020)	$	8,630	$	8,854
Short-term investments at fair value	821		1,268
Other invested assets (includes $15 and $6 measured at fair value)	122		118
Total investment portfolio	9,573		10,240
Cash	293		169
Premiums receivable, net of commissions payable	1,294		1,286
Deferred acquisition costs	116		111
Salvage and subrogation recoverable	795		747
Financial guaranty variable interest entities’ assets, at fair value	318		442
Assets of consolidated investment vehicles (includes $1,452 and $558 measured at fair value)	1,669		572
Goodwill and other intangible assets	209		216
Other assets (includes $160 and $135 measured at fair value)	513		543
Total assets	$	14,780	$	14,326
Liabilities and shareholders’ equity
Unearned premium reserve	$	3,742	$	3,736
Loss and loss adjustment expense reserve	1,076		1,050
Long-term debt	1,222		1,235
Credit derivative liabilities, at fair value	163		191
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	332		367
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	20		102
Liabilities of consolidated investment vehicles (includes $836 and $481 measured at fair value)	1,236		482
Other liabilities	480		511
Total liabilities	8,271		7,674
Commitments and contingencies (see Note 13)
Redeemable noncontrolling interests in consolidated investment vehicles	20		7
Common stock ($0.01 par value, 500,000,000 shares authorized; 84,062,384 and 93,274,987 shares issued and outstanding)	1		1
Retained earnings	6,109		6,295
Accumulated other comprehensive income, net of tax of $69 and $71	333		342
Deferred equity compensation	1		1
Total shareholders’ equity attributable to Assured Guaranty Ltd.	6,444		6,639
Nonredeemable noncontrolling interests	45		6
Total shareholders’ equity	6,489		6,645
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	14,780	$	14,326

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

1

Assured Guaranty Ltd.

Condensed Consolidated Statements of Operations (unaudited)

(dollars in millions except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues
Net earned premiums	$	121		$	112		$	224		$	230
Net investment income	78			110			158			208
Asset management fees	20			—			43			—
Net realized investment gains (losses)	4			8			(1		)	(4		)
Net change in fair value of credit derivatives	100			(8		)	23			(30		)
Fair value gains (losses) on committed capital securities	(25		)	19			23			10
Fair value gains (losses) on financial guaranty variable interest entities	1			33			(8		)	38
Fair value gains (losses) on consolidated investment vehicles	31			—			19			—
Foreign exchange gains (losses) on remeasurement	2			(14		)	(60		)	(3		)
Commutation gains (losses)	38			1			38			1
Other income (loss)	2			5			9			11
Total revenues	372			266			468			461
Expenses
Loss and loss adjustment expenses	37			(1		)	57			45
Interest expense	21			22			43			45
Amortization of deferred acquisition costs	4			4			7			10
Employee compensation and benefit expenses	46			39			110			80
Other operating expenses	42			21			87			44
Total expenses	150			85			304			224
Income (loss) before income taxes and equity in net earnings of investees	222			181			164			237
Equity in net earnings of investees	—			1			(4		)	3
Income (loss) before income taxes	222			182			160			240
Provision (benefit) for income taxes	34			40			30			44
Net income (loss)	188			142			130			196
Less: Noncontrolling interests	5			—			2			—
Net income (loss) attributable to Assured Guaranty Ltd.	$	183		$	142		$	128		$	196
Earnings per share:
Basic	$	2.11		$	1.40		$	1.43		$	1.92
Diluted	$	2.10		$	1.39		$	1.42		$	1.90

 

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

2

Assured Guaranty Ltd.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	188		$	142		$	130		$	196
Change in net unrealized gains (losses) on:
Investments with no credit impairment recognized in the statement of operations, net of tax provision (benefit) of $31, $19, $4 and $44	175			79			13			242
Investments with credit impairment recognized in the statement of operations, net of tax provision (benefit) of $6, $(12), $(7) and $(12)	25			(48		)	(27		)	(43		)
Change in net unrealized gains (losses) on investments	200			31			(14		)	199
Change in net unrealized gains (losses) on financial guaranty variable interest entities' liabilities with recourse, net of tax	(5		)	4			5			4
Other, net of tax provision (benefit)	—			(1		)	—			(1		)
Other comprehensive income (loss)	195			34			(9		)	202
Comprehensive income (loss)	383			176			121			398
Less: Comprehensive income (loss) attributable to noncontrolling interest	5			—			2			—
Comprehensive income (loss) attributable to Assured Guaranty Ltd.	$	378		$	176		$	119		$	398

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

3

 Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) (continued)

(dollars in millions, except share data)

For the Three Months Ended June 30, 2020

	Common Shares Outstanding		Common  Stock Par Value		Retained Earnings			Accumulated Other Comprehensive Income		Deferred Equity Compensation		Total Shareholders’ Equity Attributable to Assured Guaranty Ltd.			Nonredeemable Noncontrolling Interests			Total Shareholders’ Equity
Balance at March 31, 2020	89,983,322		$	1	$	6,100		$	138	$	1	$	6,240		$	25		$	6,265
Net income	—		—		183			—		—		183			5			188
Dividends ($0.20 per share)	—		—		(17		)	—		—		(17		)	—			(17		)
Reallocation of ownership interests	—		—		—			—		—		—			8			8
Contributions	—		—		—			—		—		—			23			23
Common stock repurchases	(5,956,422	)	—		(164		)	—		—		(164		)	—			(164		)
Share based compensation	35,484		—		7			—		—		7			—			7
Distributions	—		—		—			—		—		—			(16		)	(16		)
Other comprehensive income	—		—		—			195		—		195			—			195
Balance at June 30, 2020	84,062,384		$	1	$	6,109		$	333	$	1	$	6,444		$	45		$	6,489

For the Three Months Ended June 30, 2019

	Common Shares Outstanding		Common  Stock Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Deferred Equity Compensation		Total Shareholders' Equity Attributable to Assured Guaranty Ltd.			Nonredeemable Noncontrolling Interest		Total Shareholders’ Equity
Balance at March 31, 2019	102,270,409		$	1	$	—		$	6,406		$	261	$	1	$	6,669		$	—	$	6,669
Net income	—		—		—			142			—		—		142			—		142
Dividends ($0.18 per share)	—		—		—			(19		)	—		—		(19		)	—		(19		)
Common stock repurchases	(2,519,130	)	—		(7		)	(104		)	—		—		(111		)	—		(111		)
Share-based compensation	49,733		—		7			—			—		—		7			—		7
Other comprehensive income	—		—		—			—			34		—		34			—		34
Balance at June 30, 2019	99,801,012		$	1	$	—		$	6,425		$	295	$	1	$	6,722		$	—	$	6,722

4

 Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) (continued)

(dollars in millions, except share data)

For the Six Months Ended June 30, 2020

	Common Shares Outstanding		Common  Stock Par Value		Retained Earnings			Accumulated Other Comprehensive Income			Deferred Equity Compensation		Total Shareholders’ Equity Attributable to Assured Guaranty Ltd.			Nonredeemable Noncontrolling Interests			Total Shareholders’ Equity
Balance at December 31, 2019	93,274,987		$	1	$	6,295		$	342		$	1	$	6,639		$	6		$	6,645
Net income	—		—		128			—			—		128			4			132
Dividends ($0.40 per share)	—		—		(36		)	—			—		(36		)	—			(36		)
Reallocation of ownership interests	—				—			—			—		—			10			10
Contributions	—		—		—			—			—		—			41			41
Common stock repurchases	(9,585,832	)	—		(280		)	—			—		(280		)	—			(280		)
Share based compensation	373,229		—		2			—			—		2			—			2
Distributions	—		—		—			—			—		—			(16		)	(16		)
Other comprehensive loss	—		—		—			(9		)	—		(9		)	—			(9		)
Balance at June 30, 2020	84,062,384		$	1	$	6,109		$	333		$	1	$	6,444		$	45		$	6,489

For the Six Months Ended June 30, 2019

	Common Shares Outstanding		Common  Stock Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Deferred Equity Compensation		Total Shareholders’ Equity Attributable to Assured Guaranty Ltd.			Nonredeemable noncontrolling Interests		Total Shareholders’ Equity
Balance at December 31, 2018	103,672,592		$	1	$	86		$	6,374		$	93	$	1	$	6,555		$	—	$	6,555
Net income	—		—		—			196			—		—		196			—		196
Dividends ($0.36 per share)	—		—		—			(38		)	—		—		(38		)	—		(38		)
Common stock repurchases	(4,427,735	)	—		(83		)	(107		)	—		—		(190		)	—		(190		)
Share-based compensation	556,155		—		(3		)	—			—		—		(3		)	—		(3		)
Other comprehensive income	—		—		—			—			202		—		202			—		202
Balance at June 30, 2019	99,801,012		$	1	$	—		$	6,425		$	295	$	1	$	6,722		$	—	$	6,722

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

5

Assured Guaranty Ltd.

Condensed Consolidated Statements of Cash Flows (unaudited)

 (in millions)

 

	Six Months Ended June 30,
	2020			2019
Net cash flows provided by (used in) operating activities	$	(445	)	$	(198	)
Investing activities
Fixed-maturity securities:
Purchases	(627		)	(503		)
Sales	490			914
Maturities and paydowns	373			506
Short-term investments with maturities of over three months:
Purchases	(103		)	(209		)
Sales	4			2
Maturities and paydowns	60			174
Net sales (purchases) of short-term investments with original maturities of less than three months	487			(389		)
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	55			50
Net proceeds from sales of financial guaranty variable interest entities' assets	—			51
Proceeds from sales and return of capital of other invested assets	5			35
Other	(11		)	—
Net cash flows provided by (used in) investing activities	733			631
Financing activities
Dividends paid	(37		)	(39		)
Repurchases of common stock	(280		)	(190		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(52		)	(95		)
Paydown of long-term debt	(22		)	(4		)
Other	(12		)	(15		)
Cash flows from consolidated investment vehicles:
Proceeds from issuance of collateralized loan obligations	362			—
Contributions from noncontrolling interests to investment vehicles	66			—
Distributions to noncontrolling interests from investment vehicles	(16		)	—
Net cash flows provided by (used in) financing activities	9			(343		)
Effect of foreign exchange rate changes	(7		)	—
Increase (decrease) in cash and restricted cash	290			90
Cash and restricted cash at beginning of period	$	183		104
Cash and restricted cash at end of period	$	473		$	194

(continued on next page)

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

6

Assured Guaranty Ltd.

Condensed Consolidated Statements of Cash Flows (unaudited) - (Continued)

 (in millions)

	Six Months Ended June 30,
	2020		2019
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	—	$	(3	)
Interest on long-term debt	41		42
Supplemental disclosure of non-cash investing activities:
Purchases of fixed-maturity investments	$	—	$	(139	)
	As of June 30, 2020		As of June 30, 2019
Reconciliation of cash and restricted cash to the condensed consolidated balance sheets:
Cash	$	293	$	190
Restricted cash (included in other assets)	5		4
Cash of consolidated investment vehicles (see Note 11)	175		—
Cash and restricted cash at the end of period	$	473	$	194

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

7

Assured Guaranty Ltd.

Notes to Condensed Consolidated Financial Statements (unaudited)

June 30, 2020

1. Business and Basis of Presentation

Business

Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) 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.

Through its insurance subsidiaries, 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, 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 Western Europe, Canada and Australia. The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form.

On October 1, 2019, Assured Guaranty US Holdings Inc. (AGUS), a wholly-owned subsidiary of AGL, completed the acquisition (the BlueMountain Acquisition) of all of the outstanding equity interests in BlueMountain Capital Management, LLC (BlueMountain) and its associated entities. In connection with the BlueMountain Acquisition the Company established its Assured Investment Management platform, through which it provides investment management services across various asset classes including collateralized loan obligations (CLOs) and long-duration opportunity funds that build on its corporate credit, asset-backed finance and healthcare structured capital experience as well as certain funds now subject to orderly wind-down.

Basis of Presentation

The unaudited interim condensed 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. These unaudited interim condensed consolidated financial statements are as of June 30, 2020 and cover the three-month period ended June 30, 2020 (Second Quarter 2020), the three-month period ended June 30, 2019 (Second Quarter 2019), the six-month period ended June 30, 2020 (Six Months 2020) and the six-month period ended June 30, 2019 (Six Months 2019). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current year's presentation.

The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries and its consolidated VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in AGL’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (SEC).

8

AGL's principal insurance subsidiaries are:

• Assured Guaranty Municipal Corp. (AGM), domiciled in New York;

• Municipal Assurance Corp. (MAC), domiciled in New York;

• Assured Guaranty Corp. (AGC), domiciled in Maryland;

• Assured Guaranty (Europe) plc (AGE UK), organized in the U.K.;

• Assured Guaranty (Europe) SA (AGE SA), organized in France;

• Assured Guaranty Re Ltd. (AG Re), domiciled in Bermuda; and

• Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda.

The Company's principal asset management subsidiaries are BlueMountain, BlueMountain CLO Management, LLC, and BlueMountain GP Holdings, LLC.

The Company’s organizational structure includes various holding companies, 2 of which - AGUS and Assured Guaranty Municipal Holdings Inc. (AGMH) - have public debt outstanding.

Adopted Accounting Standards

Credit Losses on Financial Instruments

On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The following summarizes the effect of adoption on the relevant balances.

Financial Assets Carried at Amortized Cost

This ASU provides a new current expected credit loss model (CECL) to account for credit losses on certain financial assets carried at amortized cost such as reinsurance recoverables, premiums receivable, asset management and performance fees receivables, as well as off-balance sheet exposures such as loan commitments. The new model requires an entity to estimate lifetime credit losses related to these assets, based on relevant historical information, adjusted for current conditions and reasonable and supportable forecasts that could affect the collectability of the reported amount. The Company determined that this ASU had no effect on these balances on the date of adoption or for Six Months 2020.

Financial Assets Carried at Fair Value, not Through Net Income

The most significant effect of the adoption of this ASU is in respect of the available-for-sale investment portfolio, for which targeted amendments were made to the impairment model. Under the new guidance, credit losses are recognized as an allowance for credit loss rather than a direct write-down of the amortized cost basis of the investment (e.g. other-than-temporary impairment, or OTTI, under the previous impairment model). The allowance for credit loss is limited to the excess of amortized cost over fair value, and may be reduced, with a corresponding reversal of credit loss expense, in the event that the expected cash flows of the instrument improves. The Company has elected to classify credit loss expense (including accretion and changes in the allowance for credit loss) as a component of realized gain (loss) on investments.

When amounts are deemed uncollectible, the Company writes-off such amounts. Write-offs are deducted from the allowance for credit loss and the amortized cost basis is written down. Amounts that have been written off may not be reversed through the allowance for credit loss, and any subsequent recovery of such amounts is only recognized in income when received.

The assessment of whether a credit loss exists is performed each quarter and includes numerous factors including the extent to which fair value is less than amortized cost, and any adverse conditions specifically related to the security, industry, and/or geographic area, including changes in the financial condition of the issuer, or underlying loan obligors, as well as general economic and political factors. Additional factors considered, as applicable, include remaining payment terms of the security, prepayment speeds, expected defaults and the value of any embedded credit enhancements. Unlike the previous OTTI model, management may not consider the length of time an instrument has been impaired or the effect of changes in foreign exchange rates in its assessment of credit loss. If, based on an assessment of these and other relevant factors, the Company determines that a credit loss may exist, it then performs a discounted cash flow analysis to determine its best estimate of such allowance for credit loss.

This ASU also eliminates the existing guidance for purchased credit impaired (PCI) securities (such as the Company's loss mitigation securities) and introduced a new model for purchased financial assets with credit deterioration (PCD) securities.

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PCD securities are defined in the new guidance as financial assets that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. The ASU requires the recognition of an initial allowance for credit loss on the date of acquisition of PCD securities. Under the new guidance, the amortized cost of PCD securities on the date of acquisition is equal to the purchase price plus the allowance for credit loss, but no credit loss expense is recognized in the statement of operations on the date of acquisition. After the date of acquisition, PCD securities follow the guidance described above for the periodic assessment of credit losses in the available-for-sale investment portfolio.

For securities the Company intends to sell and securities for which it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost, the Company writes off any existing allowance for credit loss, and writes down the amortized cost basis of the instrument to fair value with an offset to realized gain (loss) in the statement of operations.

For all securities that were originally purchased with credit deterioration, whether or not an allowance was established on January 1, 2020, accrued interest is not separately presented, but rather is a component of the amortized cost of the instrument. For all other available-for-sale securities, a separate amount for accrued interest is reported in other assets. The Company has elected to not measure credit losses on its accrued interest receivable and instead write off accrued interest at the earliest to occur of (i) the date it is deemed uncollectible or (ii) when it is six months past due. All write offs of accrued interest are recorded as a reduction to interest income in the statement of operations.

The changes to the impairment model for available-for-sale securities were applied using a modified retrospective approach, and resulted in no effect to shareholders’ equity, in total or by component. On the date of adoption, there was no change to the carrying value of the available-for-sale investment portfolio, other than a gross-up of amortized cost and the recording of an offsetting allowance for credit losses for securities to which the Company applied the PCD accounting model. On January 1, 2020, the Company applied the PCD accounting model to PCI securities that were not in an unrealized gain position as of December 31, 2019. The fair value of these PCI securities was $248 million and their amortized cost was $266 million as of December 31, 2019. The Company determined the allowance for credit loss for such PCD securities was $62 million on January 1, 2020. The recording of the allowance for these PCD securities on January 1, 2020 had no effect on the condensed consolidated statement of operations or any component of shareholders’ equity. In Second Quarter 2020 and Six Months 2020, the Company recorded an additional $3 million and $14 million, respectively, in credit loss expense (including $1 million and $2 million, respectively, of accretion). Changes in the impairment model associated with PCD securities are to be applied prospectively. The Company did not purchase any PCD securities during Six Months 2020.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 10, Investments and Cash, of the Company's 2019 Annual Report on Form 10-K for a complete discussion of the accounting policy for evaluating investments for OTTI prior to January 1, 2020.

Registered Debt Offerings that Include Credit Enhancements from an Affiliate

In March 2020, the SEC adopted amendments to the financial disclosure requirements related to certain debt securities, including registered debt securities issued by a wholly-owned, operating subsidiary that are fully and unconditionally guaranteed by the parent company. Prior to the amendments, a parent guarantor was required to provide condensed consolidating financial information for so long as the guaranteed securities were outstanding. The requirements amend financial disclosures to allow summarized financial information, which may be presented on a combined basis, reducing the number of periods presented and permitting the disclosures to be provided outside the notes to the financial statements. The Company elected to apply the amended requirements beginning in the first quarter of 2020, and is no longer providing condensed consolidating financial information that resulted from the registered debt obligations of its subsidiaries that were disclosed in Part II, Item 8, Financial Statements and Supplementary Data, Note 25, Subsidiary Information, of the Company's 2019 Annual Report on Form 10-K.

Future Application of Accounting Standards

Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.  The amendments in this ASU:

• improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows,

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• simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts,

• simplify the amortization of deferred acquisition costs, and

• improve the effectiveness of the required disclosures.

This ASU does not affect the Company’s financial guaranty insurance contracts, but may affect its accounting for certain specialty (non-financial guaranty) contracts. In October 2019, the FASB affirmed its decision to defer the effective date of the ASU to January 1, 2022. The Company does not plan to adopt this ASU until January 1, 2022, and does not expect this ASU to have a material effect on its consolidated financial statements.

Simplification of the Accounting for Income Taxes

In December 2019, the FASB issued 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 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

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 guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications caused by reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only 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 guidance is effective immediately, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is evaluating the effect that this ASU will have on its consolidated financial statements.

2.    Segment Information

The Company reports its results of operations consistent with the manner in which the Company's chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. Prior to the acquisition of BlueMountain on October 1, 2019, the Company's operating subsidiaries were all insurance companies, and results of operations were viewed by the CODM as 1 segment. Beginning in the fourth quarter of 2019, with the acquisition of BlueMountain and expansion into the asset management business, the Company established the Assured Investment Management platform and now operates in 2 distinct segments, Insurance and Asset Management. The following describes the components of each segment, along with the Corporate division and Other categories. The Insurance and Asset Management segments are presented without giving effect to the consolidation of the financial guaranty (FG) VIEs and investment vehicles. See Note 11, Variable Interest Entities.

The Insurance segment primarily consists of the Company's domestic and foreign insurance subsidiaries and their wholly-owned subsidiaries that provide credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Insurance segment also includes the income (loss) from its proportionate equity investments in funds managed in the Assured Investment Management platform (Assured Investment Management funds).

The Asset Management segment consists of the Company's Assured Investment Management platform subsidiaries, which provide asset management services to outside investors as well as to the Company's Insurance segment. The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses.

The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH, as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies.

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Other items consist of intersegment eliminations, reclassification of asset management reimbursable expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain Assured Investment Management investment vehicles in which the Insurance segment invests. See Note 11, Variable Interest Entities.

The Company does not report assets by reportable segment as the CODM does not use assets to assess performance and allocate resources and only reviews assets at a consolidated level.

Total adjusted operating income includes the effect of consolidating both FG VIEs and investment vehicles; however, the effect of consolidating such entities, including the related eliminations, is included in the "other" column in the tables below, which represents the CODM's view, consistent with the management approach guidance for presentation of segment metrics.

The Company analyzes the operating performance of each segment using "adjusted operating income." Results for each segment include specifically identifiable expenses as well as allocations of expenses between legal entities based on time studies and other cost allocation methodologies based on headcount or other metrics. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading.

2) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments.

3) Elimination of fair value gains (losses) on the Company’s committed capital securities (CCS) that are recognized in net income.

4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and loss adjustment expense (LAE) reserves that are recognized in net income.

5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

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The following tables present the Company's operations by operating segment. The information for the prior year has been conformed to the new segment presentation.

Segment Information

	Second Quarter 2020
	Insurance		Asset Management			Corporate			Other			Total
	(in millions)
Third-party revenues	$	244	$	12		$	—		$	38		$	294
Intersegment revenues	2		1			—			(3		)	—
Total revenues	246		13			—			35			294
Total expenses	90		24			32			4			150
Income (loss) before income taxes and equity in net earnings of investees	156		(11		)	(32		)	31			144
Equity in net earnings of investees	26		—			—			(26		)	—
Adjusted operating income (loss) before income taxes	182		(11		)	(32		)	5			144
Provision (benefit) for income taxes	28		(2		)	(6		)	—			20
Noncontrolling interests	—		—			—			5			5
Adjusted operating income (loss)	$	154	$	(9	)	$	(26	)	$	—		$	119
Supplemental income statement information
Net investment income	$	82	$	—		$	—		$	(4	)	$	78
Interest expense	—		—			23			(2		)	21
Non-cash compensation and operating expenses (1)	9		6			—			—			15

	Second Quarter 2019
	Insurance		Asset Management		Corporate			Other			Total
	(in millions)
Third-party revenues	$	241	$	—	$	1		$	21		$	263
Intersegment revenues	—		—		—			—			—
Total revenues	241		—		1			21			263
Total expenses	40		—		31			14			85
Income (loss) before income taxes and equity in net earnings of investees	201		—		(30		)	7			178
Equity in net earnings of investees	1		—		—			—			1
Adjusted operating income (loss) before income taxes	202		—		(30		)	7			179
Provision (benefit) for income taxes	41		—		(4		)	1			38
Noncontrolling interests	—		—		—			—			—
Adjusted operating income (loss)	$	161	$	—	$	(26	)	$	6		$	141
Supplemental income statement information
Net investment income	$	110	$	—	$	1		$	(1	)	$	110
Interest expense	—		—		22			—			22
Non-cash compensation and operating expenses (1)	9		—		2			—			11

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	Six Months Ended June 30, 2020
	Insurance		Asset Management			Corporate			Other			Total
	(in millions)
Third-party revenues	$	437	$	28		$	(4	)	$	23		$	484
Intersegment revenues	5		2			—			(7		)	—
Total revenues	442		30			(4		)	16			484
Total expenses	174		52			67			3			296
Income (loss) before income taxes and equity in net earnings of investees	268		(22		)	(71		)	13			188
Equity in net earnings of investees	17		—			(5		)	(16		)	(4		)
Adjusted operating income (loss) before income taxes	285		(22		)	(76		)	(3		)	184
Provision (benefit) for income taxes	46		(4		)	(11		)	(1		)	30
Noncontrolling interests	—		—			—			2			2
Adjusted operating income (loss)	$	239	$	(18	)	$	(65	)	$	(4	)	$	152
Supplemental income statement information
Net investment income	$	165	$	—		$	1		$	(8	)	$	158
Interest expense	—		—			48			(5		)	43
Non-cash compensation and operating expenses (1)	18		9			3			—			30

	Six Months Ended June 30, 2019
	Insurance		Asset Management		Corporate			Other			Total
	(in millions)
Third-party revenues	$	474	$	—	$	1		$	22		$	497
Intersegment revenues	1		—		—			(1		)	—
Total revenues	475		—		1			21			497
Total expenses	147		—		62			14			223
Income (loss) before income taxes and equity in net earnings of investees	328		—		(61		)	7			274
Equity in net earnings of investees	2		—		1			—			3
Adjusted operating income (loss) before income taxes	330		—		(60		)	7			277
Provision (benefit) for income taxes	58		—		(9		)	1			50
Noncontrolling interests	—		—		—			—			—
Adjusted operating income (loss)	$	272	$	—	$	(51	)	$	6		$	227
Supplemental income statement information
Net investment income	$	209	$	—	$	2		$	(3	)	$	208
Interest expense	—		—		46			(1		)	45
Non-cash compensation and operating expenses (1)	20		—		3			—			23

_____________________

(1) Consists of amortization of deferred acquisition costs and intangible assets, depreciation and share-based compensation.

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Reconciliation of Net Income (Loss) Attributable to AGL

to Adjusted Operating Income (Loss)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in millions)
Net income (loss) attributable to AGL	$	183		$	142		$	128		$	196
Less pre-tax adjustments:
Realized gains (losses) on investments	4			8			(1		)	(4		)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives	97			(12		)	9			(40		)
Fair value gains (losses) on CCS	(25		)	19			23			10
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves	2			(12		)	(55		)	(3		)
Total pre-tax adjustments	78			3			(24		)	(37		)
Less tax effect on pre-tax adjustments	(14		)	(2		)	—			6
Adjusted operating income (loss)	$	119		$	141		$	152		$	227

Revenue by Country of Domicile

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(in millions)
U.S.	$	243	$	212	$	393	$	394
Bermuda	38		46		72		90
U.K. and other	13		5		19		13
Total	$	294	$	263	$	484	$	497

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The following table reconciles the Company's total consolidated revenues and expenses to segment revenues and expenses:

Reconciliation of Segment Revenues and Expenses

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in millions)
Revenues
Total consolidated revenues	$	372		$	266		$	468		$	461
Less: Realized gains (losses) on investments	4			8			(1		)	(4		)
Less: Non-credit impairment unrealized fair value gains (losses) on credit derivatives	97			(12		)	9			(40		)
Less: Fair value gains (losses) on CCS	(25		)	19			23			10
Less: Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves	2			(12		)	(55		)	(3		)
Plus: Credit derivative impairment (recoveries) (1)	—			—			(8		)	(1		)
Total segment revenues	$	294		$	263		$	484		$	497
Expenses
Total consolidated expenses	$	150		$	85		$	304		$	224
Plus: Credit derivative impairment (recoveries) (1)	—			—			(8		)	(1		)
Total segment expenses	$	150		$	85		$	296		$	223

_____________________

(1) Credit derivative impairment (recoveries) are included in "Net change in fair value of credit derivatives" in the Company's condensed consolidated statements of operations.

3. Outstanding Insurance Exposure

The Company primarily sells credit protection contracts 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 both before and after 2009 that include financial guaranty contracts in credit derivative form.

The Company also writes specialty insurance that is consistent with its risk profile and benefits from its underwriting experience.

The Company seeks to limit its exposure to losses by underwriting obligations that it views as investment grade at inception, although on occasion it may underwrite new issuances that it views as 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 or reassuming a portfolio of reinsurance it had previously ceded; 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 asset classes 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

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collect fees and charges for public services or specific infrastructure projects. The Company also 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 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 11, Variable Interest Entities. Unless otherwise specified, the outstanding par and principal and interest (debt service) amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated. The Company also provides specialty insurance and reinsurance on transactions without special purpose entities but with risk profiles similar to those of its structured finance exposures written in financial guaranty form.

Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company's obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary financial guarantor. The second-to-pay insured par outstanding as of June 30, 2020 and December 31, 2019 was $5.8 billion and $6.6 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction are BIG was $100 million and $105 million as of June 30, 2020 and December 31, 2019, respectively.

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 for 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 are generally reflective of 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 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 the 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 4, Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. The Company uses a tax-equivalent yield 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 is 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 categories are:

• BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.

• 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.

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• BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Impact of COVID-19 Pandemic

A novel coronavirus emerged in Wuhan, China in late 2019 and began to spread beyond China in early 2020. The virus is highly infectious and causes a coronavirus disease, COVID-19, that can be fatal. COVID-19 has been declared a pandemic by the World Health Organization, and its emergence and reactions to it, including various shelter-in-place guidelines and related restrictions, are having 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 quite some time now, its ultimate size, depth, course and duration 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. The Surveillance department is closely monitoring the insured portfolio, 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 shelter-in-place guidelines and related restrictions or an economic downturn.

Financial Guaranty Exposure

The Company measures its financial guaranty exposure in terms of (a) gross and net par outstanding and (b) gross and net debt service.

The Company typically guarantees the payment of principal and interest 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.

The Company purchases securities that it has insured, and for which it has 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, which amounts are included in the investment portfolio, because the Company manages such securities as investments and not insurance exposure. As of both June 30, 2020 and December 31, 2019, the Company excluded $1.4 billion of net par attributable to loss mitigation securities.

Gross debt service outstanding represents the sum of all estimated future principal and interest payments on the obligations insured, 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.

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 principal and interest 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) and CLOs), as the total estimated expected future principal and interest 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.

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The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates 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. The anticipated sunset of LIBOR at the end of 2021 has introduced another variable into the Company's calculation of future debt service. 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 Outstanding

	Gross Debt Service Outstanding				Net Debt Service Outstanding
	As of June 30, 2020		As of December 31, 2019		As of June 30, 2020		As of December 31, 2019
	(in millions)
Public finance	$	352,266	$	363,497	$	351,835	$	362,361
Structured finance	11,196		12,279		10,694		11,769
Total financial guaranty	$	363,462	$	375,776	$	362,529	$	374,130

Financial Guaranty Portfolio

by Internal Rating

As of June 30, 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 millions)
AAA	$	368	0.2	%	$	2,459	5.0	%	$	1,118	12.7	%	$	166	23.7	%	$	4,111	1.8	%
AA	17,800		10.3		4,916		10.0		3,885		44.0		34		4.9		26,635		11.4
A	92,807		53.6		10,314		20.9		1,002		11.3		172		24.5		104,295		45.0
BBB	56,448		32.6		30,741		62.3		1,065		12.1		288		41.1		88,542		38.2
BIG	5,720		3.3		863		1.8		1,752		19.9		41		5.8		8,376		3.6
Total net par outstanding	$	173,143	100.0	%	$	49,293	100.0	%	$	8,822	100.0	%	$	701	100.0	%	$	231,959	100.0	%

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Financial Guaranty Portfolio

by Internal Rating

As of December 31, 2019 

	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 millions)
AAA	$	381	0.2	%	$	2,541	5.0	%	$	1,258	13.5	%	$	181	23.8	%	$	4,361	1.8	%
AA	19,847		11.3		5,142		10.0		4,010		43.1		38		5.0		29,037		12.3
A	94,488		53.9		15,627		30.4		1,030		11.1		184		24.2		111,329		47.0
BBB	55,000		31.3		27,051		52.8		1,206		13.0		317		41.6		83,574		35.3
BIG	5,771		3.3		898		1.8		1,796		19.3		41		5.4		8,506		3.6
Total net par outstanding	$	175,487	100.0	%	$	51,259	100.0	%	$	9,300	100.0	%	$	761	100.0	%	$	236,807	100.0	%

In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $119 million of gross par for public finance and $593 million of gross par of structured finance as of June 30, 2020. 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.

Financial Guaranty Portfolio

Components of BIG Net Par Outstanding

As of June 30, 2020

	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in millions)
Public finance:
U.S. public finance	$	1,440	$	430	$	3,850	$	5,720	$	173,143
Non-U.S. public finance	817		—		46		863		49,293
Public finance	2,257		430		3,896		6,583		222,436
Structured finance:
U.S. RMBS	202		29		1,323		1,554		3,281
Other structured finance	97		56		86		239		6,242
Structured finance	299		85		1,409		1,793		9,523
Total	$	2,556	$	515	$	5,305	$	8,376	$	231,959

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Financial Guaranty Portfolio

Components of BIG Net Par Outstanding

As of December 31, 2019

	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in millions)
Public finance:
U.S. public finance	$	1,582	$	430	$	3,759	$	5,771	$	175,487
Non-U.S. public finance	854		—		44		898		51,259
Public finance	2,436		430		3,803		6,669		226,746
Structured finance:
U.S. RMBS	162		74		1,382		1,618		3,546
Other structured finance	69		62		88		219		6,515
Structured finance	231		136		1,470		1,837		10,061
Total	$	2,667	$	566	$	5,273	$	8,506	$	236,807

Financial Guaranty Portfolio

BIG Net Par Outstanding

and Number of Risks

As of June 30, 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 millions)
BIG:
Category 1	$	2,482	$	74	$	2,556	112	7	119
Category 2	511		4		515		19	1	20
Category 3	5,258		47		5,305		128	6	134
Total BIG	$	8,251	$	125	$	8,376	259	14	273

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 Financial Guaranty Portfolio

BIG Net Par Outstanding

and Number of Risks

As of December 31, 2019

	Net Par Outstanding						Number of Risks (2)
Description	Financial Guaranty Insurance (1)		Credit Derivative		Total		Financial Guaranty Insurance (1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	2,600	$	67	$	2,667	121	6	127
Category 2	561		5		566		24	1	25
Category 3	5,216		57		5,273		131	7	138
Total BIG	$	8,377	$	129	$	8,506	276	14	290

_____________________

(1)    Includes 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.   

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 $4.4 billion net par as of June 30, 2020, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except for Puerto Rico Aqueduct and Sewer Authority (PRASA), Municipal Finance Agency (MFA) and University of Puerto Rico (U of PR).

On November 30, 2015 and December 8, 2015, the then governor of Puerto Rico issued executive orders (Clawback Orders) directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company to "claw back" certain taxes pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation Authority (PRHTA), Puerto Rico Infrastructure Financing Authority (PRIFA), and Puerto Rico Convention Center District Authority (PRCCDA). The Puerto Rico exposures insured by the Company subject to clawback are shown in the table “Puerto Rico Net Par Outstanding.”

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 board (Oversight Board) 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 believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters. In addition, the Commonwealth, the Oversight Board and others have taken legal action naming the Company as a party. See “Puerto Rico Litigation” below.

The Company also participates in mediation and negotiations relating to its Puerto Rico exposure. The COVID-19 pandemic and evolving governmental and private responses to the pandemic are impacting both Puerto Rico itself and the process of resolving the payment defaults of the Commonwealth and some of its related authorities and public corporations, including delaying related litigation, the various Title III proceedings, and other legal proceedings.

The final form and timing of responses to Puerto Rico’s financial distress, the devastation of Hurricane Maria and the COVID-19 pandemic and evolving governmental and private responses to the pandemic, eventually taken by the federal government or implemented under the auspices of PROMESA and the Oversight Board or otherwise, and the final impact on the Company, after resolution of legal challenges, of any such responses on obligations insured by the Company, are uncertain. The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company's results of operations in that particular quarter or year.

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The Company groups its Puerto Rico exposure into three categories:

• Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.

• Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year. The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company.

• Other Public Corporations. The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.

Constitutionally Guaranteed

General Obligation. As of June 30, 2020, the Company had $1,253 million insured net par outstanding of the general obligations of Puerto Rico, which are supported by the good faith, credit and taxing power of the Commonwealth. Despite the requirements of Article VI of its Constitution, the Commonwealth defaulted on the debt service payment due on July 1, 2016, and the Company has been making claim payments on these bonds since that date. The Oversight Board has filed a petition under Title III of PROMESA with respect to the Commonwealth.

On May 27, 2020, the Oversight Board certified a revised fiscal plan for the Commonwealth. The revised certified Commonwealth fiscal plan contemplates a reduction in financial resources available for debt service as a result of efforts to contain, and the impact on the economy from, the COVID-19 pandemic. That revised fiscal plan also contemplates a postponement of reforms for the Commonwealth. The Company continues to disagree with the Oversight Board's view of available resources.

On February 9, 2020, the Oversight Board announced it had entered into an amended general obligation Plan Support Agreement (Amended GO PSA) with certain general obligation (GO) and Puerto Rico Public Buildings Authority (PBA) bondholders representing approximately $8 billion of the aggregate amount of general obligation and PBA bond claims. The Amended GO PSA purports to provide a framework to address approximately $35 billion of Commonwealth debt (including PBA debt) and unsecured claims. The Company is not a party to that agreement and does not support it. 

The Amended GO PSA provides for different recoveries based on the bonds’ vintage issuance date, with GO and PBA bonds issued before 2011(Vintage) receiving higher recoveries than GO and PBA bonds issued in 2011 and thereafter (except that, for purposes of the Amended GO PSA, Series 2011A GO bonds would be treated as Vintage bonds). The recoveries for the GO bonds, by vintage issuance date, are set forth in the table included below. The differentiated recovery scheme provided under the Amended GO PSA is purportedly based on the Oversight Board’s attempt to invalidate the non-Vintage GO and PBA bonds (see “Puerto Rico Litigation” below). Under the Amended GO PSA, GO and PBA bondholders generally would receive newly issued Commonwealth GO bonds, Puerto Rico Sales Tax Financing Corporation (COFINA) junior lien bonds and cash equal to the amounts set out below, expressed as a percent of their outstanding pre-petition claims (which excludes post-petition accrued interest), based on the vintage issuance date of the bonds they hold.  In all cases, holders of GO/PBA bonds supporting the Amended GO PSA are also entitled to certain fees.

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General Obligation Bonds	Assured Guaranty Net Par Outstanding as of June 30, 2020		Assured Guaranty Total Net Principal Claims Paid as of June 30, 2020		Assured Guaranty Total Net Interest Claims Paid as of June 30, 2020		Base Recovery as a % of Pre-Petition Claims
	(in millions)						(percent)
Vintage GO	$	669	$	383	$	165	74.9	%
2011 GO (Series D, E and PIB)	5		6		1		73.8
2011 GO (Series C)	210		—		48		70.4
2012 GO	369		—		72		69.9
2014 GO	—		—		—		65.4

On February 28, 2020, the Oversight Board filed with the Title III court an Amended Joint Plan of Adjustment of the Commonwealth (Amended POA) to restructure approximately $35 billion of debt (including the GO bonds) and other claims against the government of Puerto Rico and certain entities and $50 billion in pension obligations. The Amended POA includes the terms of the settlement relating to the GO bonds embodied in the Amended GO PSA. The Company believes the Amended POA, as currently constituted, does not comply with the laws and constitution of Puerto Rico and the provisions of PROMESA and does not satisfy the statutory requirements for confirmation of a plan of adjustment under Title III of PROMESA.

PBA. As of June 30, 2020, the Company had $140 million insured net par outstanding of PBA bonds, which are supported by a pledge of the rents due under leases of government facilities to departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power. Despite the requirements of Article VI of its Constitution, the PBA defaulted on most of the debt service payment due on July 1, 2016, and the Company has been making claim payments on these bonds since then. On September 27, 2019, the Oversight Board filed a petition under Title III of PROMESA with respect to the PBA to allow the restructuring of the PBA claims through the Amended POA.

            Under the Amended GO PSA (which does not include the Company as a party and which the Company does not support,) PBA bondholders generally would receive newly issued Commonwealth GO bonds, COFINA junior lien bonds and cash equal to the amounts set out below, expressed as a percent of their outstanding pre-petition claims (which excludes post-petition accrued interest), based on the vintage issuance date of the bonds they hold. In all cases, holders of PBA bonds supporting the Amended GO PSA are also entitled to certain fees.

PBA Bonds	Assured Guaranty Net Par Outstanding as of June 30, 2020		Assured Guaranty Total Net Principal Claims Paid as of June 30, 2020		Assured Guaranty Total Net Interest Claims Paid as of June 30, 2020		Base Recovery as a % of Pre-Petition Claims
	(in millions)						(percent)
Vintage PBA	$	140	$	32	$	27	77.6	%
2011 PBA	—		—		—		76.8
2012 PBA	—		—		—		72.2

As noted above, on February 28, 2020, the Oversight Board filed with the Title III court an Amended POA to restructure approximately $35 billion of debt (including the PBA bonds) and other claims against the government of Puerto Rico and certain entities and $50 billion in pension obligations. The Amended POA includes the terms of the settlement relating to the PBA bonds embodied in the Amended GO PSA. The Company believes the Amended POA, as currently constituted, does not comply with the laws and constitution of Puerto Rico and the provisions of PROMESA and does not satisfy the statutory requirements for confirmation of a plan of adjustment under Title III of PROMESA.

Public Corporations - Certain Revenues Potentially Subject to Clawback

PRHTA. As of June 30, 2020, the Company had $842 million insured net par outstanding of PRHTA (transportation revenue) bonds and $515 million insured net par outstanding of PRHTA (highway revenue) 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 up to $120 million annually of 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 non-toll revenues consisting of excise taxes and fees collected by the Commonwealth on behalf of PRHTA and its bondholders that are statutorily allocated to PRHTA and its bondholders are potentially subject to clawback. Despite the

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presence of funds in relevant debt service reserve accounts that the Company believes should have been employed to fund debt service, PRHTA defaulted on the full July 1, 2017 insured debt service payment, and the Company has been making claim payments on these bonds since that date. The Oversight Board has filed a petition under Title III of PROMESA with respect to PRHTA.

On June 26, 2020, the Oversight Board certified a revised fiscal plan for PRHTA. The revised certified PRHTA fiscal plan projects very limited capacity to pay debt service over the five-year forecast period

PRCCDA. As of June 30, 2020, the Company had $152 million insured net par outstanding of PRCCDA bonds, which are secured by certain hotel tax revenues. These revenues are sensitive to the level of economic activity in the area and are potentially subject to clawback. There were sufficient funds in the PRCCDA bond accounts to make only partial payments on the July 1, 2017 PRCCDA bond payments guaranteed by the Company, and the Company has been making claim payments on these bonds since that date.

PRIFA. As of June 30, 2020, the Company had $16 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. These revenues are potentially subject to the clawback. The Company has been making claim payments on the PRIFA bonds since January 2016.

Other Public Corporations

Puerto Rico Electric Power Authority (PREPA). As of June 30, 2020, the Company had $825 million insured net par outstanding of PREPA obligations, which 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 Oversight Board commenced proceedings for PREPA under Title III of PROMESA.

On May 3, 2019, AGM and AGC entered into a restructuring support agreement with PREPA (PREPA RSA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth of Puerto Rico, and the Oversight Board, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds in PREPA's recovery plan. Upon consummation of the restructuring transaction, PREPA’s revenue bonds will be exchanged into new securitization bonds issued by a special purpose corporation and secured by a segregated transition charge assessed on electricity bills.

The closing of the restructuring transaction is subject to a number of conditions, including approval by the Title III Court of the PREPA RSA and settlement described therein, a minimum of 67% support of voting bondholders for a plan of adjustment that includes this proposed treatment of PREPA revenue bonds and confirmation of such plan by the Title III court, and execution of acceptable documentation and legal opinions. Under the PREPA RSA, the Company has the option to guarantee its allocated share of the securitization exchange bonds, which may then be offered and sold in the capital markets. The Company believes that the additive value created by attaching its guarantee to the securitization exchange bonds would materially improve its overall recovery under the transaction, as well as generate new insurance premiums; and therefore that its economic results could differ from those reflected in the PREPA RSA.

On June 29, 2020, the Oversight Board certified a revised fiscal plan for PREPA. The revised certified PREPA fiscal plan projects no capacity to pay debt service over the five-year forecast period without incurring rate increases.

PRASA. As of June 30, 2020, the Company had $373 million of insured net par outstanding of PRASA bonds, which are secured by a lien on the gross revenues of the water and sewer system. In July 2019, PRASA entered into a restructuring transaction with the federal government and the Oversight Board to restructure its subordinated loans from federal agencies that had been under forbearance for over three years (the PRASA Agreement). The PRASA Agreement extends the maturity of the loans for up to 40 years and provides for low interest rates and no interest accrual for the first ten years on a portion of the loans, but also places the subordinated loans on a parity with the PRASA bonds the Company guarantees.  The Company was not asked to consent to the PRASA Agreement. The PRASA Agreement reduces the amount of annual debt service owed by PRASA for its current debt. The PRASA bond accounts contained sufficient funds to make the PRASA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.

On June 29, 2020, the Oversight Board certified a revised fiscal plan for PRASA. The revised certified PRASA fiscal plan projects the ability to pay debt service over the five-year forecast period with the implementation of certain measures and draws from the current expense fund.

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MFA. As of June 30, 2020, the Company had $271 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues. The MFA bond accounts contained sufficient funds to make the MFA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.

U of PR. As of June 30, 2020, the Company had $1 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. As of the date of this filing, all debt service payments on U of PR bonds insured by the Company have been made.

Resolved Commonwealth Credit

COFINA. On February 12, 2019, pursuant to a plan of adjustment approved by the PROMESA Title III Court on February 4, 2019 (COFINA Plan of Adjustment), the Company paid off in full its its $273 million net par outstanding of insured COFINA bonds, plus accrued and unpaid interest. Pursuant to the COFINA Plan of Adjustment, the Company received $152 million in initial par of closed lien senior bonds of COFINA validated by the PROMESA Title III Court (COFINA Exchange Senior Bonds), along with cash. The total recovery (cash and COFINA Exchange Senior Bonds) represented 60% of the Company’s official Title III claim, which related to amounts owed as of the date COFINA entered Title III proceedings. The fair value of the COFINA Exchange Senior Bonds, excluding accrued interest, was $139 million at February 12, 2019, and was recorded as salvage received. During the third quarter of 2019 the Company sold all of its COFINA Exchange Senior Bonds.

Puerto Rico Litigation

The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters. In addition, the Commonwealth, the Oversight Board and others have taken legal action naming the Company as party.

Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its entities on debt service payments, and related matters, and the Company is a party to a number of them. On July 24, 2019, Judge Laura Taylor Swain of the United States District Court for the District of Puerto Rico (Federal District Court for Puerto Rico) held an omnibus hearing on litigation matters relating to the Commonwealth. At that hearing, she imposed a stay through November 30, 2019, on a series of adversary proceedings and contested matters amongst the stakeholders and imposed mandatory mediation on all parties through that date. On October 28, 2019, Judge Swain extended the stay until December 31, 2019, and has since stayed the proceedings pending the Court's determination on the Commonwealth's plan of adjustment. A number of the legal actions in which the Company is involved remain subject to stay orders.

On January 7, 2016, AGM, AGC and Ambac Assurance Corporation commenced an action for declaratory judgment and injunctive relief in the Federal District Court for Puerto Rico to invalidate the executive orders issued on November 30, 2015 and December 8, 2015 by the then governor of Puerto Rico directing that the Secretary of the Treasury of the Commonwealth of Puerto Rico and the Puerto Rico Tourism Company claw back certain taxes and revenues pledged to secure the payment of bonds issued by the PRHTA, the PRCCDA and PRIFA. The Commonwealth defendants filed a motion to dismiss the action for lack of subject matter jurisdiction, which the court denied on October 4, 2016. On October 14, 2016, the Commonwealth defendants filed a notice of PROMESA automatic stay. While the PROMESA automatic stay expired on May 1, 2017, on May 17, 2017, the court stayed the action under Title III of PROMESA.

On June 3, 2017, AGC and AGM filed an adversary complaint in the Federal District Court for Puerto Rico seeking (i) a judgment declaring that the application of pledged special revenues to the payment of the PRHTA bonds is not subject to the PROMESA Title III automatic stay and that the Commonwealth has violated the special revenue protections provided to the PRHTA bonds under the Bankruptcy Code; (ii) an injunction enjoining the Commonwealth from taking or causing to be taken any action that would further violate the special revenue protections provided to the PRHTA bonds under the Bankruptcy Code; and (iii) an injunction ordering the Commonwealth to remit the pledged special revenues securing the PRHTA bonds in accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code. On January 30, 2018, the court rendered an opinion dismissing the complaint and holding, among other things, that (x) even though the special revenue provisions of the Bankruptcy Code protect a lien on pledged special revenues, those provisions do not mandate the turnover of pledged special revenues to the payment of bonds and (y) actions to enforce liens on pledged special revenues remain stayed. A hearing on AGM and AGC’s appeal of the trial court’s decision to the United States Court of Appeals for the First Circuit (First Circuit) was held on November 5, 2018. On March 26, 2019, the First Circuit issued its opinion affirming the trial court’s decision and held that Sections 928(a) and 922(d) of the Bankruptcy Code permit, but do not require, continued payments

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during the pendency of the Title III proceedings. The First Circuit agreed with the trial court that (i) Section 928(a) of the Bankruptcy Code does not mandate the turnover of special revenues or require continuity of payments to the PRHTA bonds during the pendency of the Title III proceedings, and (ii) Section 922(d) of the Bankruptcy Code is not an exception to the automatic stay that would compel PRHTA, or third parties holding special revenues, to apply special revenues to outstanding obligations. On April 9, 2019, AGM, AGC and other petitioners filed a petition with the First Circuit seeking a rehearing by the full court; the petition was denied by the First Circuit on July 31, 2019. On September 20, 2019, AGC, AGM and other petitioners filed a petition for review by the U.S. Supreme Court of the First Circuit's holding, which was denied on January 13, 2020.

On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court for Puerto Rico seeking (i) a declaratory judgment that the PREPA restructuring support agreement executed in December 2015 (2015 PREPA RSA) is a “Preexisting Voluntary Agreement” under Section 104 of PROMESA and the Oversight Board’s failure to certify the 2015 PREPA RSA is an unlawful application of Section 601 of PROMESA; (ii) an injunction enjoining the Oversight Board from unlawfully applying Section 601 of PROMESA and ordering it to certify the 2015 PREPA RSA; and (iii) a writ of mandamus requiring the Oversight Board to comply with its duties under PROMESA and certify the 2015 PREPA RSA. On July 21, 2017, in light of its PREPA Title III petition on July 2, 2017, the Oversight Board filed a notice of stay under PROMESA.

On July 18, 2017, AGM and AGC filed in the Federal District Court for Puerto Rico a motion for relief from the automatic stay in the PREPA Title III bankruptcy proceeding and a form of complaint seeking the appointment of a receiver for PREPA. 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. Under the PREPA RSA, AGM and AGC have agreed to withdraw from the lift stay motion upon the Title III Court’s approval of the settlement of claims embodied in the PREPA RSA. The Oversight Board 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, and that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned. On May 22, 2020, the Title III Court issued an order to that effect. The Oversight Board filed an updated status report on July 31, 2020, in which it requested that it be permitted to file another update by September 25, 2020.

On May 23, 2018, AGM and AGC filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment declaring that (i) the Oversight Board lacked authority to develop or approve the new fiscal plan for Puerto Rico which it certified on April 19, 2018 (Revised Fiscal Plan); (ii) the Revised Fiscal Plan and the Fiscal Plan Compliance Law (Compliance Law) enacted by the Commonwealth to implement the original Commonwealth Fiscal Plan violate various sections of PROMESA; (iii) the Revised Fiscal Plan, the Compliance Law and various moratorium laws and executive orders enacted by the Commonwealth to prevent the payment of debt service (a) are unconstitutional and void because they violate the Contracts, Takings and Due Process Clauses of the U.S. Constitution and (b) are preempted by various sections of PROMESA; and (iv) no Title III plan of adjustment based on the Revised Fiscal Plan can be confirmed under PROMESA. On August 13, 2018, the court-appointed magistrate judge granted the Commonwealth's and the Oversight Board's motion to stay this adversary proceeding pending a decision by the First Circuit in an appeal by Ambac Assurance Corporation of an unrelated adversary proceeding decision, which the First Circuit rendered on June 24, 2019. On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters through November 30, 2019, with a mandatory mediation element. Judge Swain extended the stay until December 31, 2019, and further extended the stay until March 11, 2020. Pursuant to the request of AGM, AGC and the defendants, Judge Swain ordered on September 6, 2019 that the claims in this complaint be addressed in the Commonwealth plan confirmation process and be subject to her July 24, 2019 stay and mandatory mediation order and be addressed in the Commonwealth plan confirmation process. Judge Swain postponed certain deadlines and hearings, including those related to the plan of adjustment, indefinitely as a result of the COVID-19 pandemic. The Oversight Board has requested that it be allowed to file an updated status report by September 11, 2020 regarding the effects of the pandemic on the Commonwealth, including a proposal for the plan of adjustment and disclosure statement process.

On July 23, 2018, AGC and AGM filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment (i) declaring the members of the Oversight Board are officers of the U.S. whose appointments were unlawful under the Appointments Clause of the U.S. Constitution; (ii) declaring void from the beginning the unlawful actions taken by the Oversight Board to date, including (x) development of the Commonwealth's Fiscal Plan, (y) development of PRHTA's Fiscal Plan, and (z) filing of the Title III cases on behalf of the Commonwealth and PRHTA; and (iii) enjoining the Oversight Board from taking any further action until the Oversight Board members have been lawfully appointed in conformity with the Appointments Clause of the U.S. Constitution. The Title III court dismissed a similar lawsuit filed by another party in the Commonwealth’s Title III case in July 2018. On August 3, 2018, a stipulated judgment was entered against AGM and AGC at their request based upon the court's July decision in the other Appointments Clause lawsuit and, on the same date, AGM and

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AGC appealed the stipulated judgment to the First Circuit. On August 15, 2018, the court consolidated, for purposes of briefing and oral argument, AGM and AGC's appeal with the other Appointments Clause lawsuit. The First Circuit consolidated AGM and AGC's appeal with a third Appointments Clause lawsuit on September 7, 2018 and held a hearing on December 3, 2018. On February 15, 2019, the First Circuit issued its ruling on the appeal and held that members of the Oversight Board were not appointed in compliance with the Appointments Clause of the U.S. Constitution but declined to dismiss the Title III petitions citing the (i) de facto officer doctrine and (ii) negative consequences to the many innocent third parties who relied on the Oversight Board’s actions to date, as well as the further delay which would result from a dismissal of the Title III petitions. The case was remanded back to the Federal District Court for Puerto Rico for the appellants’ requested declaratory relief that the appointment of the board members of the Oversight Board is unconstitutional. The First Circuit delayed the effectiveness of its ruling for 90 days so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Oversight Board in accordance with the Appointments Clause. On April 23, 2019, the Oversight Board filed a petition for review by the U.S. Supreme Court of the First Circuit's holding that its members were not appointed in compliance with the Appointments Clause and on the following day filed a motion in the First Circuit to further stay the effectiveness of the First Circuit’s February 15, 2019 ruling pending final disposition by the U.S. Supreme Court. On May 24, 2019, AGC and AGM filed a petition for a review by the U.S. Supreme Court of the First Circuit’s holding that the de facto officer doctrine allows courts to deny meaningful relief to successful challengers suffering ongoing injury at the hands of unconstitutionally appointed officers. On July 2, 2019, the First Circuit granted the Oversight Board’s motion to stay the effectiveness of the First Circuit’s February 15, 2019 ruling pending final disposition by the U.S. Supreme Court. On October 15, 2019, the U.S. Supreme Court heard oral arguments on the First Circuit's ruling. On June 1, 2020, the Supreme Court issued its opinion, reversing the First Circuit and holding that the selection process prescribed under PROMESA for Oversight Board members does not violate the Appointments Clause.

On December 21, 2018, the Oversight Board and the Official Committee of Unsecured Creditors of all Title III Debtors (other than COFINA) filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment declaring that (i) the leases to public occupants entered into by the PBA are not “true leases” for purposes of Section 365(d)(3) of the Bankruptcy Code and therefore the Commonwealth has no obligation to make payments to the PBA under the leases or Section 365(d)(3) of the Bankruptcy Code, (ii) the PBA is not entitled to a priority administrative expense claim under the leases pursuant to Sections 503(b)(1) and 507(a)(2) of the Bankruptcy Code, and (iii) any such claims filed or asserted against the Commonwealth are disallowed. On January 28, 2019, the PBA filed an answer to the complaint. On March 12, 2019, the Federal District Court for Puerto Rico granted, with certain limitations, AGM’s and AGC’s motion to intervene. On March 21, 2019, AGM and AGC, together with certain other intervenors, filed a motion for judgment on the pleadings. 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 until December 31, 2019, and has since stayed these proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

On January 14, 2019, the Oversight Board and the Official Committee of Unsecured Creditors filed an omnibus

objection in the Title III Court to claims filed by holders of approximately $6 billion of Commonwealth general obligation

bonds issued in 2012 and 2014, asserting among other things that such bonds were issued in violation of the Puerto Rico

constitutional debt service limit, such bonds are null and void, and the holders have no equitable remedy against the

Commonwealth. Pursuant to procedures established by Judge Swain, on April 10, 2019, AGM filed a notice of participation in

these proceedings. As of June 30, 2020, $369 million of the Company’s insured net par outstanding of the general

obligation bonds of Puerto Rico were issued on or after March 2012. On May 21, 2019, the Official Committee of Unsecured

Creditors filed a claim objection to certain Commonwealth general obligation bonds issued in 2011, approximately $215 million of which are insured by the Company as of June 30, 2020, on substantially the same bases as the January 14, 2019 filing, and which the plaintiffs propose to be subject to the proceedings relating to the 2012 and 2014 bonds. 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 until December 31, 2019, but did not further extend the stay with respect to this matter. On January 8, 2020, certain Commonwealth general obligation bondholders (self-styled as the Lawful Constitutional Debt Coalition) filed a claim objection to the 2012 and 2014 bonds, asserting among other things that those bonds were issued in violation of the Puerto Rico constitutional debt limit and are not entitled to first priority status under the Puerto Rico Constitution. Judge Swain stayed these proceedings pending the Court’s determination on the Commonwealth’s plan of adjustment.

On May 2, 2019, the Oversight Board and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court for Puerto Rico against various Commonwealth general obligation bondholders and bond insurers, including AGC and AGM, that had asserted in their proofs of claim that their bonds are secured. The complaint seeks a judgment declaring that defendants do not hold consensual or statutory liens and are unsecured claimholders to the extent they hold allowed claims. The complaint also asserts that even if Commonwealth law granted statutory liens, such liens are

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avoidable under Section 545 of the Bankruptcy Code. 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 has since stayed these proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

On May 20, 2019, the Oversight Board and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court for Puerto Rico against the fiscal agent and holders and/or insurers, including AGC and AGM, that have asserted their PRHTA bond claims are entitled to secured status in PRHTA’s Title III case. Plaintiffs are seeking to avoid the PRHTA bondholders’ liens and contend that (i) the scope of any lien only applies to revenues that have been both received by PRHTA and deposited in certain accounts held by the fiscal agent and does not include PRHTA’s right to receive such revenues; (ii) any lien on revenues was not perfected because the fiscal agent does not have “control” of all accounts holding such revenues; (iii) any lien on the excise tax revenues is no longer enforceable because any rights PRHTA had to receive such revenues are preempted by PROMESA; and (iv) even if PRHTA held perfected liens on PRHTA’s revenues and the right to receive such revenues, such liens were terminated by Section 552(a) of the Bankruptcy Code as of the petition date. 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 extended the stay again pending further order of the court on the understanding that these issues will be resolved in other proceedings.

On September 30, 2019, certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims (Fuel Line Lenders) filed an amended adversary complaint in the Federal District Court for Puerto Rico against the Oversight Board, PREPA, the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF"), U.S. Bank National Association, as trustee for PREPA bondholders, and various PREPA bondholders and bond insurers, including AGC and AGM. The complaint seeks, among other things, declarations that the advances made by the Fuel Line Lenders are Current Expenses as defined in the trust agreement pursuant to which the PREPA bonds were issued and there is no valid lien securing the PREPA bonds unless and until the Fuel Line Lenders are paid in full, as well as orders subordinating the PREPA bondholders’ lien and claim to the Fuel Line Lenders’ claims and declaring the PREPA RSA null and void. The Oversight Board 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 currently 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 Oversight Board, PREPA, AAFAF, the Commonwealth, the Governor of Puerto Rico, and U.S. Bank National Association, as trustee for  PREPA bondholders. The complaint seeks, among other things, declarations that amounts owed to SREAEE are Current Expenses as defined in the trust agreement pursuant to which the PREPA bonds were issued, that there is no valid lien securing the PREPA bonds other than on amounts in the sinking funds and that SREAEE is a third-party beneficiary of certain trust agreement provisions, as well as orders subordinating the PREPA bondholders’ lien and claim to the SREAEE claims. On November 7, 2019, the court granted a motion to intervene by AGC and AGM. The Oversight Board 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 currently 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, AGM and AGC along with certain other monoline insurers filed in Federal District Court for Puerto Rico a motion (amending and superseding a motion filed by AGM and AGC on August 23, 2019) for relief from the automatic stay imposed pursuant to Title III of PROMESA to permit movants to enforce in another forum the application of the revenues securing the PRHTA Bonds (the PRHTA Revenues) or, in the alternative, for adequate protection for their property interests in PRHTA Revenues. A preliminary hearing on the motion occurred on June 4, 2020. On July 2, 2020, Judge Swain denied the motion to the extent it sought stay relief or adequate protection with respect to liens or other property interests in PRHTA Revenues that have not been deposited in the related bond resolution funds.  The movants intend to appeal this denial and the underlying determinations to the First Circuit.

On January 16, 2020, the Financial Oversight and Management Board brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA Bonds, objecting to the bond insurers claims in the Commonwealth Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or property interests with respect

29

to PRHTA Revenues. Motions for partial summary judgment were filed on April 28, 2020, with a hearing scheduled for September 23, 2020.

On January 16, 2020, the Financial Oversight and Management Board, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, 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, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRHTA Revenues. This matter is stayed pending further order of the court.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRIFA Rum Tax Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRIFA Bonds (the PRIFA Revenues), seeking an order lifting the automatic stay so that movants can enforce rights respecting the PRIFA Revenues in another forum or, in the alternative, that the Commonwealth must provide adequate protection for movants’ lien on the PRIFA Revenues. A preliminary hearing on the motion occurred on June 4, 2020. On July 2, 2020, Judge Swain denied the motion to the extent it sought stay relief or adequate protection with respect to PRIFA Revenues that have not been deposited in the related sinking fund.  The movants intend to appeal this denial and the underlying determinations to the First Circuit either as a certified interlocutory appeal or following the issuance of a final order resolving additional issues that were not considered in the preliminary hearing.

On January 16, 2020, the Financial Oversight and Management Board brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRIFA Bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or ownership interests with respect to PRIFA Revenues. Motions for partial summary judgment were filed on April 28, 2020, with a hearing currently scheduled for September 23, 2020.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRCCDA Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRCCDA Bonds (the PRCCDA Revenues), seeking an order that an action to enforce rights respecting the PRCCDA Revenues in another forum is not subject to the automatic stay associated with the Commonwealth’s Title III proceeding or, in the alternative, if the court finds that the stay is applicable, lifting the automatic stay so that movants can enforce such rights in another forum or, in the further alternative, if the court finds the automatic stay applicable and does not lift it, that the Commonwealth must provide adequate protection for movants’ lien on the PRCCDA Revenues. A preliminary hearing on the motion occurred on June 4, 2020. On July 2, 2020, Judge Swain held that a proposed enforcement action by movants in another court would be subject to the automatic stay, that the movants have a colorable claim to a security interest in funds deposited in the “Transfer Account” and have shown a reasonable likelihood that a certain account held by Scotiabank is the Transfer Account, but denied the motion to the extent it sought stay relief or adequate protection with respect to PRCCDA Revenues that have not been deposited in the Transfer Account.  The movants intend to appeal the portion of the opinion constituting a denial and the underlying determinations related to the denial to the First Circuit either as a certified interlocutory appeal or following the issuance of a final order resolving additional issues that were not considered in the preliminary hearing.

On January 16, 2020, the Financial Oversight and Management Board brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRCCDA Bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRCCDA Revenues. Motions for partial summary judgment were filed on April 28, 2020, with a hearing currently scheduled for September 23, 2020.

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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 June 30, 2020		As of December 31, 2019		As of June 30, 2020		As of December 31, 2019
	(in millions)
Exposure to Puerto Rico	$	4,458	$	4,458	$	6,843	$	6,956

Puerto Rico

Net Par Outstanding

	As of June 30, 2020 (1)		As of December 31, 2019
	(in millions)
Commonwealth Constitutionally Guaranteed
Commonwealth of Puerto Rico - General Obligation Bonds (2)	$	1,253	$	1,253
PBA (2)	140		140
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA (Transportation revenue) (2)	842		811
PRHTA (Highway revenue) (2)	515		454
PRCCDA	152		152
PRIFA	16		16
Other Public Corporations
PREPA (2)	825		822
PRASA	373		373
MFA	271		248
U of PR	1		1
Total net exposure to Puerto Rico	$	4,388	$	4,270

____________________

(1) In Second Quarter 2020, the Company reassumed $118 million in net par of Puerto Rico exposures from its largest remaining legacy financial guaranty reinsurer.

(2) As of the date of this filing, the Oversight Board has certified a filing under Title III of PROMESA for these exposures.

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. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.

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Amortization Schedule of Puerto Rico Net Par Outstanding

and Net Debt Service Outstanding

As of June 30, 2020

	Scheduled Net Par Amortization		Scheduled Net Debt Service Amortization
	(in millions)
2020 (July 1 - September 30)	$	291	$	399
2020 (October 1 - December 31)	—		3
Subtotal 2020	291		402
2021	153		360
2022	176		375
2023	206		397
2024	222		403
2025-2029	1,173		1,895
2030-2034	1,053		1,527
2035-2039	764		942
2040-2044	104		179
2045-2047	246		272
Total	$	4,388	$	6,752

Exposure to the U.S. Virgin Islands

As of June 30, 2020, the Company had $485 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rated $219 million BIG. The $266 million USVI net par the Company rated investment grade primarily consisted of bonds secured by a lien on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum. The $219 million BIG USVI net par consisted of (a) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.

In 2017, Hurricane Irma caused significant damage in St. John and St. Thomas, while Hurricane Maria made landfall on St. Croix as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and substantial damage to St. Croix’s businesses and infrastructure, including the power grid. More recently, 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 has made its debt service payments to date.

Specialty Insurance and Reinsurance Exposure

The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. All specialty insurance and reinsurance exposures shown in the table below were rated investment grade internally as of December 31, 2019. As of June 30, 2020, $30 million of aircraft residual value insurance exposure was rated BIG.

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Specialty Insurance and Reinsurance

Exposure

	Gross Exposure				Net Exposure
	As of June 30, 2020		As of December 31, 2019		As of June 30, 2020		As of December 31, 2019
	(in millions)
Life insurance transactions (1)	$	1,063	$	1,046	$	915	$	898
Aircraft residual value insurance policies	391		398		236		243
Total	$	1,454	$	1,444	$	1,151	$	1,141

____________________

(1) The life insurance transactions net exposure is projected to increase to approximately $1.0 billion by September 30, 2026.

4. Expected Loss to be Paid

This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio, regardless of the accounting model (insurance, derivative or VIE).The expected loss to be paid is equal to the present value of expected future cash outflows for claim and LAE payments (net of the expected loss on the portion of loss mitigation bonds owned), and inflows for expected salvage and subrogation (and other recoveries including future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments, excess spread on underlying collateral, and other estimated recoveries, including those from restructuring bonds and for breaches of representations and warranties (R&W)). All cash flows are discounted using current risk-free rates.

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid 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 committees review and refresh their loss projection assumptions, scenarios and the probabilities they assign to those scenarios based on actual developments during the quarter and their 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 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 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 as a result the Company’s loss estimates may change materially over that same period.

In some instances, the terms of the Company's policy 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.

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The following tables present a roll forward of net expected loss to be paid for all contracts. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.00% to 1.47% with a weighted average of 0.57% as of June 30, 2020 and 0.00% to 2.45% with a weighted average of 1.94% as of December 31, 2019. Expected losses to be paid for transactions denominated in currencies other than the U.S. dollar represented approximately 3.9% and 3.2% of the total as of June 30, 2020 and December 31, 2019, respectively.

Net Expected Loss to be Paid

Roll Forward

	Second Quarter					Six Months
	2020		2019			2020			2019
	(in millions)
Net expected loss to be paid, beginning of period	$	660	$	963		$	737		$	1,183
Economic loss development (benefit) due to:
Accretion of discount	2		6			6			14
Changes in discount rates	1		(1		)	32			(5		)
Changes in timing and assumptions	31		(42		)	(7		)	(48		)
Total economic loss development (benefit)	34		(37		)	31			(39		)
Net (paid) recovered losses	41		34			(33		)	(184		)
Net expected loss to be paid, end of period	$	735	$	960		$	735		$	960

Net Expected Loss to be Paid

Roll Forward by Sector

	Second Quarter 2020
	Net Expected Loss to be Paid/(Recovered) as of March 31, 2020		Economic Loss Development/ (Benefit)		(Paid)/ Recovered Losses (1)			Net Expected Loss to be Paid/(Recovered) as of June 30, 2020
	(in millions)
Public finance:
U.S. public finance	$	493	$	30	$	20		$	543
Non-U.S. public finance	26		2		1			29
Public finance	519		32		21			572
Structured finance:
U.S. RMBS	104		1		23			128
Other structured finance	37		1		(3		)	35
Structured finance	141		2		20			163
Total	$	660	$	34	$	41		$	735

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	Second Quarter 2019
	Net Expected Loss to be Paid (Recovered) as of March 31, 2019		Economic Loss Development / (Benefit)			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of June 30, 2019
	(in millions)
Public finance:
U.S. public finance	$	666	$	92		$	(9	)	$	749
Non-U.S. public finance	31		(8		)	—			23
Public finance	697		84			(9		)	772
Structured finance:
U.S. RMBS	237		(118		)	43			162
Other structured finance	29		(3		)	—			26
Structured finance	266		(121		)	43			188
Total	$	963	$	(37	)	$	34		$	960

	Six Months 2020
	Net Expected Loss to be Paid/(Recovered) as of December 31, 2019		Economic Loss Development/ (Benefit)			(Paid)/ Recovered Losses (1)			Net Expected Loss to be Paid/(Recovered) as of June 30, 2020
	(in millions)
Public finance:
U.S. public finance	$	531	$	86		$	(74	)	$	543
Non-U.S. public finance	23		5			1			29
Public finance	554		91			(73		)	572
Structured finance:
U.S. RMBS	146		(62		)	44			128
Other structured finance	37		2			(4		)	35
Structured finance	183		(60		)	40			163
Total	$	737	$	31		$	(33	)	$	735

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	Six Months 2019
	Net Expected Loss to be Paid (Recovered) as of December 31, 2018		Economic Loss Development / (Benefit)			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of June 30, 2019
	(in millions)
Public finance:
U.S. public finance	$	832	$	154		$	(237	)	$	749
Non-U.S. public finance	32		(9		)	—			23
Public finance	864		145			(237		)	772
Structured finance:
U.S. RMBS	293		(183		)	52			162
Other structured finance	26		(1		)	1			26
Structured finance	319		(184		)	53			188
Total	$	1,183	$	(39	)	$	(184	)	$	960

____________________

(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 amounts for Six Months 2019 are net of the COFINA Exchange Senior Bonds and cash that were received pursuant to the COFINA Plan of Adjustment.

The tables above include (1) LAE paid of $6 million and $9 million for Second Quarter 2020 and 2019, respectively, and $9 million and $16 million for Six Months 2020 and 2019, respectively, and (2) expected LAE to be paid of $24 million as of June 30, 2020 and $33 million as of December 31, 2019.

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						Second Quarter					Six Months
	June 30, 2020			December 31, 2019			2020		2019			2020			2019
	(in millions)
Insurance	$	684		$	683		$	32	$	(22	)	$	31		$	(12	)
FG VIEs (See Note 11)	65			58			1		(14		)	7			(24		)
Credit derivatives (See Note 9)	(14		)	(4		)	1		(1		)	(7		)	(3		)
Total	$	735		$	737		$	34	$	(37	)	$	31		$	(39	)

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 $4.4 billion net par as of June 30, 2020, all of which was BIG. For additional information regarding the Company's Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 3, Outstanding Insurance Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California (the City) under chapter 9 of the Bankruptcy Code became effective. As of June 30, 2020, the Company’s net par subject to the plan consisted of $107 million of pension obligation bonds. As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth, which will likely be impacted by COVID-19. 

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The Company projects its total net expected loss across its troubled U.S. public finance exposures as of June 30, 2020, including those mentioned above, to be $543 million, compared with a net expected loss of $531 million as of December 31, 2019. The total net expected loss for troubled U.S. public finance exposures is net of a credit for estimated future recoveries of claims already paid. At June 30, 2020 that credit was $917 million compared with $819 million at December 31, 2019. The Company’s net expected losses incorporate management’s probability weighted estimates of possible scenarios. Each quarter, the Company may revise its scenarios, update assumptions (which may include shifting 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 U.S. public finance exposures. Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction.

The economic loss development for U.S. public finance transactions was $30 million during Second Quarter 2020 and $86 million during Six Months 2020, and was primarily attributable to Puerto Rico exposures. The loss development attributable to the Company’s Puerto Rico exposures reflects adjustments the Company made to the assumptions it uses in its scenarios based on the public information summarized under "Exposure to Puerto Rico" in Note 3, Outstanding Insurance Exposure as well as nonpublic information related to its loss mitigation activities during the period.

Selected Non - U.S. Public Finance Transactions

Expected loss to be paid for non-U.S. public finance transactions was $29 million as of June 30, 2020, compared with $23 million as of December 31, 2019, primarily consisting of: (i) an obligation backed by the availability and toll revenues of a major arterial road into a city in the U.K., which has been underperforming due to higher costs compared with expectations at underwriting, (ii) transactions with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the sub-sovereigns also to default, and (iii) an obligation backed by payments from a region in Italy, and for which the Company has been paying claims because of the impact of negative Euro Interbank Offered Rate (Euribor) on the transaction.

The economic loss development for non-U.S. public finance transactions, including those mentioned above, was approximately $2 million during Second Quarter 2020, which was primarily attributable to the impact of negative European interest rates on an interest rate swap in an Italian transaction. The economic loss development of $5 million during Six Months 2020 was due primarily to the impact of negative European interest rates and a weaker outlook of the performance of the U.K. road mentioned above.

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 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.

As of June 30, 2020, the Company had a net R&W payable of $95 million to R&W counterparties, compared with a net R&W payable of $53 million as of December 31, 2019. 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. When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company will have a net R&W payable.

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will improve. 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.

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Net Economic Loss Development (Benefit)

U.S. RMBS

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
First lien U.S. RMBS	$	4		$	(19	)	$	(55	)	$	(50	)
Second lien U.S. RMBS	(3		)	(99		)	(7		)	(133		)

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

     The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have been 2 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 the most recent twelve months of this data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing categories.

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First Lien Liquidation Rates

	As of June 30, 2020	As of March 31, 2020	As of December 31, 2019
Delinquent/Modified in the Previous 12 Months
Alt-A and Prime	20%	20%	20%
Option ARM	20	20	20
Subprime	20	20	20
30 – 59 Days Delinquent
Alt-A and Prime	35	30	30
Option ARM	35	30	35
Subprime	30	35	35
60 – 89 Days Delinquent
Alt-A and Prime	40	40	40
Option ARM	45	45	45
Subprime	40	45	45
90+ Days Delinquent
Alt-A and Prime	55	55	55
Option ARM	60	55	55
Subprime	45	50	50
Bankruptcy
Alt-A and Prime	45	45	45
Option ARM	50	50	50
Subprime	40	40	40
Foreclosure
Alt-A and Prime	60	65	65
Option ARM	65	65	65
Subprime	55	55	60
Real Estate Owned
All	100	100	100

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 2020. The Company's expected loss estimate assumes that a portion of early-stage delinquencies are due to COVID-19 related forbearances, and applies a liquidation rate of 20% to such loans. This is the same liquidation rate assumption used when estimating expected losses for current loans modified or delinquent within the last 12 months, as the Company believes this is the category that most resembles the population of new forbearance delinquencies.

While the Company uses liquidation rates as described above to project defaults of non-performing loans (including current loans modified or delinquent within the last 12 months), it projects defaults on presently current loans by applying a conditional default rate (CDR) trend. The start of that CDR trend 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 were 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 3 years after the initial 36-month CDR plateau period. Under the Company’s

39

methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were modified or delinquent in the last 12 months 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. Loss severities experienced in first lien transactions had reached historically high levels, and the Company is assuming in the base case that the still elevated 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 for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS

	As of June 30, 2020					As of March 31, 2020							As of December 31, 2019
	Range				Weighted Average	Range					Weighted Average		Range				Weighted Average
Alt-A First Lien
Plateau CDR	1.6	%	-	9.4%	5.2%	0.0	%	-	8.3	%	4.0	%	0.3	%	-	8.4%	4.1%
Final CDR	0.1	%	-	0.5%	0.3%	0.0	%	-	0.4	%	0.2	%	0.0	%	-	0.4%	0.2%
Initial loss severity:
2005 and prior	60%					60%							60%
2006	70%					70%							70%
2007+	70%					70%							70%
Option ARM
Plateau CDR	2.4	%	-	10.4%	5.6%	1.7	%	-	7.7	%	5.0	%	1.8	%	-	8.4%	5.4%
Final CDR	0.1	%	-	0.5%	0.3%	0.1	%	-	0.4	%	0.3	%	0.1	%	-	0.4%	0.3%
Initial loss severity:
2005 and prior	60%					60%							60%
2006	60%					60%							60%
2007+	70%					70%							70%
Subprime
Plateau CDR	1.3	%	-	19.1%	5.5%	1.9	%	-	17.8	%	5.4	%	1.6	%	-	18.1%	5.6%
Final CDR	0.1	%	-	1.0%	0.3%	0.1	%	-	0.9	%	0.3	%	0.1	%	-	0.9%	0.3%
Initial loss severity:
2005 and prior	75%					75%							75%
2006	75%					75%							75%
2007+	75%					75%							75%

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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 similar pattern 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, 2019.

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 5 scenarios as of June 30, 2020 and December 31, 2019.

Total expected loss to be paid on all first lien U.S. RMBS was $122 million and $166 million as of June 30, 2020 and December 31, 2019, respectively. The $4 million economic loss development in Second Quarter 2020 for first lien U.S. RMBS transactions was primarily attributable to COVID-19 related forbearances, partially offset by higher excess spread in certain transactions and changes in liquidation rates. The $55 million economic benefit in Six Months 2020 for first lien U.S. RMBS was primarily attributable to higher excess spread on certain transactions, partially offset by changes in discount rates and COVID-19 related forbearances. 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, which decreased in Second Quarter 2020 and Six Months 2020, and so increased excess spread. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of June 30, 2020 as it used as of December 31, 2019, increasing and decreasing the periods of stress from those used in the base case. LIBOR may be discontinued, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio referencing LIBOR. The economic development attributable to changes in discount rates was de minimis in Second Quarter 2020 and $25 million in Six Months 2020.

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 $46 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 $47 million for all first lien U.S. RMBS transactions.

U.S. Second Lien 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. As in the case of first lien transactions, second lien transactions have seen an increase in early-stage delinquency because of COVID-19 related forbearances. The Company applies a 20% liquidation rate to such forborn loans same as first lien RMBS 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.

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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, 2019.

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. In the prior periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.

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 for another five years. As a result, the Company does not apply a CDR increase when such loans reach their principal amortization period. In addition, based on the average performance history, the Company applies a CDR floor of 2.5% for 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 June 30, 2020 and December 31, 2019, 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 periodically 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. The Company projects future recoveries on these charged-off loans at the rate shown in the table below. Such recoveries are assumed to be received evenly over the next five years. Increasing the recovery rate to 30% would result in an economic benefit of $55 million, while decreasing the recovery rate to 10% would result in an economic loss of $55 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, 2019. 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 5 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 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 loss to be paid on all second lien U.S. RMBS was $6 million as of June 30, 2020 and total expected recovery was $20 million as of December 31, 2019. The $3 million economic benefit in Second Quarter 2020 and $7 million economic benefit in Six Months 2020 were primarily attributable to higher excess spread and improved performance in certain transactions and higher actual recoveries received for previously charged-off loans, partially offset by COVID-19 related forbearances and, in the case of Six Months 2020, changes in discount rates.

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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 for individual transactions for vintage 2004 - 2008 HELOCs.

Key Assumptions in Base Case Expected Loss Estimates

HELOCs

	As of June 30, 2020					As of March 31, 2020					As of December 31, 2019
	Range				Weighted Average	Range				Weighted Average	Range				Weighted Average
Plateau CDR	6.3	%	-	29.8%	13.0%	4.1	%	-	23.3%	9.6%	5.9	%	-	24.6%	9.5%
Final CDR trended down to	2.5	%	-	3.2%	2.5%	2.5	%	-	3.2%	2.5%	2.5	%	-	3.2%	2.5%
Liquidation rates:
Delinquent/Modified in the Previous 12 Months	20%					20%					20%
30 – 59 Days Delinquent	30					30					30
60 – 89 Days Delinquent	40					45					45
90+ Days Delinquent	60					65					65
Bankruptcy	55					55					55
Foreclosure	55					60					55
Real Estate Owned	100					100					100
Loss severity (1)	98%					98%					98%
Projected future recoveries on previously charged-off loans	20%					20%					20%

___________________

(1)    Loss severities on future defaults.

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 $8 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 $9 million for HELOC transactions.

Other Structured Finance

The Company projected that its total net expected loss across its troubled other structured finance exposures as of June 30, 2020 was $35 million and is primarily attributable to $76 million in BIG net par of student loan securitizations issued by private issuers that are classified as structured finance. In general, the projected losses of these transactions are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The Company also had exposure to troubled life insurance transactions. As of June 30, 2020, the Company's BIG net par in these transactions was $40 million. The economic loss development across all other structured finance transactions during Second Quarter 2020 and Six Months 2020 was $1 million and $2 million, respectively.

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Recovery Litigation

In the ordinary course of their respective businesses, certain of AGL's subsidiaries are involved in litigation with 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 results of operations in that particular quarter or year.

    The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding Insurance Exposure, for a discussion of the Company's exposure to Puerto Rico and related recovery litigation being pursued by the Company.

5. Contracts Accounted for as Insurance

Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Insurance Exposure, and Note 4, Expected Loss to be Paid, includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance. See Note 9, Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 11, Variable Interest Entities for amounts that are accounted for as consolidated FG VIEs.

Net Earned Premiums

	Second Quarter				Six Months
	2020		2019		2020		2019
	(in millions)
Financial guaranty:
Scheduled net earned premiums	$	83	$	85	$	165	$	172
Accelerations from refundings and terminations	32		20		47		46
Accretion of discount on net premiums receivable	5		5		10		9
Financial guaranty insurance net earned premiums	120		110		222		227
Specialty net earned premiums	1		2		2		3
Net earned premiums (1)	$	121	$	112	$	224	$	230

 ___________________

(1) Excludes $1 million and $11 million for Second Quarter 2020 and 2019, respectively, and $2 million and $14 million for Six Months 2020 and 2019, respectively, related to consolidated FG VIEs.

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Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward 

	Six Months
	2020			2019
	(in millions)
Beginning of year	$	1,286		$	904
Less: Specialty insurance premium receivable	2			1
Financial guaranty insurance premiums receivable	1,284			903
Gross written premiums on new business, net of commissions	220			98
Gross premiums received, net of commissions	(156		)	(127		)
Adjustments:
Changes in the expected term	(9		)	(10		)
Accretion of discount, net of commissions on assumed business	9			4
Foreign exchange gain (loss) on remeasurement	(55		)	(3		)
Financial guaranty insurance premium receivable (1)	1,293			865
Specialty insurance premium receivable	1			1
June 30,	$	1,294		$	866

____________________

(1) Excludes $6 million and $8 million as of June 30, 2020 and June 30, 2019, respectively, related to consolidated FG VIEs.

Approximately 79% and 78% of installment premiums at June 30, 2020 and December 31, 2019, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.

The timing and cumulative amount of actual collections may differ from those of expected collections in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, changes in expected lives and new business.

Expected Collections of

Financial Guaranty Insurance Gross Premiums Receivable,

Net of Commissions on Assumed Business

(Undiscounted)

	As of June 30, 2020
	(in millions)
2020 (July 1 - September 30)	$	86
2020 (October 1 - December 31)	14
2021	92
2022	106
2023	94
2024	86
2025-2029	342
2030-2034	238
2035-2039	151
After 2039	340
Total (1)	$	1,549

 ____________________

(1) Excludes expected cash collections on consolidated FG VIEs of $8 million.

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The timing and cumulative amount of actual net earned premiums may differ from those of expected net earned premiums in the table below due to factors such as accelerations, commutations, changes in expected lives and new business.

Scheduled Financial Guaranty Insurance Net Earned Premiums

	As of June 30, 2020
	(in millions)
2020 (July 1 - September 30)	$	84
2020 (October 1 - December 31)	82
Subtotal 2020	166
2021	306
2022	281
2023	259
2024	238
2025-2029	930
2030-2034	653
2035-2039	386
After 2039	518
Net deferred premium revenue (1)	3,737
Future accretion	256
Total future net earned premiums	$	3,993

 ____________________

(1) Excludes net earned premiums on consolidated FG VIEs of $45 million.

Selected Information for Financial Guaranty Insurance

Policies with Premiums Paid in Installments

	As of June 30, 2020			As of December 31, 2019
	(dollars in millions)
Premiums receivable, net of commission payable	$	1,293		$	1,284
Gross deferred premium revenue	1,679			1,637
Weighted-average risk-free rate used to discount premiums	1.6		%	1.7		%
Weighted-average period of premiums receivable (in years)	12.7			13.3

Financial Guaranty Insurance Losses

The following table provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance. To discount loss reserves, the Company used risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.00% to 1.47% with a weighted average of 0.57% as of June 30, 2020 and 0.00% to 2.45% with a weighted average of 1.94% as of December 31, 2019.

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Net Reserve (Salvage) 

	As of June 30, 2020			As of December 31, 2019
	(in millions)
Public finance:
U.S. public finance	$	341		$	328
Non-U.S. public finance	5			5
Public finance	346			333
Structured finance:
U.S. RMBS (1)	(84		)	(78		)
Other structured finance	41			40
Structured finance	(43		)	(38		)
Total	$	303		$	295

____________________

(1) Excludes net reserves of $37 million and $33 million as of June 30, 2020 and December 31, 2019, respectively, related to consolidated FG VIEs.

Components of Net Reserves (Salvage)

 

	As of June 30, 2020			As of December 31, 2019
	(in millions)
Loss and LAE reserve	$	1,076		$	1,050
Reinsurance recoverable on unpaid losses (1)	(9		)	(38		)
Loss and LAE reserve, net	1,067			1,012
Salvage and subrogation recoverable	(795		)	(747		)
Salvage and subrogation reinsurance payable (2)	31			30
Salvage and subrogation recoverable, net	(764		)	(717		)
Net reserves (salvage)	$	303		$	295

____________________

(1) Recorded as a component of other assets in the condensed consolidated balance sheets.

(2) Recorded as a component of other liabilities in the condensed consolidated balance sheets.

The table below provides a reconciliation of net expected loss to be paid for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid which represents the claim payments made and recoveries received that have not yet been recognized in the statement of operations, (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).

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Reconciliation of Net Expected Loss to be Paid and

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts

	As of June 30, 2020
	(in millions)
Net expected loss to be paid - financial guaranty insurance	$	682
Contra-paid, net	39
Salvage and subrogation recoverable, net, and other recoverable	764
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance	(1,065		)
Net expected loss to be expensed (present value) (1)	$	420

____________________

(1)    Excludes $32 million as of June 30, 2020, related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts 

	As of June 30, 2020
	(in millions)
2020 (July 1 - September 30)	$	9
2020 (October 1 - December 31)	9
Subtotal 2020	18
2021	36
2022	37
2023	34
2024	33
2025-2029	131
2030-2034	89
2035-2039	33
After 2039	9
Net expected loss to be expensed	420
Future accretion	56
Total expected future loss and LAE	$	476

 

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The following table presents the loss and LAE recorded in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.

Loss and LAE

Reported on the

Condensed Consolidated Statements of Operations

  

	Loss (Benefit)
	Second Quarter					Six Months
	2020		2019			2020			2019
	(in millions)
Public finance:
U.S. public finance	$	33	$	94		$	92		$	164
Non-U.S. public finance	—		(8		)	—			(8		)
Public finance	33		86			92			156
Structured finance:
U.S. RMBS (1)	4		(88		)	(38		)	(115		)
Other structured finance	—		1			3			4
Structured finance	4		(87		)	(35		)	(111		)
Loss and LAE	$	37	$	(1	)	$	57		$	45

____________________

(1) Excludes a loss of $2 million and a benefit of $14 million for Second Quarter 2020 and 2019, respectively, and a loss of $8 million and a benefit of $15 million for Six Months 2020 and 2019 respectively, related to consolidated FG VIEs.

The following tables provide information on financial guaranty insurance contracts categorized as BIG.

Financial Guaranty Insurance

BIG Transaction Loss Summary

As of June 30, 2020

	BIG  Categories
	BIG 1						BIG 2					BIG 3						Total BIG, Net			Effect of Consolidating FG VIEs			Total
	Gross			Ceded			Gross			Ceded		Gross			Ceded
	(dollars in millions)
Number of risks (1)	112			(1		)	19			—		128			(4		)	259			—			259
Remaining weighted-average period (in years)	7.3			4.7			17.3			—		9.3			6.1			9.2			—			9.2
Outstanding exposure:
Par	$	2,493		$	(11	)	$	511		$	—	$	5,326		$	(68	)	$	8,251		$	—		$	8,251
Interest	944			(3		)	436			—		2,291			(18		)	3,650			—			3,650
Total (2)	$	3,437		$	(14	)	$	947		$	—	$	7,617		$	(86	)	$	11,901		$	—		$	11,901
Expected cash outflows (inflows)	$	155		$	(1	)	$	73		$	—	$	4,057		$	(54	)	$	4,230		$	(262	)	$	3,968
Potential recoveries (3)	(604		)	21			(3		)	—		(2,887		)	55			(3,418		)	188			(3,230		)
Subtotal	(449		)	20			70			—		1,170			1			812			(74		)	738
Discount	18			—			(10		)	—		(72		)	(1		)	(65		)	9			(56		)
Present value of expected cash flows	$	(431	)	$	20		$	60		$	—	$	1,098		$	—		$	747		$	(65	)	$	682
Deferred premium revenue	$	134		$	—		$	23		$	—	$	453		$	(3	)	$	607		$	(45	)	$	562
Reserves (salvage)	$	(465	)	$	20		$	41		$	—	$	740		$	2		$	338		$	(37	)	$	301

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Financial Guaranty Insurance

BIG Transaction Loss Summary

As of December 31, 2019

	BIG Categories
	BIG 1						BIG 2					BIG 3						Total BIG, Net			Effect of Consolidating FG VIEs			Total
	Gross			Ceded			Gross			Ceded		Gross			Ceded
	(dollars in millions)
Number of risks (1)	121			(6		)	24			—		131			(7		)	276			—			276
Remaining weighted-average period (in years)	8.0			5.2			17.0			—		9.7			8.3			9.7			—			9.7
Outstanding exposure:
Par	$	2,654		$	(54	)	$	561		$	—	$	5,386		$	(170	)	$	8,377		$	—		$	8,377
Interest	1,149			(15		)	481			—		2,507			(73		)	4,049			—			4,049
Total (2)	$	3,803		$	(69	)	$	1,042		$	—	$	7,893		$	(243	)	$	12,426		$	—		$	12,426
Expected cash outflows (inflows)	$	135		$	(3	)	$	84		$	—	$	4,185		$	(132	)	$	4,269		$	(264	)	$	4,005
Potential recoveries (3)	(598		)	21			(10		)	—		(2,926		)	107			(3,406		)	189			(3,217		)
Subtotal	(463		)	18			74			—		1,259			(25		)	863			(75		)	788
Discount	54			(1		)	(21		)	—		(151		)	(3		)	(122		)	17			(105		)
Present value of expected cash flows	$	(409	)	$	17		$	53		$	—	$	1,108		$	(28	)	$	741		$	(58	)	$	683
Deferred premium revenue	$	142		$	(1	)	$	34		$	—	$	480		$	(4	)	$	651		$	(48	)	$	603
Reserves (salvage)	$	(441	)	$	17		$	35		$	—	$	742		$	(25	)	$	328		$	(33	)	$	295

____________________

(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.

(2) Includes amounts related to FG VIEs.

(3) Represents expected inflows for future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past.

6. Reinsurance

The Company assumes exposure (Assumed Business) from third party insurers, primarily other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (Legacy Monoline Insurers), and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of any ceding commissions. The Company, if required, secures its reinsurance obligations to these Legacy Monoline Insurers, typically by depositing in trust assets with a market value equal to its assumed liabilities calculated on a U.S. statutory basis.

Substantially all of the Company’s Assumed Business and Ceded Business relates to financial guaranty business, except for a modest amount that relates to AGRO's specialty business. The Company historically entered into, and with respect to new business originated by AGRO continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

Financial Guaranty Business

The Company’s facultative and treaty assumed agreements with the Legacy Monoline Insurers are generally subject to termination at the option of the ceding company:

• if the Company fails to meet certain financial and regulatory criteria;

• if the Company fails to maintain a specified minimum financial strength rating; or

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• upon certain changes of control of the Company.

Upon termination due to one of the above events, the Company typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the Assumed Business (plus in certain cases, an additional required amount), after which the Company would be released from liability with respect to such business.

As of June 30, 2020, if each third party company ceding business to any of the Company's insurance subsidiaries had a right to recapture such business, and chose to exercise such right, the aggregate amounts that AG Re and AGC could be required to pay to all such companies would be approximately $41 million and $248 million, respectively.

The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. The Company’s ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain triggering events, such as reinsurer downgrades.

Specialty Business

The Company, through AGRO, assumes specialty business from third party insurers (Assumed Specialty Business). It also cedes and retrocedes some of its specialty business to third party reinsurers. A downgrade of AGRO’s financial strength rating by S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) below "A" would require AGRO to post, as of June 30, 2020, an estimated $1.3 million of collateral in respect of certain of its Assumed Specialty Business. A further downgrade of AGRO’s S&P rating below A- would give the company ceding such business the right to recapture the business for AGRO’s collateral amount, and, if also accompanied by a downgrade of AGRO's financial strength rating by A.M. Best Company, Inc. below A-, would also require AGRO to post, as of June 30, 2020, an estimated $13 million of collateral in respect of a different portion of AGRO’s Assumed Specialty Business. AGRO’s ceded/retroceded contracts generally have equivalent provisions requiring the assuming reinsurer to post collateral and/or allowing AGRO to recapture the ceded/retroceded business upon certain triggering events, such as reinsurer rating downgrades.

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Effect of Reinsurance

The following table presents the components of premiums and losses reported in the condensed consolidated statements of operations and the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and specialty).

Effect of Reinsurance on Statement of Operations

	Second Quarter						Six Months
	2020			2019			2020			2019
Premiums Written:
Direct	$	148		$	50		$	212		$	89
Assumed	1			1			1			1
Ceded (1)	2			(2		)	2			13
Net	$	151		$	49		$	215		$	103
Premiums Earned:
Direct	$	113		$	99		$	207		$	204
Assumed	10			15			20			30
Ceded	(2		)	(2		)	(3		)	(4		)
Net	$	121		$	112		$	224		$	230
Loss and LAE:
Direct	$	38		$	—		$	46		$	54
Assumed	(1		)	1			11			2
Ceded	—			(2		)	—			(11		)
Net	$	37		$	(1	)	$	57		$	45

____________________

(1) Positive ceded premiums written were due to commutations and changes in expected debt service schedules.

Ceded Reinsurance (1)

	As of June 30, 2020			As of December 31, 2019
	(in millions)
Ceded premium payable, net of commissions	$	17		$	20
Ceded expected loss to be recovered (paid)	(20		)	11
Financial guaranty ceded par outstanding (2)	886			1,349
Specialty ceded exposure (see Note 3)	303			303

____________________

(1) The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of June 30, 2020 and December 31, 2019 was approximately $18 million and $68 million, respectively. Such collateral is posted (i) in the case of certain reinsurers not authorized or "accredited" in the U.S., in order for the Company to receive credit for the liabilities ceded to such reinsurers in statutory financial statements, and (ii) in the case of certain reinsurers authorized in the U.S., on terms negotiated with the Company.

(2) Of the total par ceded to BIG rated reinsurers, $79 million and $224 million is rated BIG as of June 30, 2020 and December 31, 2019, respectively.

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Commutations

In Second Quarter 2020, the Company reassumed a previously ceded portfolio of insured business from its largest remaining legacy third party financial guaranty reinsurer, which includes $118 million in net par of Puerto Rico exposures.

Commutations of Ceded Reinsurance Contracts

	Second Quarter				Six Months
	2020		2019		2020		2019
	(in millions)
Increase in net unearned premium reserve	$	5	$	15	$	5	$	15
Increase in net par outstanding	336		1,069		336		1,069
Commutation gains (losses)	38		1		38		1

7. Fair Value Measurement

The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).

Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During Six Months 2020, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income.

The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows, with Level 1 being the highest and Level 3 the lowest. An asset's or liability’s categorization is based on the lowest level of significant input to its valuation.

Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.

Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3

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financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

There was a transfer of a fixed-maturity security from Level 3 into Level 2 during Six Months 2020. There was a transfer of a fixed-maturity security from Level 2 into Level 3 during Second Quarter 2019 and Six Months 2019. There were no other transfers into or from Level 3 during the period presented.

Carried at Fair Value

Fixed-Maturity Securities and Short-Term Investments

The fair value of fixed-maturity securities in the investment portfolio is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events, and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news.

Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. The valuation of fixed-maturity investments is more subjective when markets are less liquid due to the lack of market based inputs.

Short-term investments that are traded in active markets are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.

As of June 30, 2020, the Company used models to price 159 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $1,094 million. Most Level 3 securities were priced with the assistance of an independent third party. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecasts and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the security including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.

Other Assets

Committed Capital Securities

Each of AGC and AGM have entered into put agreements with 4 separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.

The fair value of CCS, which is recorded in other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC's CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value of the AGC CCS and AGM CPS are recorded in fair value gains (losses) on committed capital securities in the condensed consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGC and AGM CDS spreads, LIBOR curve projections, the Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3 in the fair value hierarchy.

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Supplemental Executive Retirement Plans

The Company classifies the fair value measurement included in the Company's various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is valued based on the observable published daily values of the underlying mutual fund included in the plans (Level 1) or based upon the net asset value (NAV) of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. Change in fair value of these assets is recorded in other operating expenses in the condensed consolidated statement of operations.

Contracts Accounted for as Credit Derivatives

The Company’s credit derivatives primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes recorded in the statement of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions are generally terminated for an amount that approximates the present value of future premiums or for a negotiated amount, rather than at fair value.

The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company's credit derivative contracts in determining the fair value of these contracts.

Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.

The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at June 30, 2020 were such that market prices of the Company’s CDS contracts were not available.

Assumptions and Inputs

The various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company.

With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. It is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.

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Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders who are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process. The following spread hierarchy is utilized in determining which source of gross spread to use.

• Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).

• Transactions priced or closed during a specific quarter within a specific asset class and specific rating.

• Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company's CDS contracts.

• Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

The rates used to discount future expected premium cash flows ranged from 0.23% to 0.89% at June 30, 2020 and 1.69% to 2.08% at December 31, 2019.

The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its transactions. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. The Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS transactions that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a transaction generally decreases. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM's portfolio, changes in AGM's credit spreads do not significantly affect the fair value of these CDS contracts.

In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. Given market conditions and the Company’s own credit spreads, de minimis amounts, based on fair value, of the Company's CDS contracts were fair valued using this minimum premium as of June 30, 2020 and December 31, 2019. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC's credit spreads. In general, when AGC's credit spreads narrow, the cost to hedge AGC's name declines and more transactions price above previously established floor levels. Meanwhile, when AGC's credit spreads widen, the cost to hedge AGC's name increases causing more transactions to price at established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s own credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC's credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.

A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are less than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value

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of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts and taking the present value of such amounts discounted at the LIBOR corresponding to the weighted average remaining life of the contract.

Strengths and Weaknesses of Model

The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.

The primary strengths of the Company’s CDS modeling techniques are:

• The model takes into account the transaction structure and the key drivers of market value.

• The model maximizes the use of market-driven inputs whenever they are available.

• The model is a consistent approach to valuing positions.

The primary weaknesses of the Company’s CDS modeling techniques are:

• There is no exit market or any actual exit transactions; therefore, the Company’s exit market is a hypothetical one based on the Company’s entry market.

• There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.

• The markets for the inputs to the model are highly illiquid, which impacts their reliability.

• Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.

Fair Value Option on FG VIEs’ Assets and Liabilities

The Company elected the fair value option for the FG VIEs’ assets and liabilities and classifies them as Level 3 in the fair value hierarchy. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. The net change in the fair value of consolidated FG VIEs’ assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in instrument-specific credit risk (ISCR) which is separately presented in other comprehensive income (OCI). Interest income and interest expense are derived from the trustee reports and also included in "fair value gains (losses) on FG VIEs." The FG VIEs issued securities typically collateralized by first lien and second lien RMBS as well as loans and receivables.

The fair value of the Company’s FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the market value of the FG VIEs’ assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets.

The third party utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds.

The models used to price the FG VIEs’ liabilities generally apply the same inputs used in determining fair value of FG VIEs’ assets. For those liabilities insured by the Company, the benefit of the Company's insurance policy guaranteeing the timely payment of principal and interest is also taken into account.

57

Significant changes to any of the inputs described above could have materially changed the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse.

Assets and Liabilities of Consolidated Investment Vehicles

Due to the fact that BlueMountain manages and the insurance companies have an investment in certain Assured Investment Management funds, the Company consolidated several Assured Investment Management investment vehicles listed below (collectively, the consolidated investment vehicles). All consolidated investment vehicles are accounted for at fair value. See Note 11, Variable Interest Entities.

The Assured Investment Management funds that are consolidated (consolidated Assured Investment Management funds) are:

• AHP Capital Solutions, LP (AHP),

• AIM Asset Backed Income Fund (US) L.P. (ABIF),

• BlueMountain CLO Warehouse Fund (US) L.P. (CLO Warehouse Fund), and

• AIM Municipal Bond Fund L.P. (AMBF).

The CLO Warehouse Fund invested in the following entities managed by Assured Investment Management, and which are also consolidated:

• BlueMountain CLO XXVI Ltd. (CLO XXVI),

• BlueMountain CLO XXIX Ltd. (CLO XXIX), and

• BlueMountain CLO Warehouse Ltd. (CLOWH).

CLO XXVI and CLO XXIX, which are CLOs managed by Assured Investment Management (collectively, the consolidated CLOs), are collateralized financing entities (CFE) under Accounting Standards Codification (ASC) 810, Consolidation, and have elected to measure assets and liabilities using the fair value of their respective assets, which are more observable. The financial assets of consolidated CLOs are all Level 2 assets, and therefore more observable than the fair value of the financial liabilities of consolidated CLOs, which are all Level 3 liabilities. As a result, the financial assets of consolidated CLOs are measured at fair value and the financial liabilities of consolidated CLOs are measured as: (1) the sum of the fair value of the financial assets, and the carrying value of any nonfinancial assets held temporarily, less (2) the sum of the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by the Company). CLOWH is not a CFE. The assets and liabilities of CLOWH are recorded at fair value under the fair value option.

Investments of consolidated investment vehicles which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which have no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third party data generally at the average between the offer and bid prices. These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments. Inputs are used in applying the various valuation techniques and broadly refer to the current assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors.

Assets in consolidated Assured Investment Management funds that are carried at fair value primarily consist of corporate loans, CLOs, asset backed securities, municipal bonds, short-term and other investments. Assets supporting consolidated CLOs and certain assets of the consolidated funds are Level 2. Short-term investments are classified as Level 1. The remainder of the invested assets of consolidated funds are Level 3. Liabilities include various tranches of CLO debt, which are classified as Level 3 and securities sold short, which are classified as Level 2 in the fair value hierarchy. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.

58

Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of June 30, 2020

			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions	$	4,113	$	—	$	4,016	$	97
U.S. government and agencies	174		—		174		—
Corporate securities	2,389		—		2,360		29
Mortgage-backed securities:
RMBS	635		—		381		254
Commercial mortgage-backed securities (CMBS)	411		—		411		—
Asset-backed securities	768		—		54		714
Non-U.S. government securities	140		—		140		—
Total fixed-maturity securities	8,630		—		7,536		1,094
Short-term investments	821		754		67		—
Other invested assets (1)	15		9		—		6
FG VIEs’ assets, at fair value	318		—		—		318
Assets of consolidated investment vehicles:
Fund investments
Debt securities	63		—		3		60
Equity securities and warrants	54		—		1		53
Structured products	43		—		37		6
Obligations of state and political subdivisions	39		—		39		—
CLO investments
Debt securities	850		—		850		—
Short-term investments	403		403		—		—
Total assets of consolidated investment vehicles	1,452		403		930		119
Other assets	160		41		42		77
Total assets carried at fair value	$	11,396	$	1,207	$	8,575	$	1,614
Liabilities:
Credit derivative liabilities	$	163	$	—	$	—	$	163
FG VIEs’ liabilities with recourse, at fair value	332		—		—		332
FG VIEs’ liabilities without recourse, at fair value	20		—		—		20
Liabilities of consolidated investment vehicles:
CLO obligations of CFE	806		—		—		806
Securities sold short	30		—		30		—
Total liabilities of consolidated investment vehicles	836		—		30		806
Total liabilities carried at fair value	$	1,351	$	—	$	30	$	1,321

59

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of December 31, 2019

			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions	$	4,340	$	—	$	4,233	$	107
U.S. government and agencies	147		—		147		—
Corporate securities	2,221		—		2,180		41
Mortgage-backed securities:
RMBS	775		—		467		308
CMBS	419		—		419		—
Asset-backed securities	720		—		62		658
Non-U.S. government securities	232		—		232		—
Total fixed-maturity securities	8,854		—		7,740		1,114
Short-term investments	1,268		1,061		207		—
Other invested assets (1)	6		—		—		6
FG VIEs’ assets, at fair value	442		—		—		442
Assets of consolidated investment vehicles:
Fund investments
Debt securities	47		—		—		47
Equity securities and warrants	17		—		—		17
CLO investments
Debt securities	494		—		494		—
Total assets of consolidated investment vehicles	558		—		494		64
Other assets	135		32		45		58
Total assets carried at fair value	$	11,263	$	1,093	$	8,486	$	1,684
Liabilities:
Credit derivative liabilities	$	191	$	—	$	—	$	191
FG VIEs’ liabilities with recourse, at fair value	367		—		—		367
FG VIEs’ liabilities without recourse, at fair value	102		—		—		102
Liabilities of consolidated investment vehicles
CLO obligations of CFE	481		—		—		481
Total liabilities carried at fair value	$	1,141	$	—	$	—	$	1,141

____________________

(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis.

60

Changes in Level 3 Fair Value Measurements

The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Second Quarter 2020, Second Quarter 2019, Six Months 2020 and Six Months 2019.

Rollforward of Level 3 Assets

At Fair Value on a Recurring Basis

Second Quarter 2020

	Fixed-Maturity Securities																							Assets of Consolidated Investment Vehicles
	Obligations of State and Political Subdivisions				Corporate Securities				RMBS					Asset- Backed Securities					FG VIEs’ Assets at Fair Value					Debt Securities				Equity Securities and Warrants					Structured Products					Other (7)
	(in millions)
Fair value as of March 31, 2020	$	86			$	26			$	253				$	596				$	368				$	52			$	32				$	12				$	103
Total pretax realized and unrealized gains/(losses) recorded in:
Net income (loss)	1		(1	)	1		(1	)	2			(1	)	7			(1	)	(50		)	(2	)	3		(4	)	7			(4	)	3			(4	)	(25		)	(3	)
Other comprehensive income (loss)	10				2				12					17					—					—				—					—					—
Purchases	—				—				—					118					—					5				17					5					—
Sales	—				—				—					(21		)			—					—				(3		)			(14		)			—
Settlements	—				—				(13		)			(3		)			(18		)			—				—					—					—
VIE consolidations	—				—				—					—					18					—				—					—					—
Fair value as of June 30, 2020	$	97			$	29			$	254				$	714				$	318				$	60			$	53				$	6				$	78
Change in unrealized gains/(losses) included in earnings related to financial instruments held as of June 30, 2020																			$	25		(2	)	$	3	(4	)	$	7		(4	)	$	1		(4	)	$	(25	)	(3	)
Change in unrealized gains/(losses) included in OCI related to financial instruments held as of June 30, 2020	$	10			$	2			$	11				$	16																							$	—

61

Rollforward of Level 3 Liabilities

At Fair Value on a Recurring Basis

Second Quarter 2020

						FG VIEs’ Liabilities, at Fair Value
	Credit Derivative Asset (Liability), net (5)					With Recourse					Without Recourse					Liabilities of Consolidated Investment Vehicles
	(in millions)
Fair value as of March 31, 2020	$	(262	)			$	(312	)			$	(82	)			$	(426	)
Total pretax realized and unrealized gains/(losses) recorded in:
Net income (loss)	100			(6	)	(12		)	(2	)	63			(2	)	(18		)	(4	)
Other comprehensive income (loss)	—					(7		)			—					—
Issuances	—					—					—					(362		)
Settlements	1					15					2					—
VIE consolidations	—					(16		)			(3		)			—
Fair value as of June 30, 2020	$	(161	)			$	(332	)			$	(20	)			$	(806	)
Change in unrealized gains/(losses) included in earnings related to financial instruments held as of June 30, 2020	$	100		(6	)	$	(11	)	(2	)	$	(11	)	(2	)	$	(18	)	(4	)
Change in unrealized gains/(losses) included in OCI related to financial instruments held as of June 30, 2020						$	(7	)

Rollforward of Level 3 Assets and Liabilities

At Fair Value on a Recurring Basis

Second Quarter 2019

	Fixed-Maturity Securities																																	FG VIEs’ Liabilities, at Fair Value
	Obligations of State and Political Subdivisions				Corporate Securities					RMBS					Asset- Backed Securities					FG VIEs’ Assets at Fair Value					Other (7)				Credit Derivative Asset (Liability), net (5)					With Recourse					Without Recourse
	(in millions)
Fair value as of March 31, 2019	$	104			$	48				$	318				$	958				$	560				$	68			$	(228	)			$	(505	)			$	(104	)
Total pretax realized and unrealized gains/(losses) recorded in:
Net income (loss)	1		(1	)	1			(1	)	5			(1	)	30			(1	)	47			(2	)	19		(3	)	(8		)	(6	)	(20		)	(2	)	(3		)	(2	)
Other comprehensive income (loss)	—				(1		)			15					(85		)			—					—				—					5					—
Purchases	—				—					—					8					—					—				—					—					—
Settlements	—				—					(13		)			(238		)			(75		)			—				20					69					1
FG VIE deconsolidation	—				—					—					—					(6		)			—				—					5					1
Transfers into Level 3	—				—					—					1					—					—				—					—					—
Fair value as of June 30, 2019	$	105			$	48				$	325				$	674				$	526				$	87			$	(216	)			$	(446	)			$	(105	)
Change in unrealized gains/(losses) included in earnings related to financial instruments held as of June 30, 2019																				$	52		(2	)	$	19	(3	)	$	(7	)	(6	)	$	(20	)	(2	)	$	(12	)	(2	)
Change in unrealized gains/(losses) included in OCI related to financial instruments held at June 30, 2019	$	—			$	(1	)			$	15				$	8									$	—								$	5

62

Rollforward of Level 3 Assets

At Fair Value on a Recurring Basis

Six Months 2020

	Fixed-Maturity Securities																									Assets of Consolidated Investment Vehicles
	Obligations of State and Political Subdivisions					Corporate Securities					RMBS					Asset- Backed Securities					FG VIEs’ Assets at Fair Value					Debt Securities				Equity Securities and Warrants					Structured Products					Other (7)
	(in millions)
Fair value as of December 31, 2019	$	107				$	41				$	308				$	658				$	442				$	47			$	17				$	—				$	55
Total pretax realized and unrealized gains/(losses) recorded in:
Net income (loss)	2			(1	)	(6		)	(1	)	5			(1	)	14			(1	)	(87		)	(2	)	8		(4	)	3			(4	)	3			(4	)	23		(3	)
Other comprehensive income (loss)	(11		)			(6		)			(35		)			(42		)			—					—				—					—					—
Purchases	—					—					—					118					—					5				50					17					—
Sales	—					—					—					(23		)			—					—				(17		)			(14		)			—
Settlements	(1		)			—					(24		)			(10		)			(55		)			—				—					—					—
VIE consolidations	—					—					—					—					18					—				—					—					—
Transfers out of Level 3	—					—					—					(1		)			—					—				—					—					—
Fair value as of June 30, 2020	$	97				$	29				$	254				$	714				$	318				$	60			$	53				$	6				$	78
Change in unrealized gains/(losses) included in earnings related to financial instruments held as of June 30, 2020																					$	(11	)	(2	)	$	8	(4	)	$	3		(4	)	$	1		(4	)	$	23	(3	)
Change in unrealized gains/(losses) included in OCI related to financial instruments held as of June 30, 2020	$	(11	)			$	(6	)			$	(34	)			$	(41	)																						$	—

63

Rollforward of Level 3 Liabilities

At Fair Value on a Recurring Basis

Six Months 2020

						FG VIEs’ Liabilities, at Fair Value
	Credit Derivative Asset (Liability), net (5)					With Recourse					Without Recourse					Liabilities of Consolidated Investment Vehicles
	(in millions)
Fair value as of December 31, 2019	$	(185	)			$	(367	)			$	(102	)			$	(481	)
Total pretax realized and unrealized gains/(losses) recorded in:
Net income (loss)	23			(6	)	4			(2	)	74			(2	)	37			(4	)
Other comprehensive income (loss)	—					6					—					—
Issuances	—					—					—					(362		)
Settlements	1					41					11					—
VIE consolidations	—					(16		)			(3		)			—
Fair value as of June 30, 2020	$	(161	)			$	(332	)			$	(20	)			$	(806	)
Change in unrealized gains/(losses) included in earnings related to financial instruments held as of June 30, 2020	$	27		(6	)	$	4		(2	)	$	(1	)	(2	)	$	37		(4	)
Change in unrealized gains/(losses) included in OCI related to financial instruments held as of June 30, 2020						$	6

64

Rollforward of Level 3 Assets and Liabilities

At Fair Value on a Recurring Basis

Six Months 2019

	Fixed-Maturity Securities																																		FG VIEs’ Liabilities, at Fair Value
	Obligations of State and Political Subdivisions					Corporate Securities					RMBS					Asset- Backed Securities					FG VIEs’ Assets at Fair Value					Other (7)				Credit Derivative Asset (Liability), net (5)					With Recourse					Without Recourse
	(in millions)
Fair value as of December 31, 2018	$	99				$	56				$	309				$	947				$	569				$	77			$	(207	)			$	(517	)			$	(102	)
Total pretax realized and unrealized gains/(losses) recorded in:
Net income (loss)	2			(1	)	(10		)	(1	)	11			(1	)	44			(1	)	64			(2	)	10		(3	)	(30		)	(6	)	(31		)	(2	)	(7		)	(2	)
Other comprehensive income (loss)	5					2					20					(94		)			—					—				—					5					—
Purchases	—					—					11					18					—					—				—					—					—
Settlements	(1		)			—					(26		)			(242		)			(101		)			—				21					92					3
FG VIE deconsolidation	—					—					—					—					(6		)			—				—					5					1
Transfers into Level 3	—					—					—					1					—					—				—					—					—
Fair value as of June 30, 2019	$	105				$	48				$	325				$	674				$	526				$	87			$	(216	)			$	(446	)			$	(105	)
Change in unrealized gains/(losses) included in earnings related to financial instruments held as of June 30, 2019																					$	72		(2	)	$	10	(3	)	$	(28	)	(6	)	$	(31	)	(2	)	$	(15	)	(2	)
Change in unrealized gains/(losses) included in OCI related to financial instruments held at June 30. 2019	$	5				$	2				$	20				$	11									$	—								$	5

 ____________________

(1) Included in net realized investment gains (losses) and net investment income.

(2) Included in fair value gains (losses) on FG VIEs.

(3) Recorded in fair value gains (losses) on CCS, net investment income and other income.

(4) Recorded in fair value gains (losses) on consolidated investment vehicles.

(5) Represents the net position of credit derivatives. Credit derivative assets (recorded in other assets) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the condensed consolidated balance sheet based on net exposure by transaction.

(6) Reported in net change in fair value of credit derivatives.

(7) Includes CCS and other invested assets.

65

Level 3 Fair Value Disclosures

Quantitative Information About Level 3 Fair Value Inputs

At June 30, 2020

Financial Instrument Description	Fair Value at June 30, 2020 (in millions)		Significant Unobservable Inputs	Range				Weighted Average (5)
Assets (2):
Fixed-maturity securities (1):
Obligations of state and political subdivisions	$	97	Yield	5.3	%	-	35.3%	10.9%
Corporate securities	29		Yield	45.3%
RMBS	254		CPR	2.7	%	-	15.0%	6.5%
			CDR	1.5	%	-	7.5%	5.4%
			Loss severity	45.0	%	-	125.0%	83.4%
			Yield	4.5	%	-	7.2%	5.5%
Asset-backed securities:
Life insurance transactions	335		Yield	5.5%
CLOs /Trust preferred securities (TruPS)	342		Yield	1.5	%	-	4.2%	2.4%
Others	37		Yield	13.3%
FG VIEs’ assets, at fair value (1)	318		CPR	0.4	%	-	18.8%	8.6%
			CDR	1.2	%	-	26.5%	5.3%
			Loss severity	45.0	%	-	100.0%	79.7%
			Yield	2.9	%	-	8.7%	5.9%
Assets of consolidated investment vehicles (3):
Debt securities	60		Discount rate	14.9	%	-	23.4%	18.5%
			Market multiple - enterprise/revenue value	0.66x
			Market multiple - enterprise/EBITDA (4)	10.0x
Equity securities and warrants	53		Discount rate	14.9	%	-	26.9%	25.6%
			Market multiple - enterprise/revenue value	0.66x
			Market multiple - enterprise/EBITDA	8.1x		-	10.0x
			Yield	10.1%
Structured products	6		Yield	4.8	%	-	11.6%	7.4%
Other assets (1)	75		Implied Yield	4.0	%	-	4.8%	4.4%
			Term (years)	10 years

66

Financial Instrument Description (1)	Fair Value at June 30, 2020 (in millions)			Significant Unobservable Inputs	Range				Weighted Average (5)
Liabilities:
Credit derivative liabilities, net	$	(161	)	Year 1 loss estimates	0.0	%	-	83.0%	2.1%
				Hedge cost (in basis points (bps))	21.0		-	119.0	44.0
				Bank profit (in bps)	44.0		-	289.0	107.0
				Internal floor (in bps)	9.0		-	30.0	9.0
				Internal credit rating	AAA		-	CCC	AA-
FG VIEs’ liabilities, at fair value	(352		)	CPR	0.4	%	-	18.8%	8.6%
				CDR	1.2	%	-	26.5%	5.3%
				Loss severity	45.0	%	-	100.0%	79.7%
				Yield	1.9	%	-	8.3%	4.6%
Liabilities of consolidated investment vehicles:
CLO obligations of CFE (6)	(806		)	Yield	2.6	%	-	13.4%	3.0%

___________________

(1) Discounted cash flow is used as the primary valuation technique.

(2) Excludes several investments recorded in other invested assets with a fair value of $6 million.

(3) The primary inputs to the valuation are data on comparable companies, including market multiples, yields/discount rates, financial projections, and recent market transaction prices where available.

(4) Earnings before interest, taxes, depreciation, and amortization.

(5) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of consolidated investment vehicles, where it is calculated as a percentage of fair value.

(6) See CFE fair value methodology described above for consolidated CLOs.

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Quantitative Information About Level 3 Fair Value Inputs

At December 31, 2019

Financial Instrument Description	Fair Value at December 31, 2019 (in millions)		Significant Unobservable Inputs	Range				Weighted Average as a Percentage of Current Par Outstanding
Assets (2):
Fixed-maturity securities (1):
Obligations of state and political subdivisions	$	107	Yield	4.5	%	-	31.1%	8.5%
Corporate securities	41		Yield	35.9%
RMBS	308		CPR	2.0	%	-	15.0%	6.3%
			CDR	1.5	%	-	7.0%	4.9%
			Loss severity	40.0	%	-	125.0%	78.8%
			Yield	3.7	%	-	6.1%	4.8%
Asset-backed securities:
Life insurance transactions	350		Yield	5.8%
CLOs/TruPS	256		Yield	2.5	%	-	4.1%	2.9%
Others	52		Yield	2.3	%	-	9.4%	9.3%
FG VIEs’ assets, at fair value (1)	442		CPR	0.1	%	-	18.6%	8.6%
			CDR	1.2	%	-	24.7%	4.9%
			Loss severity	40.0	%	-	100.0%	76.1%
			Yield	3.0	%	-	8.4%	5.2%
Assets of consolidated investment vehicles (3):
Debt securities	47		Discount rate	16.0	%	-	28.0%	21.5%
			Market multiple - enterprise/revenue value	0.5x
			Market multiple - enterprise/EBITDA	9.5x
Equity securities and warrants	17		Discount rate	16.0	%	-	28.0%	20.8%
			Market multiple - enterprise/revenue value	0.5x
			Market multiple - enterprise/EBITDA	9.5x
			Yield	12.5%
Other assets (1)	52		Implied Yield	5.1	%	-	5.8%	5.5%
			Term (years)	10 years

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Financial Instrument Description (1)	Fair Value at December 31, 2019 (in millions)			Significant Unobservable Inputs	Range				Weighted Average as a Percentage of Current Par Outstanding
Liabilities:
Credit derivative liabilities, net	$	(185	)	Year 1 loss estimates	0.0	%	-	46.0%	1.3%
				Hedge cost (in bps)	5.0		-	31.0	11.0
				Bank profit (in bps)	51.0		-	212.0	76.0
				Internal floor (in bps)	30.0
				Internal credit rating	AAA		-	CCC	AA-
FG VIEs’ liabilities, at fair value	(469		)	CPR	0.1	%	-	18.6%	8.6%
				CDR	1.2	%	-	24.7%	4.9%
				Loss severity	40.0	%	-	100.0%	76.1%
				Yield	2.7	%	-	8.4%	4.2%
Liabilities of consolidated investment vehicles:
CLO obligations of CFE	(481		)	Yield	10.0%

____________________

(1) Discounted cash flow is used as the primary valuation technique.

(2) Excludes several investments recorded in other invested assets with a fair value of $6 million.

(3) The primary inputs to the valuation are recent market transaction prices, supported by market multiples and yields/discount rates.

Not Carried at Fair Value

Financial Guaranty Insurance Contracts

Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, as well as prices observed in the credit derivative market with an adjustment for illiquidity so that the terms would be similar to a financial guaranty insurance contract, and also includes adjustments for stressed losses, ceding commissions and return on capital. The Company classified the fair value of financial guaranty insurance contracts as Level 3.

Long-Term Debt

Long-term debt issued by AGUS and AGMH is valued by broker-dealers using third party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. The fair value of notes payable was determined by calculating the present value of the expected cash flows, and was classified as Level 3 in the fair value hierarchy.

Due From/To Brokers and Counterparties

Due from/to brokers and counterparties primarily consists of cash, margin deposits, and cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date. Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the consolidated balance sheet where a contractual right of offset exists under an enforceable netting arrangement. The cash at brokers is partially related to collateral for securities sold short and derivative contracts; its use is therefore restricted until the

69

securities are purchased or the derivative contracts are closed. The fair value of these items is approximated by carrying value and such items are considered Level 1. 

The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.

Fair Value of Financial Instruments Not Carried at Fair Value

	As of June 30, 2020						As of December 31, 2019
	Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
	(in millions)
Assets (liabilities):
Other invested assets	$	—		$	2		$	1		$	2
Other assets (1)	84			84			97			97
Financial guaranty insurance contracts (2)	(2,724		)	(4,568		)	(2,714		)	(4,013		)
Long-term debt	(1,222		)	(1,517		)	(1,235		)	(1,573		)
Other liabilities (1)	(36		)	(36		)	(14		)	(14		)
Assets (liabilities) of consolidated investment vehicles:
Due from brokers and counterparties	41			41			—			—
Due to brokers and counterparties	(400		)	(400		)	—			—

____________________

(1) The Company's other assets and other liabilities consist predominantly of: accrued interest, management fees receivables, receivables for securities sold and payables for securities purchased, for which the carrying value approximates fair value, and a promissory note receivable.

(2) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance. 

8.    Investments and Cash

Accounting Policy

Refer to Note 1, Business and Basis of Presentation for a description of new accounting guidance adopted as of January 1, 2020 related to credit impairment of financial assets.

Investment Portfolio

As of June 30, 2020, the majority of the investment portfolio is managed by 6 outside managers. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The externally managed portfolio must maintain a minimum average rating of A+ by S&P or A1 by Moody’s Investors Service, Inc. (Moody’s).

The investment portfolio tables shown below include assets managed both externally and internally. The internally managed portfolio primarily consists of the Company's investments in (i) securities acquired for loss mitigation purposes or other risk management purposes, (ii) securities managed under Investment Management Agreements (IMAs) with BlueMountain, and (iii) other alternative investments, including both equity and debt securities, that the Company believes present an attractive investment opportunity. Alternative investments include assets invested in Assured Investment Management funds, which are accounted for as consolidated investment vehicles and therefore not included in this note.

One of the Company's strategies for mitigating losses has been to purchase loss mitigation securities at discounted prices. The Company also holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of the financial guaranties (other risk management assets).

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The insurance subsidiaries currently intend to invest $500 million in Assured Investment Management funds. As of June 30, 2020, the Insurance segment had committed capital to the 4 consolidated Assured Investment Management funds, of which $354 million has been drawn by the respective Assured Investment Management funds, and which had a fair value of $367 million as of June 30, 2020. The remaining outstanding commitment to the Assured Investment Management funds was $112 million as of June 30, 2020. The undrawn portion is reflected in short-term investments in the table below. All of the Assured Investment Management funds in which the insurance subsidiaries invest were consolidated as of June 30, 2020 and December 31, 2019. See Note 11, Variable Interest Entities.

In Second Quarter 2020, AGM, AGC and MAC entered into IMAs with BlueMountain to manage a portfolio of municipal obligations and a portfolio of CLOs. As of June 30, 2020, they have together allocated $250 million to municipal obligation strategies and $100 million to CLO strategies, with authorization to allocate an additional $200 million to CLOs strategies.

The Company has agreed to purchase up to $100 million of limited partnership interests in a fund that invests in the equity of private equity managers of which $84 million of the commitment was not funded as of June 30, 2020. The Company has also invested in a limited liability company that owns fuel cells with a fair value of $61 million as of June 30, 2020.

Investment Portfolio

Carrying Value

	As of June 30, 2020		As of December 31, 2019
	(in millions)
Fixed-maturity securities (1):
Externally managed	$	7,503	$	7,978
Internally managed:
Assured Investment Management	354		—
Loss mitigation and other securities	773		876
Short-term investments	821		1,268
Other invested assets
Equity method investments	107		111
Other	15		7
Total	$	9,573	$	10,240

____________________

(1) 7.7% and 8.6% of fixed-maturity securities are rated BIG as of June 30, 2020 and December 31, 2019, respectively.

Accrued investment income, which is recorded in other assets, was $75 million and $79 million as of June 30, 2020 and December 31, 2019, respectively. In Six Months 2020, the Company did not write off any accrued investment income.

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Fixed-Maturity Securities and Short-Term Investments

by Security Type 

As of June 30, 2020

Security Type	Percent of Total (1)		Amortized Cost		Allowance for Credit Losses			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI (2) Pre-tax Gain (Loss) on Securities with Credit Loss			Weighted Average Credit Rating (3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	42	%	$	3,789	$	(11	)	$	336	$	(1	)	$	4,113	$	(1	)	AA-
U.S. government and agencies	2		160		—			14		—			174		—			AA+
Corporate securities	26		2,327		(38		)	138		(38		)	2,389		(18		)	A
Mortgage-backed securities (4):	0
RMBS	7		649		(20		)	37		(31		)	635		(29		)	A-
CMBS	4		384		—			27		—			411		—			AAA
Asset-backed securities	8		780		(6		)	12		(18		)	768		(4		)	BBB-
Non-U.S. government securities	2		148		—			1		(9		)	140		—			AA
Total fixed-maturity securities	91		8,237		(75		)	565		(97		)	8,630		(52		)	A+
Short-term investments	9		821		—			1		(1		)	821		—			AAA
Total	100	%	$	9,058	$	(75	)	$	566	$	(98	)	$	9,451	$	(52	)	A+

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Fixed-Maturity Securities and Short-Term Investments

by Security Type 

As of December 31, 2019 

Security Type	Percent of Total (1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Pre-tax Gain (Loss) on Securities with OTTI			Weighted Average Credit Rating (3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	42	%	$	4,036	$	305	$	(1	)	$	4,340	$	40		AA-
U.S. government and agencies	1		137		10		—			147		—			AA+
Corporate securities	23		2,137		103		(19		)	2,221		(8		)	A
Mortgage-backed securities (4):
RMBS	8		745		37		(7		)	775		8			A-
CMBS	4		402		17		—			419		—			AAA
Asset-backed securities	7		684		38		(2		)	720		16			BB+
Non-U.S. government securities	2		230		7		(5		)	232		3			AA
Total fixed-maturity securities	87		8,371		517		(34		)	8,854		59			A+
Short-term investments	13		1,268		—		—			1,268		—			AAA
Total	100	%	$	9,639	$	517	$	(34	)	$	10,122	$	59		AA-

____________________

(1) Based on amortized cost.

(2) Accumulated OCI (AOCI).

(3) Ratings represent the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio primarily consists of high-quality, liquid instruments.

(4) U.S. government-agency obligations were approximately 39% of mortgage backed securities as of June 30, 2020 and 42% as of December 31, 2019 based on fair value.

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Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

For Which an Allowance for Credit Loss was Not Recorded

As of June 30, 2020

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	35	$	(1	)	$	—	$	—		$	35	$	(1	)
Corporate securities	341		(8		)	61		(12		)	402		(20		)
Mortgage-backed securities:
RMBS	30		(2		)	1		—			31		(2		)
CMBS	—		—			1		—			1		—
Asset-backed securities	468		(10		)	118		(3		)	586		(13		)
Non-U.S. government securities	74		(1		)	40		(8		)	114		(9		)
Total	$	948	$	(22	)	$	221	$	(23	)	$	1,169	$	(45	)
Number of securities (1)			196					65					244

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

As of December 31, 2019

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	45	$	(1	)	$	—	$	—		$	45	$	(1	)
U.S. government and agencies	5		—			5		—			10		—
Corporate securities	61		—			119		(19		)	180		(19		)
Mortgage-backed securities:
RMBS	10		—			75		(7		)	85		(7		)
CMBS	—		—			4		—			4		—
Asset-backed securities	24		—			183		(2		)	207		(2		)
Non-U.S. government securities	—		—			56		(5		)	56		(5		)
Total	$	145	$	(1	)	$	442	$	(33	)	$	587	$	(34	)
Number of securities			57					119					176
Number of securities with OTTI			1					7					8

___________________

(1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.

Of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 25 securities had unrealized losses in excess of 10% of their carrying value as of June 30, 2020. The total unrealized loss for these securities was $18 million as of June 30, 2020. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit

74

loss. The Company has determined that the unrealized losses recorded as of June 30, 2020 were not related to credit quality. In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss position prior to expected recovery in value.

Of the securities in an unrealized loss position for 12 months or more as of December 31, 2019, 19 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 2019. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company determined that the unrealized losses recorded as of December 31, 2019 were not related to credit quality.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of June 30, 2020 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Fixed-Maturity Securities

by Contractual Maturity

As of June 30, 2020

	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	338	$	335
Due after one year through five years	1,577		1,631
Due after five years through 10 years	1,994		2,078
Due after 10 years	3,295		3,540
Mortgage-backed securities:
RMBS	649		635
CMBS	384		411
Total	$	8,237	$	8,630

Based on fair value, investments and restricted assets that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted totaled $290 million and $280 million, as of June 30, 2020 and December 31, 2019, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,422 million and $1,502 million, based on fair value as of June 30, 2020 and December 31, 2019, respectively.

Net Investment Income

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. Net investment income includes the income earned on fixed-maturity securities, short-term investments and other invested assets (excluding investments accounted for under the equity method, which are recorded in equity in earnings of investees in the condensed consolidated statements of operations). The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets.

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Net Investment Income

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Interest income:
Externally managed	$	62		$	69		$	124		$	141
Internally managed	18			43			38			71
Interest income	80			112			162			212
Investment expenses	(2		)	(2		)	(4		)	(4		)
Net investment income	$	78		$	110		$	158		$	208

Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses). Realized gains and losses on sales of investments are determined using the specific identification method.

Net Realized Investment Gains (Losses)

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Gross realized gains on available-for-sale securities	$	16		$	13		$	23		$	19
Gross realized losses on available-for-sale securities	(8		)	(1		)	(9		)	(3		)
Credit impairments (1)	(4		)	(4		)	(15		)	(20		)
Net realized investment gains (losses) (2)	$	4		$	8		$	(1	)	$	(4	)

____________________

(1) Credit impairment in Second Quarter 2020 and Six Months 2020 was related primarily to an increase in the allowance for credit loss on loss mitigation securities. Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in Six Months 2020. Credit impairment in Second Quarter 2019 was primarily attributable to foreign exchange losses while Six Months 2019 was primarily attributable to loss mitigation securities and foreign exchange losses.

(2) Includes foreign currency losses of $2 million for Second Quarter 2020, $3 million for Second Quarter 2019 and $5 million for Six Months 2019, and foreign currency gains of $1 million for Six Months 2020.

The proceeds from sales of fixed-maturity securities classified as available-for-sale were $404 million in Second Quarter 2020, $443 million in Second Quarter 2019, $490 million in Six Months 2020 and $914 million in Six Months 2019.

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The following table presents the roll-forward of the credit losses on fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2020 or an OTTI and for which unrealized loss was recognized in OCI for 2019.

Roll Forward of Credit Losses

for Fixed-Maturity Securities

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Balance, beginning of period	$	73		$	197		$	—		$	185
Effect of adoption of accounting guidance on credit losses on January 1, 2020	—			—			62			—
Additions for credit losses on securities for which credit impairments were not previously recognized	—			—			1			—
Reductions for securities sold and other settlements	(1		)	(6		)	(1		)	(6		)
Additions (reductions) for credit losses on securities for which credit impairments were previously recognized	3			—			13			12
Balance, end of period	$	75		$	191		$	75		$	191

9. Contracts Accounted for as Credit Derivatives

The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with GAAP (primarily CDS). The credit derivative portfolio also includes interest rate swaps.

Credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

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Credit Derivative Net Par Outstanding by Sector

The components of the Company’s credit derivative net par outstanding are presented in the table below. The estimated remaining weighted average life of credit derivatives was 11.3 years and 11.5 years as of June 30, 2020 and December 31, 2019, respectively.

Credit Derivatives (1)

	As of June 30, 2020					As of December 31, 2019
	Net Par Outstanding		Net Fair Value Asset (Liability)			Net Par Outstanding		Net Fair Value Asset (Liability)
	(in millions)
U.S. public finance	$	2,195	$	(66	)	$	1,942	$	(83	)
Non-U.S. public finance	2,327		(29		)	2,676		(39		)
U.S. structured finance	1,119		(61		)	1,206		(58		)
Non-U.S. structured finance	124		(5		)	132		(5		)
Total	$	5,765	$	(161	)	$	5,956	$	(185	)

____________________

(1)    Expected recoveries were $14 million as of June 30, 2020 and $4 million as of December 31, 2019.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating

	As of June 30, 2020				As of December 31, 2019
Ratings	Net Par Outstanding		% of Total		Net Par Outstanding		% of Total
	(dollars in millions)
AAA	$	1,594	27.6	%	$	1,730	29.0	%
AA	1,728		30.0		1,695		28.5
A	848		14.7		1,110		18.6
BBB	1,470		25.5		1,292		21.7
BIG (1)	125		2.2		129		2.2
Credit derivative net par outstanding	$	5,765	100.0	%	$	5,956	100.0	%

____________________

(1) All BIG credit derivatives are U.S. RMBS transactions.

Fair Value of Credit Derivatives

Net Change in Fair Value of Credit Derivative Gains (Losses)

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Realized gains on credit derivatives	$	1		$	1		$	3		$	4
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements	(1		)	(21		)	(3		)	(25		)
Realized gains (losses) and other settlements	—			(20		)	—			(21		)
Net unrealized gains (losses)	100			12			23			(9		)
Net change in fair value of credit derivatives	$	100		$	(8	)	$	23		$	(30	)

     Realized losses and other settlements for Second Quarter 2019 and Six Months 2019 were primarily due to a final

maturity paydown of a U.S. structured finance transaction, for which there was an offsetting unrealized gain.

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During Second Quarter 2020, unrealized gains were generated primarily as a result of price improvements of the underlying collateral.  These gains were partially offset by losses due to the decreased cost to buy protection on AGC, as the market cost of AGC's credit protection decreased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company (or another comparable entity) would expect to receive on these transactions increased.

During Six Months 2020, unrealized gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period. These gains were partially offset by the wider spreads of the underlying collateral and lower discount rates.

During Second Quarter 2019, unrealized gains were generated primarily as a result of a final maturity paydown of a CDS contract and price improvements. These items were partially offset by wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name during the period.

During Six Months 2019, unrealized losses were generated primarily as a result of wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name during the period. These losses were partially offset by the price improvements.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date.

CDS Spread on AGC (in bps)

	As of June 30, 2020	As of March 31, 2020	As of December 31, 2019	As of June 30, 2019	As of March 31, 2019	As of December 31, 2018
Five-year CDS spread	159	224	41	56	74	110
One-year CDS spread	32	64	9	13	20	22

Fair Value of Credit Derivative Assets (Liabilities)

and Effect of AGC

Credit Spread

	As of June 30, 2020			As of December 31, 2019
	(in millions)
Fair value of credit derivatives before effect of AGC credit spread	$	(388	)	$	(261	)
Plus: Effect of AGC credit spread	227			76
Net fair value of credit derivatives	$	(161	)	$	(185	)

The fair value of CDS contracts at June 30, 2020, before considering the benefit applicable to AGC’s credit spreads, is a direct result of the relatively wide credit spreads of certain underlying credits generally due to the long tenor of these credits.

Collateral Posting for Certain Credit Derivative Contracts

The transaction documentation with 1 counterparty for $148 million in CDS net par insured by the Company requires the Company to post collateral, subject to a $148 million cap, to secure its obligation to make payments under such contracts. Eligible collateral is generally cash or U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. As of June 30, 2020, AGC did not need to post collateral to satisfy these requirements.

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10.    Asset Management Fees

The following table presents the sources of asset management fees on a consolidated basis.

Asset Management Fees

	Second Quarter 2020		Six Months 2020
	(in millions)
Management fees:
CLOs (1)	$	3	$	7
Opportunity funds	2		4
Wind-down funds	6		15
Total management fees	11		26
Reimbursable fund expenses	9		17
Total asset management fees (2)	$	20	$	43

_____________________

(1) To the extent that the Company's wind-down and/or opportunity funds are invested in BlueMountain managed CLOs, BlueMountain may rebate any management fees and/or performance compensation earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by BlueMountain. Gross management fees from CLOs, before rebates, were $7 million for Second Quarter 2020 and $17 million for Six Months 2020.

(2) There were 0 performance fees for Second Quarter 2020 and Six Months 2020. Performance fees are recorded when the contractual performance criteria have been met and when it is probable that a significant reversal of revenues will not occur in future reporting periods. For opportunity funds, these conditions are met typically close to the end of the fund’s life. The Company's current opportunity funds were not near the end of their harvest period during the quarter, when they would typically earn performance fee.

The Company had management fees receivable, which are included in other assets on the condensed consolidated balance sheets, of $3 million as of June 30, 2020 and management and performance fees receivable of $9 million as of December 31, 2019. The Company had 0 unearned revenues as of June 30, 2020 and December 31, 2019.     

11. Variable Interest Entities

Financial Guaranty Variable Interest Entities

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but does not act as the servicer or collateral manager for any VIE obligations guaranteed by its insurance subsidiaries. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the Company's financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that are in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

Assured Guaranty is not primarily liable for the debt obligations issued by the VIEs it insures and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on FG VIEs’ liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to 0 at maturity of the FG VIEs’ debt, except for net premiums received and net

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claims paid by Assured Guaranty under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 4, Expected Loss to be Paid.

As part of the terms of its financial guaranty contracts, the Company, under its insurance contract, obtains certain protective rights with respect to the VIE that give the Company additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The Company is deemed to be the control party for certain VIEs under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. If the protective rights that could make the Company the control party have not been triggered, then the VIE is not consolidated. If the Company is deemed no longer to have those protective rights, the VIE is deconsolidated.

The Company has elected the fair value option for assets and liabilities classified as FG VIEs' assets and liabilities because the carrying amount transition method was not practical.

As of both June 30, 2020 and December 31, 2019, the Company consolidated 27 FG VIEs. During Six Months 2020 there were 2 FG VIEs that matured and 2 FG VIEs that were consolidated. During Six Months 2019, 2 FG VIEs were deconsolidated. There were no other consolidations or deconsolidations for the periods presented.

The change in the ISCR of the FG VIEs’ assets held as of June 30, 2020 that was recorded in the condensed consolidated statements of operations for Second Quarter 2020 and Six Months 2020 were losses of $13 million and $16 million, respectively. The change in the ISCR of the FG VIEs’ assets were gains of $29 million and $35 million for Second Quarter 2019 and Six Months 2019, respectively. To calculate ISCR, the change in the fair value of the FG VIEs’ assets is allocated between changes that are due to ISCR and changes due to other factors, including interest rates. The ISCR amount is determined by using expected cash flows at the original date of consolidation discounted at the effective yield less current expected cash flows discounted at that same original effective yield.

The inception to date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the Company’s CDS spread from the most recent date of consolidation to the current period. In general, if the Company’s CDS spread tightens, more value will be assigned to the Company’s credit; however, if the Company’s CDS widens, less value is assigned to the Company’s credit.

	As of June 30, 2020		As of December 31, 2019
	(in millions)
Excess of unpaid principal over fair value of:
FG VIEs’ assets	$	312	$	279
FG VIEs’ liabilities with recourse	30		21
FG VIEs’ liabilities without recourse	38		19
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due	49		52
Unpaid principal for FG VIEs’ liabilities with recourse (1)	362		388

____________________

(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2020 to 2038.

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The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated financial statements, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities with recourse.

Consolidated FG VIEs

By Type of Collateral

	As of June 30, 2020				As of December 31, 2019
	Assets		Liabilities		Assets		Liabilities
	(in millions)
With recourse:
U.S. RMBS first lien	$	228	$	261	$	270	$	297
U.S. RMBS second lien	59		59		70		70
Other	11		12		—		—
Total with recourse	298		332		340		367
Without recourse	20		20		102		102
Total	$	318	$	352	$	442	$	469

Consolidated Investment Vehicles

Through a jointly owned subsidiary, AGM, AGC and MAC, the U.S. insurance subsidiaries, intend to invest $500 million in Assured Investment Management funds. As of June 30, 2020 and December 31, 2019, $354 million and $79 million, respectively, was invested in Assured Investment Management funds. As of June 30, 2020 and December 31, 2019, the fair value of such investments in the Insurance segment was $367 million and $77 million, respectively. CLO Warehouse Fund invested in the subordinated notes of certain CLOs managed by Assured Investment Management, and which are also consolidated.

The consolidated investment vehicles are VIEs. The Company consolidates these investment vehicles as it is deemed to be the primary beneficiary based on its power to direct the most significant activities of each VIE (through its Assured Investment Management platform asset management subsidiaries) and its level of economic interest in the entities (through a jointly owned subsidiary of its U.S. insurance subsidiaries).

Each of the consolidated Assured Investment Management funds are investment companies for accounting purposes and therefore account for their underlying investments at fair value. The consolidated CLOs are CFEs. Under the practical expedient for CFEs, the Company elected to measure the consolidated CLOs’ assets and liabilities using the fair value of their assets, which are more observable. Changes in the fair value of assets and liabilities of consolidated investment vehicles are recorded in "fair value gains (losses) on consolidated investment vehicles" in the condensed consolidated statements of operations.

Upon consolidation of an Assured Investment Management fund, the Company records noncontrolling interest (NCI) for the portion of each fund owned by employees and any third party investors. Redeemable employee-owned NCI is classified outside of shareholders’ equity, within temporary equity, and non-redeemable employee-owned NCI is presented within shareholders' equity in the consolidated balance sheets. During the first quarter of 2020 and Second Quarter 2020, redemption features for certain employee-owned interests were amended resulting in reclassifications from redeemable NCI to non-redeemable NCI.

The assets and liabilities of the Company's consolidated investment vehicles are held within separate legal entities. The assets of the consolidated investment vehicles are not available to creditors of the Company, other than creditors of the applicable consolidated investment vehicles. In addition, creditors of the consolidated investment vehicles have no recourse against the assets of the Company, other than the assets of such applicable consolidated investment vehicles. 

Generally, the consolidation of investment vehicles and FG VIEs has a significant effect on the Company's assets, liabilities and cash flows. The consolidated investment vehicles have no net effect on the net income attributable to the Company, other than the economic interest the Company holds in consolidated funds in the Company's Insurance segment through a jointly owned subsidiary of the U.S. insurance subsidiaries. The ownership interests of the Company's consolidated funds, to which the Company has no economic rights, are reflected as either redeemable or nonredeemable NCI in the

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condensed consolidated financial statements. Liquidity available at the Company's consolidated investment vehicles is typically not available for corporate liquidity needs, except to the extent of the Company's investment in the fund.

Assets and Liabilities

of Consolidated Investment Vehicles

 

	As of June 30, 2020		As of December 31, 2019
	(in millions)
Assets (1):
Fund assets:
Cash and cash equivalents	$	174	$	2
Fund investments, at fair value (2)
Debt securities	63		47
Equity securities and warrants	54		17
Structured products	43		—
Obligations of state and political subdivisions	39		—
Due from brokers and counterparties	29		—
CLO assets:
Cash	1		12
CLO investments, at fair value
Debt securities (3)	850		494
Short-term investments	403		—
Other assets	13		—
Total assets	$	1,669	$	572
Liabilities:
CLO obligations of CFE, at fair value (4)	806		481
Securities sold short, at fair value	30		—
Due to brokers and counterparties	400		—
Other liabilities	—		1
Total liabilities	$	1,236	$	482

____________________

(1) Assets held by consolidated investment vehicles are not available to fund the general liquidity needs of the Company.

(2) Includes investment in affiliates of $53 million and $9 million as of June 30, 2020 and December 31, 2019, respectively.

(3) Includes $846 million in corporate loans of CFEs as of June 30, 2020 and $494 million as of December 31, 2019.

(4) The weighted average maturity and weighted average interest rate of CLO obligations were 5.9 years and 2.7%, respectively, for June 30, 2020 and 12.8 years and 3.8%, respectively, for December 31, 2019. CLO obligations will mature at various dates ranging from 2031 to 2032.

As of June 30, 2020, the consolidated investment vehicles had a commitment to invest $12 million.

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Redeemable Noncontrolling Interests in Consolidated Investment Vehicles

	Second Quarter 2020			Six Months 2020
	(in millions)
Beginning balance	$	8		$	7
Reallocation of ownership interests	(8		)	(10		)
Contributions to investment vehicles	20			25
Net loss	—			(2		)
June 30,	$	20		$	20

Interest income and interest expense are included in "fair value gains (losses) on consolidated investment vehicles." Investment purchases and sales for all consolidated investment vehicles are classified as operating activities, debt issuances and repayments are classified in financing activities.

Effect of Consolidating FG VIEs and Consolidated Investment Vehicles

The effect on the statements of operations and financial condition of consolidating FG VIEs includes (i) changes in fair value gains (losses) on FG VIEs’ assets and liabilities, (ii) the elimination of premiums and losses related to the AGC and AGM FG VIEs’ liabilities with recourse and (iii) the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIEs’ debt. Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances are considered intercompany transactions and therefore eliminated. Such eliminations are included in the table below to present the full effect of consolidating FG VIEs.

The effect on the statements of operations and financial condition of consolidating Assured Investment Management investment vehicles includes (i) changes in fair value of consolidated investment vehicles assets and liabilities, (2) the elimination of the equity in earnings in investees related to the Insurance segment's investments in the consolidated Assured Investment Management funds, (3) the elimination of debt of the consolidated CLOs against the assets of the consolidated CLO Warehouse Fund, (4) the recording of noncontrolling interest for the proportion of each consolidated Assured Investment Management fund that is not owned by the Company, and (5) the elimination of intercompany asset management fees.

The cash flows generated by the FG VIEs’ assets are classified as cash flows from investing activities. Paydowns of FG VIEs' liabilities are supported by the cash flows generated by FG VIEs’ assets, and for liabilities with recourse, possibly claim payments made by AGM or AGC under its financial guaranty insurance contracts. Paydowns of FG VIEs' liabilities both with and without recourse are classified as cash flows used in financing activities. Interest income, interest expense and other expenses of the FG VIEs’ assets and liabilities are classified as operating cash flows. Claim payments made by AGC and AGM under the financial guaranty contracts issued to the FG VIEs are eliminated upon consolidation and therefore such claim payments are treated as paydowns of FG VIEs’ liabilities and as a financing activity as opposed to an operating activity of AGM and AGC.

Cash flows of the consolidated investment vehicles attributable to such entities' investment purchases and dispositions, as well as operating expenses of the investment vehicles, are presented as cash flow from operating activities in the condensed consolidated statements of cash flows. Financing activities and capital cash flows to and from investors are presented as financing activities consistent with investment company guidelines.

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Effect of Consolidating FG VIEs and Consolidated Investment Vehicles

on the Condensed Consolidated Balance Sheets

Increase (Decrease)

	As of June 30, 2020			As of December 31, 2019
	(in millions)
Assets
Investment portfolio:
Fixed maturity securities and short-term investments	$	(35	)	$	(39	)
Equity method investments (1)	(367		)	(77		)
Total investments	(402		)	(116		)
Premiums receivable, net of commissions payable	(6		)	(7		)
Salvage and subrogation recoverable	(9		)	(8		)
FG VIEs’ assets, at fair value	318			442
Assets of consolidated investment vehicles (1)	1,669			572
Other assets	(1		)	—
Total assets	$	1,569		$	883
Liabilities and shareholders’ equity
Unearned premium reserve	$	(41	)	$	(39	)
Loss and LAE reserve	(46		)	(41		)
FG VIEs’ liabilities with recourse, at fair value	332			367
FG VIEs’ liabilities without recourse, at fair value	20			102
Liabilities of consolidated investment vehicles (1)	1,236			482
Other liabilities	1			—
Total liabilities	1,502			871
Redeemable noncontrolling interests in consolidated investment vehicles (1)	20			7
Retained earnings	30			34
Accumulated other comprehensive income	(28		)	(35		)
Total shareholders’ equity attributable to Assured Guaranty Ltd.	2			(1		)
Nonredeemable noncontrolling interests (1)	45			6
Total shareholders’ equity	47			5
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	1,569		$	883

 ____________________

(1) These line items represent the components of the effect of consolidating Assured Investment Management investment vehicles.

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Effect of Consolidating FG VIEs and Consolidated Investment Vehicles

on the Condensed Consolidated Statements of Operations

Increase (Decrease)

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Net earned premiums	$	(1	)	$	(11	)	$	(2	)	$	(14	)
Net investment income	(2		)	(1		)	(3		)	(2		)
Asset management fees	(1		)	—			(2		)	—
Fair value gains (losses) on FG VIEs	1			33			(8		)	38
Fair value gains (losses) on consolidated investment vehicles	31			—			19			—
Loss and LAE	2			(14		)	8			(15		)
Other operating expense	1			—			1			—
Equity in net earnings of investees	(26		)	—			(16		)	—
Effect on income before tax	5			7			(3		)	7
Less: Tax provision (benefit)	—			1			(1		)	1
Effect on net income (loss)	5			6			(2		)	6
Effect on redeemable noncontrolling interests	5			—			2			—
Effect on net income (loss) attributable to AGL	$	—		$	6		$	(4	)	$	6

The fair value gains on consolidated investment vehicles for Second Quarter 2020 and Six Months 2020 were attributable to price appreciation on underlying assets.

For Second Quarter 2020, the fair value gains on FG VIEs were $1 million, primarily due to price appreciation due to observed tightening in market credit spreads for the underlying collateral, offset in part by the loss on consolidation of a new structured deal. The fair value losses on FG VIEs were $8 million for Six Months 2020, primarily due to price depreciation due to the observed widening in the market spreads for the underlying collateral. For Second Quarter 2019 and Six Months 2019, the primary driver of the gain was price appreciation on the FG VIE assets resulting from improvement in the underlying collateral.

Other Consolidated VIEs

In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the original insured financial guaranty insurance or credit derivative contract, the Company classifies the assets and liabilities of those VIEs in the line items that most accurately reflect the nature of the items, as opposed to within the FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $95 million and liabilities of $13 million as of June 30, 2020, and assets of $91 million and liabilities of $12 million as of December 31, 2019, primarily recorded in the investment portfolio and credit derivative liabilities on the condensed consolidated balance sheets.

Non-Consolidated VIEs

As described in Note 3, Outstanding Insurance Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 18 thousand policies monitored as of June 30, 2020, approximately 16 thousand policies are not within the scope of ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of June 30, 2020 and December 31, 2019, the Company identified 88 and 90 policies, respectively, that contain provisions and experienced events that may trigger consolidation. Based on management’s assessment of these potential triggers or events, the Company consolidated 27 FG VIEs as of both June 30, 2020 and December 31, 2019. The Company’s exposure provided through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Insurance Exposure.

The Company manages funds and CLOs that have been determined to be a VIE or voting interest entity, in which the Company concluded that it held no variable interests, through either equity interests held, debt interests held or decision-

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making fees received by the Assured Investment Management platform subsidiaries. As such, the Company does not consolidate these entities.

12. Income Taxes

Overview

AGL and its Bermuda subsidiaries AG Re, AGRO, and Cedar Personnel Ltd. (Bermuda Subsidiaries), are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL's U.S. and U.K. subsidiaries are subject to income taxes imposed by U.S. and U.K. authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code (the Code) to be taxed as a U.S. domestic corporation.

In November 2013, AGL became tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda.

AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO and AG Intermediary Inc. file their own consolidated federal income tax return.

The CARES (Coronavirus Aid, Relief, and Economic Security) Act became law on March 27, 2020 and was updated on April 9, 2020. The CARES Act, among other tax changes, accelerates the ability of companies to receive refunds of alternative minimum tax (AMT) credits related to tax years beginning in 2018 and 2019. As a result, the Company has recognized a current tax asset of $12 million of AMT credits that had been recorded as a deferred tax asset as of December 31, 2019.

Tax Assets (Liabilities)

Deferred and Current Tax Assets (Liabilities) (1)

	As of June 30, 2020			As of December 31, 2019
	(in millions)
Deferred tax assets (liabilities)	$	(45	)	$	(17	)
Current tax assets (liabilities)	48			47

____________________

(1) Included in other assets or other liabilities on the condensed consolidated balance sheets.

Valuation Allowance

The Company has $13 million of foreign tax credits (FTC) carryovers from previous acquisitions and $23 million of FTC due to the 2017 Tax Cuts and Jobs Act for use against regular tax in future years. FTCs will begin to expire in 2020 and will fully expire by 2027. In analyzing the future realizability of FTCs, the Company notes limitations on future foreign source income due to overall foreign losses as negative evidence. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC of $36 million will not be utilized, and therefore recorded a valuation allowance with respect to this tax attribute.

The Company came to the conclusion that it is more likely than not that the remaining deferred tax assets will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years, and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with the remaining deferred tax assets. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.

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Provision for Income Taxes

The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pretax income for the full year 2020. A discrete calculation of the provision is calculated for each interim period.

The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, and no taxes for the Company’s Bermuda Subsidiaries unless subject to U.S. tax by election. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions.

A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below.

Effective Tax Rate Reconciliation

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Expected tax provision (benefit)	$	42		$	38		$	31		$	47
Tax-exempt interest	(4		)	(5		)	(8		)	(10		)
Foreign taxes	(1		)	4			7			5
Taxes on reinsurance	(1		)	3			(1		)	4
Other	(2		)	—			1			(2		)
Total provision (benefit) for income taxes	$	34		$	40		$	30		$	44
Effective tax rate	15.4		%	21.9		%	18.5		%	18.4		%

The expected tax provision (benefit) is calculated as the sum of pretax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pretax loss in one jurisdiction and pretax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.

 The following tables present pretax income and revenue by jurisdiction.

Pretax Income (Loss) by Tax Jurisdiction

	Second Quarter					Six Months
	2020		2019			2020			2019
	(in millions)
U.S.	$	198	$	190		$	172		$	225
Bermuda	22		—			15			16
U.K. and other	2		(8		)	(27		)	(1		)
Total	$	222	$	182		$	160		$	240

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Revenue by Tax Jurisdiction

	Second Quarter					Six Months
	2020		2019			2020		2019
	(in millions)
U.S.	$	313	$	227		$	406	$	376
Bermuda	45		40			59		73
U.K. and other	14		(1		)	3		12
Total	$	372	$	266		$	468	$	461

Pretax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.

Audits

As of June 30, 2020, AGUS had open tax years with the U.S. Internal Revenue Service (IRS) for 2016 to present and is currently under audit for the 2016 tax year. In July 2020, the IRS issued a Revenue Agent Report which did not identify any material adjustments. Assured Guaranty Overseas US Holdings Inc. has open tax years of 2016 forward but is not currently under audit with the IRS. The Company's U.K. subsidiaries are not currently under examination and have open tax years of 2017 forward. CIFG Assurance North America Inc., which was acquired by AGC during 2016, is not currently under examination and has open tax years of 2016 to the date of acquisition.

Uncertain Tax Positions

The Company's policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued $0.3 million for Six Months 2020 and $1 million for the full year 2019. As of both June 30, 2020 and December 31, 2019, the Company has accrued $2 million of interest.

The total amount of reserves for unrecognized tax positions, including accrued interest, as of both June 30, 2020 and December 31, 2019 that would affect the effective tax rate, if recognized, was $17 million.

13.    Commitments and Contingencies

Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations in a particular quarter or year.

In addition, in the ordinary course of their respective businesses, certain of AGL's insurance subsidiaries are involved in litigation with third parties to recover losses paid in prior periods or prevent or reduce losses in the future. For example, the Company is involved in a number of legal actions in the Federal District Court for Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See "Exposure to Puerto Rico" section of Note 3, Outstanding Insurance Exposure, for a description of such actions. Also in the ordinary course of their respective business, certain of AGL's investment management subsidiaries are involved in litigation with third parties regarding fees, appraisals, or portfolio companies. 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 results of operations in that particular quarter or year.

The Company also receives subpoenas duces tecum and interrogatories from regulators from time to time.

Litigation

On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial Products Inc. (AGFP), an affiliate of AGC which in the past had provided credit protection to counterparties under CDS. AGC acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the

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State of New York, asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination of 9 credit derivative transactions between LBIE and AGFP and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP's termination of 28 other credit derivative transactions between LBIE and AGFP and AGFP's calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP properly terminated the transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP calculated that LBIE owes AGFP approximately $4 million for the claims which were dismissed and approximately $25 million in connection with the termination of the other credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. AGFP filed a motion to dismiss the claims for breach of the implied covenant of good faith in LBIE's complaint, and on March 15, 2013, the court granted AGFP's motion to dismiss in respect of the count relating to the 9 credit derivative transactions and narrowed LBIE's claim with respect to the 28 other credit derivative transactions. LBIE's administrators disclosed in an April 10, 2015 report to LBIE’s unsecured creditors that LBIE's valuation expert has calculated LBIE's claim for damages in aggregate for the 28 transactions to range between a minimum of approximately $200 million and a maximum of approximately $500 million, depending on what adjustment, if any, is made for AGFP's credit risk and excluding any applicable interest. AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP's counterclaims, and on July 2, 2018, the court granted in part and denied in part AGFP’s motion. The court dismissed, in its entirety, LBIE’s remaining claim for breach of the implied covenant of good faith and fair dealing and also dismissed LBIE’s claim for breach of contract solely to the extent that it is based upon AGFP’s conduct in connection with the auction. With respect to LBIE’s claim for breach of contract, the court held that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. On October 1, 2018, AGFP filed an appeal with the Appellate Division of the Supreme Court of the State of New York, First Judicial Department, seeking reversal of the portions of the lower court's ruling denying AGFP’s motion for summary judgment with respect to LBIE’s sole remaining claim for breach of contract. On January 17, 2019, the Appellate Division affirmed the Supreme Court's decision, holding that the lower court correctly determined that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. The trial, originally scheduled for March 9, 2020, has been postponed due to the COVID-19

pandemic.

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14. Shareholders' Equity

Other Comprehensive Income

The following tables present the changes in each component of AOCI and the effect of reclassifications out of AOCI on the respective line items in net income.

Changes in Accumulated Other Comprehensive Income by Component

Second Quarter 2020

	Net Unrealized Gains (Losses) on Investments with no Credit Impairment			Net Unrealized gains (Losses) on Investments with Credit Impairment			Net Unrealized Gains (Losses) on FG VIEs’ Liabilities with Recourse due to ISCR			Cumulative Translation Adjustment			Cash Flow  Hedge		Total  AOCI
	(in millions)
Balance, March 31, 2020	$	252		$	(66	)	$	(17	)	$	(38	)	$	7	$	138
Other comprehensive income (loss) before reclassifications	184			19			(6		)	—			—		197
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)	12			(8		)	—			—			—		4
Fair value gains (losses) on FG VIEs	—			—			(1		)	—			—		(1		)
Total before tax	12			(8		)	(1		)	—			—		3
Tax (provision) benefit	(3		)	2			—			—			—		(1		)
Total amount reclassified from AOCI, net of tax	9			(6		)	(1		)	—			—		2
Net current period other comprehensive income (loss)	175			25			(5		)	—			—		195
Balance, June 30, 2020	$	427		$	(41	)	$	(22	)	$	(38	)	$	7	$	333

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Changes in Accumulated Other Comprehensive Income by Component

Second Quarter 2019

	Net Unrealized Gains (Losses) on Investments with no Credit Impairment			Net Unrealized gains (Losses) on Investments with Credit Impairment			Net Unrealized Gains (Losses) on FG VIEs’ Liabilities with Recourse due to ISCR			Cumulative Translation Adjustment			Cash Flow  Hedge		Total  AOCI
	(in millions)
Balance, March 31, 2019	$	222		$	99		$	(31	)	$	(37	)	$	8	$	261
Other comprehensive income (loss) before reclassifications	90			(40		)	(2		)	(1		)	—		47
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)	11			(3		)	—			—			—		8
Net investment income	2			14			—			—			—		16
Fair value gains (losses) on FG VIEs	—			—			(8		)	—			—		(8		)
Total before tax	13			11			(8		)	—			—		16
Tax (provision) benefit	(2		)	(3		)	2			—			—		(3		)
Total amount reclassified from AOCI, net of tax	11			8			(6		)	—			—		13
Net current period other comprehensive income (loss)	79			(48		)	4			(1		)	—		34
Balance, June 30, 2019	$	301		$	51		$	(27	)	$	(38	)	$	8	$	295

Changes in Accumulated Other Comprehensive Income by Component

Six Months 2020

	Net Unrealized Gains (Losses) on Investments with no Credit Impairment			Net Unrealized gains (Losses) on Investments with Credit Impairment			Net Unrealized Gains (Losses) on FG VIEs’ Liabilities with Recourse due to ISCR			Cumulative Translation Adjustment			Cash Flow  Hedge		Total  AOCI
	(in millions)
Balance, December 31, 2019	$	352		$	48		$	(27	)	$	(38	)	$	7	$	342
Effect of adoption of accounting guidance on credit losses	62			(62		)	—			—			—		—
Other comprehensive income (loss) before reclassifications	28			(42		)	3			—			—		(11		)
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)	18			(19		)	—			—			—		(1		)
Fair value gains (losses) on FG VIEs	—			—			(3		)	—			—		(3		)
Total before tax	18			(19		)	(3		)	—			—		(4		)
Tax (provision) benefit	(3		)	4			1			—			—		2
Total amount reclassified from AOCI, net of tax	15			(15		)	(2		)	—			—		(2		)
Net current period other comprehensive income (loss)	13			(27		)	5			—			—		(9		)
Balance, June 30, 2020	$	427		$	(41	)	$	(22	)	$	(38	)	$	7	$	333

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Changes in Accumulated Other Comprehensive Income by Component

Six Months 2019

	Net Unrealized Gains (Losses) on Investments with no Credit Impairment			Net Unrealized gains (Losses) on Investments with Credit Impairment			Net Unrealized Gains (Losses) on FG VIEs’ Liabilities with Recourse due to ISCR			Cumulative Translation Adjustment			Cash Flow  Hedge		Total  AOCI
	(in millions)
Balance, December 31, 2018	$	59		$	94		$	(31	)	$	(37	)	$	8	$	93
Other comprehensive income (loss) before reclassifications	255			(47		)	(4		)	(1		)	—		203
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)	14			(18		)	—			—			—		(4		)
Net investment income	2			14			—			—			—		16
Fair value gains (losses) on FG VIEs	—			—			(10		)	—			—		(10		)
Total before tax	16			(4		)	(10		)	—			—		2
Tax (provision) benefit	(3		)	—			2			—			—		(1		)
Total amount reclassified from AOCI, net of tax	13			(4		)	(8		)	—			—		1
Net current period other comprehensive income (loss)	242			(43		)	4			(1		)	—		202
Balance, June 30, 2019	$	301		$	51		$	(27	)	$	(38	)	$	8	$	295

Share Repurchases

On February 26, 2020, the Board of Directors (the Board) authorized the repurchase of another $250 million of common shares. As of August 6, 2020, the Company was authorized to purchase $149 million of its common shares. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date.

Share Repurchases

Period	Number of Shares Repurchased	Total Payments (in millions)		Average Price Paid Per Share
2019 (January 1 - March 31)	1,908,605	$	79	$	41.62
2019 (April 1 - June 30)	2,519,130	111		43.89
2019 (July 1 - September 30)	3,400,677	150		44.11
2019 (October 1 - December 31)	3,335,517	160		47.97
Total 2019	11,163,929	$	500	$	44.79
2020 (January 1 - March 31)	3,629,410	116		32.03
2020 (April 1 - June 30)	5,956,422	164		27.49
2020 (July 1- August 6)	800,052	19		23.17
Total 2020	10,385,884	$	299	$	28.74

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15.    Earnings Per Share

Computation of Earnings Per Share 

	Second Quarter				Six Months
	2020		2019		2020		2019
	(in millions, except per share amounts)
Basic Earnings Per Share (EPS):
Net income (loss) attributable to AGL	$	183	$	142	$	128	$	196
Less: Distributed and undistributed income (loss) available to nonvested shareholders	—		—		—		—
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic	$	183	$	142	$	128	$	196
Basic shares	86.5		101.2		89.5		102.1
Basic EPS	$	2.11	$	1.40	$	1.43	$	1.92
Diluted EPS:
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic	$	183	$	142	$	128	$	196
Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries	—		—		—		—
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted	$	183	$	142	$	128	$	196
Basic shares	86.5		101.2		89.5		102.1
Dilutive securities:
Options and restricted stock awards	0.5		0.7		0.7		0.9
Diluted shares	87.0		101.9		90.2		103.0
Diluted EPS	$	2.10	$	1.39	$	1.42	$	1.90
Potentially dilutive securities excluded from computation of EPS because of antidilutive effect	0.6		0.1		1.2		—

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.

Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are:

• the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, including their impact on the factors listed below;

• changes in the world’s credit markets, segments thereof, interest rates, credit spreads or general economic conditions;

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• developments in the world’s financial and capital markets that adversely affect insured obligors’ repayment rates, Assured Guaranty’s insurance loss or recovery experience, investments of Assured Guaranty or assets it manages;

• reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty's insurance;

• the loss of investors in Assured Guaranty's asset management strategies or the failure to attract new investors to Assured Guaranty's asset management business;

• the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures;

• insured losses in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures;

• increased competition, including from new entrants into the financial guaranty industry;

• poor performance of Assured Guaranty's asset management strategies compared to the performance of the asset management strategies of Assured Guaranty's competitors;

• the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity or to unanticipated consequences;

• the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, most of its contracts written in credit default swap (CDS) form, and variable interest entities (VIEs) as well as on the mark-to-market of assets Assured Guaranty manages;

• rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured;

• the inability of Assured Guaranty to access external sources of capital on acceptable terms;

• changes in applicable accounting policies or practices;

• changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions;

• the failure of Assured Guaranty to successfully integrate the business of BlueMountain Capital Management, LLC (BlueMountain) and its associated entities;

• the possibility that acquisitions made by Assured Guaranty, including its acquisition of BlueMountain (BlueMountain Acquisition), do not result in the benefits anticipated or subject Assured Guaranty to unanticipated consequences;

• difficulties with the execution of Assured Guaranty’s business strategy;

• loss of key personnel;

• the effects of mergers, acquisitions and divestitures;

• natural or man-made catastrophes or pandemics;

• other risk factors identified in AGL’s filings with the United States (U.S.) Securities and Exchange Commission (the SEC);

• other risks and uncertainties that have not been identified at this time; and

• management’s response to these factors.

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The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in AGL's 2019 Annual Report on Form 10-K and its Quarterly Report for the three months ended March 31, 2020, on Form 10-Q. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC.

If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.

For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Available Information

The Company maintains an Internet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings) the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance) links to the Company's Corporate Governance Guidelines, its Code of Conduct, AGL's Bye-Laws and the charters for its Board committees. In addition, the SEC maintains an Internet site (at www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses). The Company uses this web site as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company's web site, in addition to following the Company's press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company's web site is not incorporated by reference into, and is not a part of, this report.

Executive Summary

This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to AGL's 2019 Annual Report on Form 10-K.

Overview

Beginning in the fourth quarter of 2019, after the acquisition of BlueMountain, the Company realigned its reporting structure to be consistent with how management now views the Company's different business lines. Management views the Company's businesses in two distinct segments: Insurance and Asset Management. The Company's Corporate division activities are presented separately. The Insurance and Asset Management businesses are conducted through separate legal entities, which is the basis on which the results of operations are presented and reviewed by the chief operating decision maker (CODM) to assess performance and allocate resources.

In the Insurance segment, the Company provides credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled

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payment due on an obligation, including a scheduled debt service payment, 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 credit protection products 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 Western Europe, Canada and Australia. The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience.

Premiums are earned over the contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts. The Company estimates remaining expected lives of its insured obligations 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, reassumptions of previously ceded business, or books of business acquired in a business combination.

In the Asset Management segment, the Company established the Assured Investment Management platform to provide investment advisory services, which include the management of collateralized loan obligations (CLOs), opportunity and liquid asset funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of June 30, 2020, the Assured Investment Management platform had $17.0 billion of assets under management (AUM), including $828 million that is managed on behalf of the Company's insurance subsidiaries. AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of the Assured Investment Management platform, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, please see " -- Results of Operations by Segment -- Asset Management Segment."

Fees in respect of investment advisory services are the largest components of revenues for the Asset Management segment. Assured Investment Management asset managers are compensated for their investment advisory services generally through management fees which are based on AUM. In addition, Assured Investment Management asset managers may receive performance fees on certain CLOs and funds, if certain thresholds are met.

The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH), as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies.

The Company reviews its segment results before giving effect to the consolidation of VIEs. The effect of consolidating VIEs, as well as intersegment eliminations and certain reclassification are presented separately in the Company's reconciliations of segment results to GAAP and non-GAAP measures.

Economic Environment and Impact of COVID-19

The novel coronavirus that emerged in Wuhan, China in late 2019 and which causes the coronavirus disease known as COVID-19 continued to spread throughout the world during the three-month period ended June 30, 2020 (Second Quarter 2020). As of June 30, 2020, there were over 10 million confirmed cases worldwide and close to 3 million confirmed cases in the U.S. COVID-19 was declared a pandemic by the World Health Organization, and its emergence and reactions to it, including various shelter-in-place guidelines and related 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 quite some time now, its ultimate size, depth, course and duration 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.

As a consequence of the onset of the COVID-19 pandemic, economic activity in the U.S. and throughout the world slowed significantly. Between mid-March and the end of April at the height of the past U.S. stay-at-home orders and economic dislocation, an estimated 30 million Americans filed for unemployment, according to the Bureau of Labor Statistics (BLS). Real gross domestic product (GDP) decreased 5% in the first quarter of 2020, according to the Bureau of Economic Analysis (BEA). The BEA reported on July 30th in its advanced estimate that GDP shrank by annualized rate of 32.9% in Second Quarter of 2020.

The labor market began to recover in Second Quarter 2020. According to the BLS, 6.5 million American workers were hired in May and 4.8 million were hired in June. The unemployment rate declined from a high of 14.7% in April to 11.1% in June, and the number of unemployed persons fell by 3.2 million to 17.8 million. Although unemployment fell in May and June,

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the BLS estimates that U.S. jobless rate and the number of unemployed are up by 7.6% and 12 million, respectively, since February 2020.

Among the steps taken by the Federal Reserve (the Fed) to help counteract the negative economic consequences of COVID-19 was the establishment of the Municipal Liquidity Facility (MLF), which was authorized to provide up to $500 billion in 36-month loans to certain qualifying states and municipalities. As of the end of Second Quarter 2020, only one issuer - the State of Illinois - had borrowed from the MLF; it borrowed $1.2 billion. During Second Quarter 2020, the Fed also disclosed it had bought nearly $9 billion in Exchange Traded Funds (ETFs) and corporate bonds in an effort to support the U.S. economy and to provide an additional source of liquidity.

In a joint meeting of the Federal Open Market Committee (FOMC) and the Federal Reserve Board in June, the FOMC maintained the target range for the federal funds rate at 0% to 0.25%. In a statement released on June 10, 2020, the FOMC stated: “The coronavirus outbreak is causing tremendous human and economic hardship across the U.S. and around the world. . . . The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” In its July 27-28, 2020 meeting, the FOMC decided to maintain the target range for the federal funds rate at 0% to 0.25% percent, citing the ongoing pandemic.

Volatility in both the fixed-income and equity markets in response to the pandemic continued in Second Quarter 2020.  The 30-year AAA Municipal Market Data (MMD) rate jumped more by 51 basis points (bps) on the first day of Second Quarter 2020 to 2.50%, soon fell to 1.90%, only to rise again to 2.28% in late April. As the quarter progressed, the rate stabilized and generally moved lower through the remainder of the quarter, finishing at 1.63%. Credit spreads remained relatively wide compared to recent history. The difference, or spread, between the 30-year BBB MMD rate and the 30-year AAA MMD rate finished June at levels that were approximately 2.5x what they were in early March (157 bps vs. 63 bps). See “Key Business Strategies -- Insurance” below for the impact of the interest rate environment and U.S. municipal credit spreads on the demand for bond insurance. After steep losses in the first quarter of 2020, the Dow Jones Industrial Average (DJIA) gained more than 17% in Second Quarter 2020, the S&P 500 Index gained 20%, and the Nasdaq Composite gained over 30%.

The initial impact of the COVID-19 pandemic and governmental and private actions taken in response on home prices had mixed results on home prices and home sales. Nationally, home prices in April and May (the latest data available from S&P CoreLogic Case-Shiller) were up, rising 4.6% and 4.5%, respectively. The National Association of Realtors (NAR) reported that sales of existing homes in the Northeast fell by 29.9% in May as compared with May 2019 while, nationally, single-family sales were down 24.8% from the same period a year ago and condominium sales dropped 41.4%. Sales of existing homes jumped nearly 21% in June compared with May, according to the NAR, the largest monthly gain since it began tracking the data in 1968. Sales overall, however, dipped year-over-year, down 11.3% from a year ago. The supply of existing homes available fell 18.2% compared to June 2019 to 1.57 million homes for sale at the end of June. In See Item 1, Financial Statements, Note 4, Expected Loss to be Paid, for a discussion of the residential market assumptions used in determining expected losses for U.S. residential mortgage-backed securities (RMBS).

Direct and indirect consequences of COVID-19 are causing financial distress to many of the obligors and assets underlying obligations guaranteed by the Company, and may result in increases in claims and loss reserves. The Company believes that 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 shelter-in-place guidelines and related restrictions or an economic downturn, are most at risk for increased claims. For Second Quarter 2020, the Company made adjustments to its assumptions and weightings for loss scenarios for those distressed credits it believes are most likely to be impacted by the COVID-19 pandemic, including RMBS, Puerto Rico and certain other distressed public finance exposures. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it are unknown, so the Company cannot predict the ultimate size of any increases in claims and loss reserves that may result from the pandemic.

The Company believes its financial guaranty business model is particularly well-suited to withstand global economic disruptions. If an insured obligor defaults, the Company is required to pay only any shortfall in interest and principal on scheduled payment dates; the Company’s policies forbid acceleration of its obligations without its consent. In addition, many of the obligations the Company insures benefit from debt service reserve funds or other funding sources from which interest and principal may be paid during limited periods of stress, providing the obligor with an opportunity to recover. While the Company believes its guaranty may support the market value of an insured obligation in comparison to a similar uninsured obligation, the Company’s ultimate loss on a defaulted insured obligation is not a function of that underlying obligation’s market price. Rather, the Company’s ultimate loss is the sum of all principal and interest payments it makes under its policy less the sum of all reimbursements, subrogation payments and other recoveries it receives from the obligor or any other sources

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in connection with the obligation. For contracts accounted for as insurance (which constitute 98% of its net par outstanding at June 30, 2020), its expected losses equal the discounted value of all insurance payments it projects making less the discounted value of all recoveries it expects to receive, on a probability-weighted basis. See Part I, Financial Statements, Note 4, Expected Losses to be Paid.

The nature of the financial guaranty business model, which requires the Company to pay only any shortfall in interest and principal on scheduled payment dates, along with the Company’s liquidity practices, reduce the need of the Company to sell investment assets in periods of market distress. As of June 30, 2020, the Company had $821 million of short-term investments and $293 million of cash. In addition, the Company’s investment portfolio generates cash over time through interest and principal receipts.

While volatility and dislocation in the municipal finance market in the U.S. resulted in the Company issuing a reduced number of new insurance policies in late March and into April 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as Second Quarter 2020 progressed, and present value of new business production (PVP) for both the Second Quarter 2020 and the six-month period ended June 30, 2020 (Six Months 2020) was very strong compared to a year ago. See "-- Results of Operations by Segment -- Insurance Segment" below. The Company cannot predict what impact the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, will have on the market for its insurance products over the medium term. On one hand, increased defaults and an increased focus on the credit of public finance issuers and other obligors may increase the perceived value of the Company’s insurance products, and so increase demand, as appears to have been the case in Second Quarter 2020. On the other hand, legislative responses, especially in the public finance sector, could reduce the need for the Company’s insurance products. While a reduction in new insurance business written compared to previous years would be unwelcome since it would impact the Company's net income in future years, it would have a limited impact on the current year’s net income, since the Company earns the premium for a new policy over the term of the policy, often as long as twenty or thirty years. In 2019, for example, only approximately 3% of the premiums the Company earned in 2019 related to new financial guaranty policies it wrote in 2019.

The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may have an adverse impact on the amount of third-party funds the Company can attract to its asset management products and on the amount of the Company’s AUM, which would reduce the amount of management fees earned by the Company. In addition, the volatility and downgrades in loan markets have triggered over-collateralization provisions in CLOs, deferring current CLO management fee payments to the Company. On the other hand, periods of market volatility may increase the attractiveness of investment managers such as those in the Company’s Assured Investment Management platform, and may provide the Company with opportunities to increase its AUM. In Six Months 2020, funded AUM declined, but fee-earning AUM increased, largely as the result of the sale of CLO equity before the disruption in the markets caused by the COVID-19 pandemic. See "-- Results of Operations by Segment -- Asset Management Segment" below.

The Company’s ability to raise third party funds and increase and retain AUM is directly related to the performance of the assets it manages as measured against market averages and the performance of the Company’s competitors, and if it performs worse during the COVID-19 pandemic than its competitors, that could impede its ability to raise funds, seek investors and hire and retain professionals, and may also lead to an impairment of goodwill. In the first quarter of 2020 and Second Quarter 2020, the Company considered the impact of COVID-19 on the Company’s goodwill carrying value associated with the asset management segment, and determined no impairment had occurred. 

Over the past several years, the Company’s insured subsidiaries have sought and received permission from their respective regulators to make certain discretionary payments to their holding companies, which has increased the amount of cash available to such holding companies to make investments in the asset management business and, in the case of AGL, to repurchase its common shares. The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may impact the Company’s regulatory capital position and the willingness of the insurance subsidiaries’ regulators to permit discretionary payments to their holding companies, which may result in the Company investing less in the asset management business or making fewer repurchases of its common shares than it had planned. As of August 6, 2020, the Company had remaining authorization to repurchase $149 million of its common shares. For more information, see Part I, Item 1A, Risk Factors, “Operational Risks - The Company’s holding companies’ ability to meet their obligations may be constrained,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The Company began operating remotely in accordance with its business continuity plan in March, 2020, instituting mandatory work-from-home policies beginning on March 16, 2020, in its U.S. offices, on March 17, 2020, in its U.K. offices, and on March 19, 2020, in its Bermuda office. The Company is providing the services and communications it normally would,

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and continues to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades. However, the Company’s operations could be disrupted if key members of its senior management or a significant percentage of its workforce or the workforce of its vendors were unable to continue work because of illness, government directives, or otherwise. In addition, the Company’s shift to working from home has made it more dependent on the Internet and communications access and capabilities and has heightened its risk of cybersecurity attacks. For more information, see Part I, Item 1A, Risk Factors, “Operational Risks - The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in such systems could adversely affect the Company’s business,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Financial Performance of Assured Guaranty

Results of operations for Second Quarter 2020 and Six Months 2020 include the results of BlueMountain, which was acquired on October 1, 2019.

Financial Results

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions, except per share amounts)
GAAP Highlights
Net income (loss) attributable to AGL	$	183		$	142		$	128		$	196
Net income (loss) attributable to AGL per diluted share	2.10			1.39			1.42			1.90
Weighted average diluted shares	87.0			101.9			90.2			103.0
Adjusted operating income (loss) (1) (2)
Insurance	$	154		$	161		$	239		$	272
Asset Management	(9		)	—			(18		)	—
Corporate	(26		)	(26		)	(65		)	(51		)
Other	—			6			(4		)	6
Adjusted operating income (loss)	119			141			152			227
Adjusted operating income per diluted share (2)	1.36			1.38			1.68			2.20
Insurance Segment
Gross written premiums (GWP)	$	149		$	51		$	213		$	90
PVP (1)	96			56			147			98
Gross par written	6,012			4,183			9,045			6,890
Asset Management Segment
CLO net inflows	$	528		$	—		$	461		$	—
Opportunity funds outflows	(53		)	—			(50		)	—
Liquid strategies net inflows	370			—			370			—
Wind-down funds net outflows	(541		)	—			(1,416		)	—
Total net flows	$	304		$	—		$	(635	)	$	—

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	As of June 30, 2020						As of December 31, 2019
	Amount			Per Share			Amount			Per Share
	(in millions, except per share amounts)
Shareholders' equity attributable to AGL	$	6,444		$	76.66		$	6,639		$	71.18
Adjusted operating shareholders' equity (1) (3)	5,997			71.34			6,246			66.96
Adjusted book value (1) (4)	8,796			104.63			9,047			96.99
Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity	8			0.09			7			0.07
Gain (loss) related to VIE consolidation included in adjusted book value	(2		)	(0.03		)	(4		)	(0.05		)
Common shares outstanding (5)	84.1						93.3

____________________

(1) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP) and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available. See “—Non-GAAP Financial Measures” for additional details.

(2) "Adjusted operating income" was formerly known as "Non-GAAP operating income."

(3) "Adjusted operating shareholders' equity" was formerly known as "Non-GAAP operating shareholders' equity."

(4) "Adjusted book value" was formerly known as "Non-GAAP adjusted book value."

(5) See "Key Business Strategies – Capital Management" below for information on common share repurchases.

Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses such as: changes in credit spreads of insured credit derivative obligations, changes in fair value of assets and liabilities of VIEs, and committed capital securities (CCS), changes in fair value of credit derivatives related to the Company's own credit spreads, and changes in risk-free rates used to discount expected losses.

Other factors that drive volatility in net income in the Insurance segment include: changes in expected losses and recoveries, the amount and timing of the refunding and/or termination of insured obligations, realized gains and losses on the investment portfolio (including credit impairment), changes in foreign exchange rates, the effects of large settlements, commutations, acquisitions, the effects of the Company's various loss mitigation strategies,and changes in the fair value of investments in Assured Investment Management funds. In the Asset Management segment, changes in the fair value of Assured Investment Management funds affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 

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Condensed Consolidated Results of Operations

Condensed Consolidated Results of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in millions)
Revenues:
Net earned premiums	$	121		$	112		$	224		$	230
Net investment income	78			110			158			208
Asset management fees	20			—			43			—
Net realized investment gains (losses)	4			8			(1		)	(4		)
Net change in fair value of credit derivatives	100			(8		)	23			(30		)
Fair value gains (losses) on CCS	(25		)	19			23			10
Fair value gains (losses) on financial guaranty VIEs	1			33			(8		)	38
Fair value gains (losses) on consolidated investment vehicles	31			—			19			—
Foreign exchange gain (loss) on remeasurement	2			(14		)	(60		)	(3		)
Commutation gains (losses)	38			1			38			1
Other income (loss)	2			5			9			11
Total revenues	372			266			468			461
Expenses:
Loss and loss adjustment expenses (LAE)	37			(1		)	57			45
Interest expense	21			22			43			45
Amortization of deferred acquisition costs (DAC)	4			4			7			10
Employee compensation and benefit expenses	46			39			110			80
Other operating expenses	42			21			87			44
Total expenses	150			85			304			224
Income (loss) before income taxes and equity in net earnings of investees	222			181			164			237
Equity in net earnings of investees	—			1			(4		)	3
Income (loss) before income taxes	222			182			160			240
Provision (benefit) for income taxes	34			40			30			44
Net income (loss)	188			142			130			196
Less: Noncontrolling interest	5			—			2			—
Net income (loss) attributable to AGL	$	183		$	142		$	128		$	196

Second Quarter 2020 Compared with Second Quarter 2019

Net income attributable to AGL for Second Quarter 2020 was higher compared to the three-month period ended June 30, 2019 (Second Quarter 2019) primarily due to:

• fair value gains on credit derivatives in Second Quarter 2020 compared with losses in Second Quarter 2019,

• commutation gains in Second Quarter 2020,

• fair value gains in the consolidated Assured Investment Management funds (the consolidated investment vehicles), and

• foreign exchange gains on remeasurement in Second Quarter 2020 compared with losses in Second Quarter 2019.

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These increases were offset in part by fair value losses on CCS in Second Quarter 2020 compared with gains in Second Quarter 2019, higher loss and LAE, lower fair value gains on financial guaranty (FG) VIEs and lower net investment income in Second Quarter 2020.

Six Months 2020 Compared with Six Months 2019

Net income attributable to AGL for Six Months 2020 was lower compared to the six-month period ended June 30, 2019 (Six Months 2019) primarily due to:

• higher foreign exchange losses on remeasurement in Six Months 2020,

• lower net investment income,

• fair value losses on FG VIE in Six Months 2020 compared with gains in Six Months 2019, and

• pretax loss in the Asset Management segment.

These decreases were offset in part by fair value gains on credit derivatives in Six Months 2020 compared with losses in Six Months 2019, a commutation gain in Six Months 2020 and fair value gains in the consolidated investment vehicles.

Shareholders' equity attributable to AGL decreased since December 31, 2019 primarily due to share repurchases and dividends, partially offset by net income. Adjusted operating shareholders' equity decreased in Six Months 2020 as adjusted operating income was offset mainly by share repurchases and dividends. Adjusted book value decreased in Six Months 2020 primarily due to share repurchases and dividends, partially offset by net premiums written.

Shareholders' equity attributable to AGL per share, adjusted operating shareholders' equity per share and adjusted book value per share all increased in Six Months 2020 to $76.66, $71.34 and $104.63, respectively. In Six Months 2020, the Company repurchased an additional 9.6 million shares under the share repurchase program that began in 2013. See "Accretive Effect of Cumulative Repurchases" table below.

The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21% in 2019, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, and no taxes for the Company’s Bermuda subsidiaries Assured Guaranty Re Ltd (AG Re), Assured Guaranty Re Overseas Ltd. (AGRO) and Cedar Personnel Ltd., unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. The effective tax rate was lower in 2019 due to the proportion of income in different tax jurisdictions.

Key Business Strategies

The Company continually evaluates its business strategies. For example, with the BlueMountain Acquisition the Company has increased its focus on asset management and alternative investments. Currently, the Company is pursuing the following key business strategies in three areas:

• Insurance

• Asset Management and Alternative Investments

• Capital Management

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Insurance

The Company seeks to grow the insurance business through new business production, acquisitions of legacy monolines and reinsurance transactions, and to continue to mitigate losses in its current insured portfolio.

Growth of the Insured Portfolio

The Company seeks to grow its insurance portfolio through new business production in each of its three markets: U.S. public finance, international infrastructure and global structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance:

• encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds;

• enables institutional investors to operate more efficiently; and

• allows smaller, less well-known issuers to gain market access on a more cost-effective basis.

On the other hand, the persistently low interest rate environment and relatively tight U.S. municipal credit spreads have dampened demand for bond insurance, and provisions in legislation known as the 2017 Tax Cuts and Jobs Act, such as the termination of the tax-exempt status of advance refunding bonds and the reduction in corporate tax rates, have resulted in a reduction of supply and made municipal obligations less attractive to certain institutional investors.

In certain segments of the global infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company's business opportunities and its risk profile beyond U.S. public finance. Quarterly business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from quarter to quarter.

While volatility and dislocation in the municipal finance market in the U.S. resulted in the Company issuing a reduced number of new insurance policies in late March and into April 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as Second Quarter 2020 progressed, and PVP for both the Second Quarter 2020 and Six Months 2020 was very strong compared to a year ago. See "-- Results of Operations by Segment -- Insurance Segment" below. The Company cannot predict what impact the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, will have on the market for its insurance products over the medium term. On one hand, increased defaults and an increased focus on the credit of public finance issuers and other obligors may increase the perceived value of the Company’s insurance products, and so increase demand, as appears to have been the case in Second Quarter 2020. On the other hand, legislative responses, especially in the public finance sector, could reduce the need for the Company’s insurance products. While a reduction in new insurance business written compared to previous years would be unwelcome since it would impact the Company's net income in future years, it would have a limited impact on the current year’s net income, since the Company earns the premium for a new policy over the term of the policy, often as long as twenty or thirty years. In 2019, for example, only approximately 3% of the premiums the Company earned in 2019 related to new financial guaranty policies it wrote in 2019.

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U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)

Based on Sale Date

	Six Months 2020			Six Months 2019			Year Ended December 31, 2019
	(dollars in billions, except number of issues and percent)
Par:
New municipal bonds issued	$	191.9		$	165.0		$	406.6
Total insured	$	13.9		$	9.7		$	23.9
Insured by Assured Guaranty	$	8.0		$	5.7		$	14.0
Number of issues:
New municipal bonds issued	5,161			4,637			10,590
Total insured	977			797			1,724
Insured by Assured Guaranty	478			423			839
Bond insurance market penetration based on:
Par	7.3		%	5.9		%	5.9		%
Number of issues	18.9		%	17.2		%	16.3		%
Single A par sold	27.4		%	22.9		%	21.4		%
Single A transactions sold	61.3		%	57.9		%	54.9		%
$25 million and under par sold	22.9		%	18.2		%	18.1		%
$25 million and under transactions sold	22.4		%	20.4		%	19.7		%

____________________

(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP healthcare and project finance transactions insured by Assured Guaranty, which the Company also considers to be public finance business.

The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios. These transactions enable the Company to improve its future earnings and deploy excess capital.

In Second Quarter 2020, the Company reassumed $336 million in par from its largest remaining legacy financial guaranty reinsurer. This commutation resulted in an increase of unearned premium reserve of $5 million and commutation gain of $38 million.

Loss Mitigation

In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolios, the Company employs a number of strategies.

In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company's role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises. Currently, the Company is actively working to mitigate potential losses in connection with the obligations it insures of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations and was an active participant in negotiating the Puerto Rico Electric Power Authority (PREPA) restructuring support agreement and the Puerto Rico Sales Tax Financing Corporation (COFINA) plan of adjustment. The Company will also, where appropriate, pursue litigation to enforce its rights, and it has initiated a number of legal actions to enforce its rights in Puerto Rico. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure and Insured Portfolio section below.

The Company is currently working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS.

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In some instances, the terms of the Company's policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief.

Asset Management

The BlueMountain Acquisition represents a significant increase in the Company's participation in the asset management industry. BlueMountain is a diversified asset manager that serves as investment advisor to CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. BlueMountain manages structured and public finance, credit and special situation investments, with a track record dating back to 2003. BlueMountain underwrites assets and structures investments while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. In Second Quarter 2020, Assured Investment Management launched a new strategy, focused on more liquid investments. Liquid strategies are investment vehicles that typically offer investors redemption rights within one year and are largely invested in liquid securities, such as municipal obligations. As of June 30, 2020, liquid strategies includes a new municipal bond fund, launched primarily with funds from the U.S. insurance subsidiaries, and new Investment Management Agreements (IMAs) for a portfolio of the U.S. insurance companies' municipal obligations.

As of June 30, 2020, the Assured Investment Management platform is a top-twenty CLO manager by AUM, as published by CreditFlux, and is led by an experienced CLO and loan research team. BlueMountain and its affiliates have issued 38 CLOs since inception, in both the U.S. and European markets. The CLOs have broad investor distribution with access to a diversified set of global investors. The team has focused on building diversified portfolios with a focus on free cash flow generation and downside protection.

The Company intends to invest $500 million of capital in funds managed in the Assured Investment Management platform plus additional amounts in other accounts managed in the Assured Investment Management platform. The Company intends to use these capital investments to (a) launch new products (CLOs, and/or opportunity funds) on the Assured Investment Management platform and (b) enhance the returns of its own investment portfolio. As of June 30, 2020, the Company had invested approximately $354 million of the $500 million it intends to invest in Assured Investment Management funds. This capital was invested in four new investment vehicles, with each vehicle dedicated to a single strategy including CLOs, asset-backed finance, healthcare structured capital and municipal bonds. In addition, Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC) entered into IMAs with BlueMountain to manage a portfolio of municipal obligations and a portfolio of CLOs. They have together allocated $250 million to municipal obligation strategies and $100 million to CLO strategies, with authorization to allocate an additional $200 million to CLOs strategies. All of these strategies are consistent with the investment strengths of the Assured Investment Management platform and its plans to continue to grow its investment strategies.

Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform. The Company intends to leverage the Assured Investment Management infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations.

Capital Management

In recent years, the Company has developed several strategies to manage capital within the Assured Guaranty group efficiently.

From 2013 through August 6, 2020, the Company has repurchased 116.1 million common shares for approximately $3,515 million, representing approximately 60% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 26, 2020, the Board of Directors (the Board) authorized an additional $250 million of share repurchases. As of August 6, 2020, the Company had remaining authorization to repurchase $149 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 14, Shareholders' Equity, for additional information about the Company's repurchases of its common shares.

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Summary of Share Repurchases

	Amount		Number of Shares	Average price per share
	(in millions, except per share data)
2013 - 2019	$	3,216	105.72	$	30.42
2020 (First Quarter)	116		3.63	32.03
2020 (Second Quarter)	164		5.96	27.49
2020 (through August 6, 2020)	19		0.80	23.17
Cumulative repurchases since the beginning of 2013	$	3,515	116.11	$	30.27

Accretive Effect of Cumulative Repurchases (1)

	Second Quarter 2020		Six Months 2020		As of June 30, 2020
	(per share)
Net income (loss) attributable to AGL	$	1.07	$	0.56
Adjusted operating income	0.66		0.70
Shareholders' equity attributable to AGL					$	26.60
Adjusted operating shareholders' equity					23.56
Adjusted book value					42.76

_________________

(1) Represents the estimated accretive effect of cumulative repurchases since the beginning of 2013.

The Company considers the appropriate mix of debt and equity in its capital structure, and may repurchase some of its debt from time to time. For example, in Six Months 2020, AGUS purchased $23 million of par of AGMH's outstanding Junior Subordinated Debentures, which resulted in a loss on extinguishment of debt of $5 million in Six Months 2020. The Company may choose to make additional purchases of this or other Company debt in the future.

Other Matters

Ratings

Demand for the financial guaranties issues by the Company's insurance subsidiaries may be impacted by changes in the credit ratings assigned by the rating agencies to them. On July 16, 2020, S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P), affirmed the ratings it assigns to AGL, AGL's insurance subsidiaries, and certain other AGL affiliates. 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.

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	S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC	Kroll Bond Rating Agency	Moody’s Investors Service, Inc.	A.M. Best Company, Inc.
AGM	AA (stable) (7/16/20)	AA+ (stable) (12/19/19)	A2 (stable) (8/13/19)	—
AGC	AA (stable) (7/16/20)	AA (stable) (11/22/19)	(1)	—
Municipal Assurance Corp. (MAC)	AA (stable) (7/16/20)	AA+ (stable) (3/4/20)	—	—
AG Re	AA (stable) (7/16/20)	—	—	—
AGRO	AA (stable) (7/16/20)	—	—	A+ (stable) (7/13/20)
Assured Guaranty (Europe) plc	AA (stable) (7/16/20)	AA+ (stable) (12/19/19)	A2 (stable) (8/13/19)	—
Assured Guaranty (Europe) SA	AA (stable) (7/16/20)	AA+ (stable) (1/21/20)	—	—

____________________

(1) AGC requested that Moody’s Investors Service, Inc. (Moody’s) withdraw its financial strength ratings of AGC in January 2017, but Moody's denied that request. Moody’s continues to rate AGC A3 (stable).

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 1, Financial Statements, Note 6, Reinsurance and "--Liquidity and Capital Resources--" section below.

Brexit

On June 23, 2016, a referendum was held in the U.K. in which a majority voted to exit the European Union (EU), known as “Brexit”. The U.K. government served notice to the European Council on March 29, 2017 of its desire to withdraw in accordance with Article 50 of the Treaty on European Union. As described in Part 1, Item 1, Business, Regulation of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, the U.K. parliament has approved a withdrawal agreement with the EU and the U.K. left the EU on January 31, 2020. There is a transition period under the terms of the withdrawal agreement which will end on December 31, 2020. Negotiations will be ongoing during the transition period between the U.K. and EU to determine the wider terms of the U.K.'s future relationship with the EU, including the terms of trade between the U.K. and the EU. If the U.K. and EU fail to agree the U.K.'s future relationship with the EU during the transition period ending on December 31, 2020, there will be considerable uncertainty as to the ongoing terms of the U.K’s relationship with the EU, including the terms of trade between the U.K. and the EU, and a likely negative impact on all parties.

LIBOR Sunset

In 2017, the U.K.’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate London Interbank Offered Rate (LIBOR). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. While regulators have suggested substitute rates, including the Secured Overnight Financing Rate, the impact of the discontinuance of LIBOR, if it occurs, will be contract-specific. The Company has exposure to LIBOR in three areas of its operations: (i) issuers of obligations the Company insures have obligations, assets and hedges that reference LIBOR, and some of the obligations the Company insures reference LIBOR, (ii) debt issued by the Company's wholly owned subsidiaries AGUS and AGMH currently pay, or will convert to, a floating interest rate tied to LIBOR, and (iii) CCS from which the Company benefits also pay interest tied to LIBOR. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Long-Term Debt and Credit Facilities of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

The Company has reviewed its insured portfolio to identify insured transactions that it believes may be vulnerable to the transition from LIBOR. The review focused on insured issues that are scheduled or projected to have an outstanding principal balance as of December 31, 2021, the date of LIBOR’s scheduled sunset, and excluded, due to their immateriality, insured issues projected to have an outstanding principal balance of less than $1 million at December 31, 2021. The Company

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reviewed the language governing the setting of interest rates in the event of unavailability of LIBOR in the governing documents of all below-investment-grade (BIG) insured transactions (except those issues projected to have an outstanding principal balance of less than $1 million at December 31, 2021), which the Company believes are most likely to be vulnerable to issues relating to the setting of interest rates after the sunset of LIBOR. The Company has also reviewed relevant language in the documents relating to the debt issued by the Company and the CCS that benefit the Company. As a significant portion of these securities are likely to become fixed rate in December 2021, the initial benefit or harm of the sunset of LIBOR depends on the level of interest rates at such time. Also, whatever interest rate is set by the party responsible for calculating the interest rate may be challenged in the court by other parties in interest. The Company has initiated a dialogue with relevant trustees, calculation agents, auction agents, servicers and other parties responsible for implementing the rate change in these transactions. Most have not yet committed to a course of action.

Given the lack of clarity on decisions that parties responsible for calculating interest rates will make and the reaction of impacted parties as well as the unknown level of interest rates when the change occurs, the Company cannot at this time predict the impact of the discontinuance of LIBOR, if it occurs, on every obligor and obligation the Company enhances or on its own debt issuances. For more information, see the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Income Taxes

The U.S. Internal Revenue Service and Department of the Treasury issued proposed regulations on July 10, 2019

relating to the tax treatment of passive foreign investment companies. The proposed regulations provide guidance on various passive foreign investment company rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. Management is currently in the process of evaluating the impact to its shareholders and business operations.

Results of Operations

Business Segments

The Company reports its results of operations consistent with the manner in which the Company's CODM reviews the business to assess performance and allocate resources. Prior to the BlueMountain Acquisition on October 1, 2019, the Company's operating subsidiaries were all insurance companies, and results of operations were viewed by the CODM as one segment. Beginning in the fourth quarter of 2019, with the BlueMountain Acquisition and expansion into the asset management business, the Company now operates in two distinct segments, Insurance and Asset Management. The Company calls its Asset Management segment its "Assured Investment Management" platform. The following describes the components of each segment, along with the Corporate division and Other categories. The Insurance and Asset Management segments are presented without giving effect to the consolidation of the FG VIEs and investment vehicles. See Item 1. Financial Statement, Note 11, Variable Interest Entities.

The Insurance segment primarily consists of the Company's domestic and foreign insurance subsidiaries and their wholly-owned subsidiaries that provide credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Insurance segment also includes the income (loss) from its proportionate equity interest in Assured Investment Management funds.

The Asset Management segment consists of the Company's Assured Investment Management platform subsidiaries, which provide asset management services to outside investors as well as to the Company's Insurance segment. The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses.

The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH, as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies.

Other items consist of intersegment eliminations, reclassification of asset management reimbursable expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain Assured Investment Management investment vehicles in which Insurance segment invests.

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The Company does not report assets by reportable segment as the CODM does not use assets to assess performance and allocate resources and only reviews assets at a consolidated level.

The Company analyzes the operating performance of each segment using "adjusted operating income." See “-- Non-GAAP Financial Measures -- Adjusted Operating Income” below for definition of "adjusted operating income" (formerly known as non-GAAP operating income) and Item 1, Financial Statements, Note 2, Segment Information. Results for each segment include specifically identifiable expenses as well as allocations of expenses among legal entities based on time studies and other cost allocation methodologies based on headcount or other metrics. Total adjusted operating income includes the effect of consolidating both FG VIEs and investment vehicles; however the effect of consolidating such entities, including the related eliminations, is included in the "other" column in the tables below, which represents the CODM's view, consistent with the management approach guidance for presentation of segment metrics.

The following table summarizes adjusted operating income from the Company's business segment operations and also provides a reconciliation of the segment measure to net income on a consolidated GAAP basis. See also Item 1, Financial Statements, Note 2, Segment Information.

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Adjusted operating income (loss) by segment:
Insurance	$	154		$	161		$	239		$	272
Asset management	(9		)	—			(18		)	—
Corporate	(26		)	(26		)	(65		)	(51		)
Other	—			6			(4		)	6
Adjusted operating income (loss)	$	119		$	141		$	152		$	227
Reconciling items from adjusted operating income to net income (loss) attributable to AGL:
Plus pre-tax adjustments:
Realized gains (losses) on investments	$	4		$	8		$	(1	)	$	(4	)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives	97			(12		)	9			(40		)
Fair value gains (losses) on CCS	(25		)	19			23			10
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves	2			(12		)	(55		)	(3		)
Total pre-tax adjustments	78			3			(24		)	(37		)
Plus tax effect on pre-tax adjustments	(14		)	(2		)	—			6
Net income (loss) attributable to AGL	$	183		$	142		$	128		$	196

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Results of Operations by Segment

Insurance Segment Results

Insurance Results

	Second Quarter					Six Months
	2020		2019			2020		2019
	(in millions)
Revenues
Net earned premiums and credit derivative revenues	$	125	$	127		$	232	$	253
Net investment income	82		110			165		209
Commutation gains (losses)	38		1			38		1
Other income (loss)	1		3			7		12
Total revenues	246		241			442		475
Expenses
Loss expense	39		(15		)	57		29
Amortization of DAC	4		4			7		10
Employee compensation and benefit expenses	29		34			70		71
Other operating expenses	18		17			40		37
Total expenses	90		40			174		147
Equity in net earnings of investees	26		1			17		2
Adjusted operating income (loss) before income taxes	182		202			285		330
Provision (benefit) for income taxes	28		41			46		58
Adjusted operating income (loss)	$	154	$	161		$	239	$	272

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Insurance New Business Production

Gross Written Premiums and

New Business Production

	Second Quarter					Six Months
	2020		2019			2020		2019
	(in millions)
GWP
Public Finance—U.S.	$	60	$	43		$	89	$	73
Public Finance—non-U.S.	81		12			115		14
Structured Finance—U.S.	8		(4		)	9		2
Structured Finance—non-U.S.	—		—			—		1
Total GWP	$	149	$	51		$	213	$	90
PVP (1):
Public Finance—U.S.	$	60	$	44		$	89	$	76
Public Finance—non-U.S.	28		8			49		12
Structured Finance—U.S.	8		3			9		8
Structured Finance—non-U.S.	—		1			—		2
Total PVP	$	96	$	56		$	147	$	98
Gross Par Written (1):
Public Finance—U.S.	$	5,282	$	3,657		$	7,923	$	5,673
Public Finance—non-U.S.	557		299			934		475
Structured Finance—U.S.	173		227			188		721
Structured Finance—non-U.S.	—		—			—		21
Total gross par written	$	6,012	$	4,183		$	9,045	$	6,890
Average rating on new business written	A-		A-			A-		A-

____________________

(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.”

GWP relates to both financial guaranty insurance and specialty insurance and reinsurance contracts. Financial guaranty GWP includes amounts collected upfront on new business written, the present value of future premiums on new business written (discounted at risk-free rates), as well as the effects of changes in the estimated lives of transactions in the inforce book of business. Specialty insurance and reinsurance GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore not included in GWP. The non-GAAP measure, PVP, on the other hand, includes upfront premiums and the present value of estimated future installments on new business at the time of issuance for all contracts whether in insurance or credit derivative form, discounted at a pre-tax book yield. See Non-GAAP Financial Measures below.

Second Quarter 2020

U.S. public finance GWP increased 40%, and PVP increased 36%, compared with Second Quarter 2019, including transactions guaranteed in both the primary and secondary market. The average rating of all U.S. public finance par written in Second Quarter 2020 was A-. The Company guaranteed 62% of insured U.S. public finance new issuance par in Second Quarter 2020.

Outside the U.S., GWP and PVP also increased in Second Quarter 2020, compared with Second Quarter 2019. In Second Quarter 2020, the Company's new French subsidiary, Assured Guaranty (Europe) SA, wrote a guaranty of a solar bond transaction in Spain, and a secondary market guaranty to a European financial institution for a public sector credit. Non-U.S. GWP and PVP also includes the restructuring of an existing insured transaction that resulted in no additional exposure. The Company has consistently written new non-U.S. public finance business every quarter since the end of 2015.

112

In total, the structure finance sector's GWP and PVP both increased in Second Quarter 2020 compared with Second Quarter 2019. New business in Second Quarter 2020 included an insurance securitization and two whole business securitizations.

Business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.

Six Months 2020

The volatility and dislocation in the municipal finance market in the U.S. caused by the COVID-19 pandemic resulted in the Company issuing a reduced number of new insurance policies in late March. However, the first quarter of 2020 U.S. public finance GWP was $29 million, only slightly lower compared with the first quarter of 2019 GWP of $30 million. Similarly, PVP was $29 million in the first quarter of 2020, compared with PVP of $32 million in the first quarter of 2019. Second Quarter 2020 U.S. public finance GWP and PVP activity increased significantly bringing Six Months 2020 U.S. public finance GWP to $89 million, compared with Six Months 2019 GWP of $73 million. Similarly, U.S. public finance PVP was $89 million in Six Months 2020, compared with PVP of $76 million in Six Months 2019. The average rating of U.S. public finance par written was A-, and represented 57% of the total U.S. municipal market insured issuance in Six Months 2020.

Outside the U.S., increases in public finance GWP and PVP were attributable primarily to two guaranties of solar bond transactions in Spain, and a secondary market guaranty to a European financial institution for a public sector credit, all written by the Company's new French subsidiary, Assured Guaranty (Europe) SA. In addition, several insured transactions were restructured resulting in no additional insured exposure.

Net Earned Premiums and Credit Derivative Revenues

Premiums are earned over the contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts. The Company estimates remaining expected lives of its insured obligations 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, reassumptions of previously ceded business or books of business acquired in a business combination. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information. Credit derivative revenue represents realized gains on credit derivatives representing premiums received and receivable.

Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by (a) refundings of insured obligations or (b) 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 and had been at historically high levels in recent years primarily due to the low interest rate environment, which has allowed many municipalities and other public finance issuers to refinance their debt obligations at lower rates. 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 such issuers pay down insured obligations prior to their originally scheduled maturities, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the nonrefundable deferred premium revenue remaining. Provisions in the 2017 Tax Cuts and Jobs Act regarding the termination of the tax-exempt status of advance refunding bonds have resulted in fewer refundings.

Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations are 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.

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Net Earned Premiums and Credit Derivative Revenues

 

	Second Quarter				Six Months
	2020		2019		2020		2019
	(in millions)
Financial guaranty insurance:							71
Public finance
Scheduled net earned premiums	$	73	$	72	$	143	$	143
Accelerations:
Refundings	26		22		41		49
Terminations	6		—		6		—
Total accelerations	32		22		47		49
Total public finance	105		94		190		192
Structured finance
Scheduled net earned premiums	16		20		34		43
Accelerations	—		7		—		6
Total structured finance	16		27		34		49
Specialty insurance and reinsurance	1		2		2		3
Total net earned premiums	$	122	$	123	$	226	$	244
Credit derivative revenues	3		4		6		9
Total net earned premiums and credit derivative revenue	$	125	$	127	$	232	$	253

Net earned premiums decreased in Second Quarter 2020 compared with Second Quarter 2019 primarily due to the scheduled decline in the insured structured finance insured portfolio, offset in part by higher accelerations. Net earned premiums decreased in Six Months 2020 compared with Six Months 2019, primarily due to the scheduled decline in the insured structured finance portfolio. At June 30, 2020, $3.8 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts.

Credit derivative revenues have declined in Second Quarter 2020 compared with Second Quarter 2019 and in Six Months 2020 compared with Six Months 2019 primarily due to the scheduled decline in the net par outstanding. The Company has not written new credit derivatives since 2009. Other than credit derivatives that may be acquired in business combinations and reinsurance agreements, or as part of loss mitigation strategies, credit derivative exposure is expected to decline.

Net Investment Income and Equity in Net Earnings of Investees

Net investment income is a function of the yield earned and the size of the investment portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Net investment income in the Insurance segment represents income earned on the available for sale portfolio, short-term investments and other invested assets, other than equity method investments. Equity method investments in the Insurance segment include the insurance companies' investments in Assured Investment Management funds, as well as other direct investments. The income (loss) on such investments is presented as a separate line item, "equity in earnings of investees." The Company currently intends to invest up to $500 million in Assured Investment Management funds, and as of June 30, 2020 had invested $354 million.

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Net Investment Income and Equity in Net Earnings of Investees

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Income from fixed-maturity securities managed by third parties	$	62		$	67		$	124		$	140
Income from internally managed securities	20			45			40			72
Interest income from intercompany loans	2			—			5			1
Gross investment income	84			112			169			213
Investment expenses	(2		)	(2		)	(4		)	(4		)
Net investment income	$	82		$	110		$	165		$	209
Fair value gains (losses) on Assured Investment Management funds	$	26		$	—		$	16		$	—
Other	—			1			1			2
Equity in net earnings of investees	26			1			17			2

Net investment income for Second Quarter 2020 and Six Months 2020 decreased compared to Second Quarter 2019 and Six Months 2019, primarily due to a decrease in the average asset balances in the investment portfolio. The overall pre-tax book yield was 3.33% as of June 30, 2020 and 3.56% as of June 30, 2019. Excluding the internally managed portfolio, pre-tax book yield was 3.05% as of June 30, 2020 and 3.23% as of June 30, 2019.

The fair value gains on investments in Assured Investment Management funds in Second Quarter 2020 and Six Months 2020 were were driven by the overall market rebounding in the second quarter.

Commutation Gains (Losses)

In Second Quarter 2020, the Company reassumed $336 million in par from its largest remaining legacy third party financial guaranty reinsurer. This commutation resulted in an increase of unearned premium reserve of $5 million and commutation gain of $38 million.

Other Income (Loss)

Other income (loss) consists of recurring items such as those listed in the table below as well as ancillary fees on financial guaranty policies for commitments and consents, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries and other non-recurring items.

Other Income (Loss)

	Second Quarter					Six Months
	2020		2019			2020			2019
	(in millions)
Foreign exchange gain (loss) on remeasurement (1)	$	—	$	(1	)	$	(5	)	$	—
Other	1		4			12			12
Total other income (loss)	$	1	$	3		$	7		$	12

 ____________________

(1) Primarily related to cash.

115

Economic Loss Development

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. For a discussion of methodologies used in calculating the expected loss to be paid for all contracts and the accounting policies for measurement and recognition under GAAP for each type of contract, see the notes listed below in Part II. Item 8, Financial Statements and Supplementary Data, of the Company's 2019 Annual Report on Form 10-K:

•Note 6 for expected loss to be paid

•Note 7 for contracts accounted for as insurance

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

•Note 11 for contracts accounted for as credit derivatives

•Note 14 for FG VIEs

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 losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid primarily consists of the present value of future: expected claim and LAE payments, expected recoveries from issuers or excess spread, cessions to reinsurers, expected recoveries/payables for breaches of representations and warranties, and the effects of other loss mitigation strategies. Current risk-free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported. Assumptions used in the determination of the net expected loss to be paid such as delinquency, severity, and discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used. The primary drivers of economic loss development are discussed below. Changes in risk-free rates used to discount losses affect economic loss development, and loss and LAE; however, the effect of changes in discount rates are not indicative of actual credit impairment or improvement in the period.

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						Second Quarter					Six Months
	June 30, 2020			December 31, 2019			2020		2019			2020			2019
	(in millions)
Insurance	$	684		$	683		$	32	$	(22	)	$	31		$	(12	)
FG VIEs	65			58			1		(14		)	7			(24		)
Credit derivatives	(14		)	(4		)	1		(1		)	(7		)	(3		)
Total	$	735		$	737		$	34	$	(37	)	$	31		$	(39	)
Net exposure rated BIG	$	8,406		$	8,506

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Net Expected Loss to be Paid (Recovered) and

Net Economic Loss Development (Benefit)

By Sector

	Net Expected Loss to be Paid/(Recovered)				Net Economic Loss Development/(Benefit)
	As of				Second Quarter					Six Months
	June 30, 2020		December 31, 2019		2020		2019			2020			2019
	(in millions)
U.S. public finance (1)	$	543	$	531	$	30	$	92		$	86		$	154
Non-U.S. public finance	29		23		2		(8		)	5			(9		)
Structured finance
U.S. RMBS	128		146		1		(118		)	(62		)	(183		)
Other structured finance	35		37		1		(3		)	2			(1		)
Structured finance	163		183		2		(121		)	(60		)	(184		)
Total	$	735	$	737	$	34	$	(37	)	$	31		$	(39	)
Effect of changes in the risk-free rates included in economic loss development (benefit)					$	1	$	(1	)	$	32		$	(5	)

____________________

(1) The total net expected loss for troubled U.S. public finance exposures is net of a credit for estimated future recoveries of claims already paid of $917 million as of June 30, 2020 and $819 million as of December 31, 2019.

Risk-Free Rates

	Risk-Free Rates used in Expected Loss for U.S. Dollar Denominated Obligations
	Range				Weighted Average
As of June 30, 2020	0.00	%	-	1.47%	0.57	%
As of March 31, 2020	0.00	%	-	1.39%	0.64	%
As of December 31, 2019	0.00	%	-	2.45%	1.94	%
As of June 30, 2019	0.00	%	-	2.63%	2.10	%
As of March 31, 2019	0.00	%	-	2.87%	2.46	%
As of December 31, 2018	0.00	%	-	3.06%	2.74	%

Second Quarter 2020 Net Economic Loss Development

Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.7 billion as of June 30, 2020 compared with $5.8 billion as of December 31, 2019. The Company projects that its total net expected loss across its troubled U.S. public finance exposures as of June 30, 2020 will be $543 million, compared with $531 million as of December 31, 2019. Economic loss development on U.S. exposures in Second Quarter 2020 was $30 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $2 million for non-U.S. exposures during Second Quarter 2020 due to the impact of negative European interest rates on an interest rate swap in an Italian transaction.

U.S. RMBS: The economic loss development attributable to U.S. RMBS was $1 million and was mainly related to COVID-19 related forbearances, partially offset by higher excess spread and improved performance in certain transactions and changes in liquidation rates. The economic development attributable to changes in discount rates was de minimis in Second Quarter 2020.

See Item 1, Financial Statements, Note 4, Expected Loss to be Paid for additional information.

117

Second Quarter 2019 Net Economic Loss Development

Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $6.0 billion as of June 30, 2019 compared with $6.4 billion as of December 31, 2018. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of June 30, 2019 would be $749 million, compared with $832 million as of December 31, 2018. Economic loss development on U.S. exposures in Second Quarter 2019 was $92 million, which was primarily attributable to Puerto Rico exposures. The economic benefit was approximately $8 million for non-U.S. exposures during Second Quarter 2019, which was mainly attributable to the improved internal outlook of certain Spanish sovereigns and sub-sovereigns.

U.S. RMBS: The net benefit attributable to U.S. RMBS was $118 million and was mainly related to higher projected recoveries for previously charged-off loans for second lien U.S. RMBS, an increase in excess spread, improved performance, and loss mitigation efforts.

Six Months 2020 Net Economic Loss Development

Economic loss development on U.S. public finance exposures in Six Months 2020 was $86 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $5 million for non-U.S. public finance exposures during Six Months 2020 due to the impact of negative European interest rates on an interest rate swap in an Italian transaction and the weaker outlook of the performance of a troubled U.K. road. The net benefit attributable to U.S. RMBS was $62 million and was mainly related to higher excess spread on certain transactions supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to LIBOR, which decreased in Six Months 2020, and partially offset by COVID-19 related forbearances. The economic development attributable to changes in discount rates was a loss of $32 million in Six Months 2020.

Six Months 2019 Net Economic Loss Development

The total economic benefit of $39 million in Six Months 2019 was generated mainly by the structured finance sector, partially offset by the economic loss development in the U.S. public finance sector. The economic benefit in the structured finance sector in Six Months 2019 was $184 million, which was primarily attributable to an increase in excess spread, higher projected recoveries for previously charged-off loans for second lien U.S. RMBS, improved performance, and loss mitigation efforts. This was partially offset by U.S. public finance economic loss development of $154 million, which was primarily attributable to Puerto Rico exposures. The effect of the change in the risk-free rates used to discount expected losses was a benefit of $5 million in Six Months 2019.

Insurance Segment Loss and LAE

The primary differences between net economic loss development and the amount reported as loss and LAE in the condensed consolidated statements of operations are that loss and LAE: (1) considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty insurance contracts, (2) eliminates loss and LAE related to consolidated FG VIEs, and (3) does not include estimated losses on credit derivatives.     

Loss and LAE reported in the Insurance segment adjusted operating income (i.e., adjusted loss and LAE) includes loss and LAE on financial guaranty insurance contracts (without giving effect to eliminations related to consolidation of FG VIEs), plus credit derivative losses.

For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. 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 a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.

The amount of loss and LAE recognized in the Insurance segment income, which includes all 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.

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While expected loss to be paid is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.

The following table presents the Insurance segment loss and LAE, net of reinsurance.

Insurance Segment

Loss and LAE (Benefit)

	Second Quarter					Six Months
	2020		2019			2020			2019
	(in millions)
U.S. public finance	$	33	$	94		$	92		$	164
Non-U.S. public finance	—		(8		)	—			(8		)
Structured finance
U.S. RMBS	6		(104		)	(38		)	(133		)
Other structured finance	—		3			3			6
Structured finance	6		(101		)	(35		)	(127		)
Total loss and LAE (benefit)	$	39	$	(15	)	$	57		$	29

The primary components of the Insurance segment loss and LAE expense were as follows:

• Loss and LAE in Second Quarter 2020 and Six Months 2020 was mainly driven by loss expense on certain Puerto Rico transactions. For Six Months 2020, these losses were partially offset by a benefit in first lien U.S. RMBS transactions.

• Loss and LAE in Second Quarter 2019 was a benefit mainly driven by U.S. RMBS exposures, partially offset by losses on certain Puerto Rico exposures. Loss and LAE in Six Months 2019 was mainly driven by higher losses on certain Puerto Rico exposures, partially offset by a benefit on U.S. RMBS exposures.

For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Losses.

Compensation, Benefits, Other Operating Expenses and Amortization of DAC

Second Quarter 2020 compared with Second Quarter 2019: Employee compensation and benefit expenses decreased in Second Quarter 2020 compared with Second Quarter 2019 primarily due to reduced bonus expense. Amortization of DAC was flat in Second Quarter 2020 compared with Second Quarter 2019.

Six Months 2020 compared with Six Months 2019:Amortization of DAC was lower in Six Months 2020 compared with Six Months 2019 primarily due to a decrease in net earned premiums.

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Asset Management Segment Results

Asset Management Results

	Second Quarter			Six Months
	2020			2020
	(in millions)
Revenues
Management fees:
CLOs	$	2		$	7
Opportunity funds	3			5
Wind-down funds	7			16
Total management fees (1)	12			28
Other income	1			2
Total revenues	13			30
Expenses
Amortization of intangible assets	3			6
Employee compensation and benefit expenses	14			32
Other operating expenses	7			14
Total expenses	24			52
Adjusted operating income (loss) before income taxes	(11		)	(22		)
Provision (benefit) for income taxes	(2		)	(4		)
Adjusted operating income (loss)	$	(9	)	$	(18	)

_____________________

(1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses.

Asset Management Fees

Management fees from CLOs are the net management fees that BlueMountain retains after rebating the portion of these fees that pertains to the CLO equity that is held directly by Assured Investment Management funds. Gross management fees from CLOs, before rebates to Assured Investment Management funds, were $7 million and $17 million for Second Quarter 2020 and Six Months 2020, respectively. The COVID-19 pandemic and resulting volatility and downgrades in loan markets have triggered over-collateralization provisions in CLOs, deferring current CLO management fee payments to the Company, as well as slowed the issuance of CLOs. Management fees from opportunity funds are mainly attributable to previously established opportunity funds and also includes two opportunity funds in which the Insurance segment’s U.S. insurance subsidiaries invest. Total opportunity fund AUM includes $256 million in AUM of the Company's U.S.insurance subsidiaries. A new liquid asset strategy was launched at the end of the quarter primarily with capital from the U.S. insurance subsidiaries. Distributions to investors in the wind-down funds are expected to continue, at least into 2021.

There were no performance fees recognized in Second Quarter 2020 and Six Months 2020. Performance fees are recorded when the contractual performance criteria (sometimes referred to as "high water marks" or "return hurdles") have been met and when it is probable that a significant reversal of revenues will not occur in future reporting periods. For opportunity funds, these conditions are met typically close to the end of the fund’s life. The Company's current opportunity funds were not near the end of their harvest period during the quarter, when they would typically earn performance fees.

Expenses

Expenses primarily consist of employee compensation and benefits, and also include other operating expenses such as depreciation and amortization related to the leases held by Assured Investment Management in New York and London. Amortization of finite-lived intangible assets, which mainly consist of Assured Investment Management's CLO and investment management contracts and its CLO distribution network, was $3 million and $6 million during Second Quarter 2020 and Six Months 2020, respectively.

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Assets Under Management

The Company uses AUM as a metric to measure progress in its Asset Management segment. The Company uses measures of its AUM in its decision making process and intends to use a measure of change in AUM in its calculation of certain components of management compensation. Investors also use AUM to evaluate companies that participate in the asset management business. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following:

• the amount of aggregate collateral balance and principal cash of Assured Investment Management's CLOs, including CLO equity that may be held by Assured Investment Management funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji). BlueMountain is not the investment manager of BM Fuji CLOs, but rather has entered into a services agreement and a secondary agreement with BM Fuji pursuant to which BlueMountain provides certain services associated with the management of BM Fuji-advised CLOs and acts in the capacity of service provider, and

• the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments.

The Company's calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which Assured Investment Management affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.

The Company also uses several other measurements of AUM to understand and measure its AUM in more detail and for various purposes, including its relative position in the market and its income and income potential:

• “Third-party assets under management” or “3rd Party AUM” refers to the assets Assured Investment Management manages or advises on behalf of third-party investors. This includes current and former employee investments in Assured Investment Management's funds. For CLOs, this also includes CLO equity that may be held by Assured Investment Management's funds.

• “Intercompany assets under management” or “Intercompany AUM” refers to the assets Assured Investment Management manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners' investments of BlueMountain (or its affiliates) into the funds.

• “Funded assets under management” or “Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs.

• “Unfunded assets under management” or “Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse fund.

• “Fee earning assets under management” or “Fee Earning AUM” refers to assets where Assured Investment Management collects fees and has elected not to waive or rebate fees to investors.

• “Non-fee earning assets under management” or “Non-Fee Earning AUM” refers to assets where Assured Investment Management does not collect fees or has elected to waive or rebate fees to investors. Assured Investment Management reserves the right to waive some or all fees for certain investors, including investors affiliated with Assured Investment Management and/or the Company. Further, to the extent that the Company's wind-down and/or opportunity funds are invested in Assured Investment Management managed CLOs, BlueMountain may rebate any management fees and/or performance compensation earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by Assured Investment Management.

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Rollforward of

Assets Under Management

	CLOs			Opportunity Funds			Liquid Strategies		Wind-Down Funds			Total
	(in millions)
Second Quarter 2020
AUM, March 31, 2020	$	12,645		$	969		$	—	$	2,865		$	16,479
Inflows	741			30			370		—			1,141
Outflows:
Redemptions	—			—			—		—			—
Distributions	(213		)	(83		)	—		(541		)	(837		)
Total outflows	(213		)	(83		)	—		(541		)	(837		)
Net flows	528			(53		)	370		(541		)	304
Change in fund value	39			57			1		136			233
AUM, June 30, 2020 (1)	$	13,212		$	973		$	371	$	2,460		$	17,016
Six Months 2020
AUM, December 31, 2019	$	12,758		$	1,023		$	—	$	4,046		$	17,827
Inflows	741			118			370		—			1,229
Outflows:
Redemptions	—			—			—		—			—
Distributions	(280		)	(168		)	—		(1,416		)	(1,864		)
Total outflows	(280		)	(168		)	—		(1,416		)	(1,864		)
Net flows	461			(50		)	370		(1,416		)	(635		)
Change in fund value	(7		)	—			1		(170		)	(176		)
AUM, June 30, 2020 (1)	$	13,212		$	973		$	371	$	2,460		$	17,016

_____________________

(1) Includes AUM of the insurance company subsidiaries (intercompany AUM) of $256 million in opportunity funds, $221 million in the CLOs and $351 million in liquid strategies.

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Components of

Assets Under Management

	CLOs		Opportunity Funds		Liquid Strategies		Wind-Down Funds		Total
	(in millions)
As of June 30, 2020:
Funded AUM	$	13,142	$	868	$	371	$	2,438	$	16,819
Unfunded AUM	70		105		—		22		197
Fee Earning AUM	$	6,513	$	804	$	371	$	2,258	9,946
Non-Fee Earning AUM	6,699		169		—		202		7,070
Intercompany AUM
Funded AUM	$	165	$	200	$	351	$	—	$	716
Unfunded AUM	56		56		—		—		112
As of December 31, 2019:
Funded AUM	$	12,721	$	796	$	—	$	3,980	$	17,497
Unfunded AUM	37		227		—		66		330
Fee Earning AUM	$	3,438	$	695	$	—	$	3,838	$	7,971
Non-Fee Earning AUM	9,320		328		—		208		9,856
Intercompany AUM
Funded AUM	$	19	$	58	$	—	$	—	$	77
Unfunded AUM	30		84		—		—		114

Total inflows of $1.2 billion in Six Months 2020 includes CLO AUM inflows of $741 million, which mainly consists of a new CLO, and an IMA with the U.S. insurance company subsidiaries to manage up to $300 million in CLO obligations, of which $100 million had been allocated as of June 30, 2020.

CLO AUM includes CLO equity that is held by various Assured Investment Management funds of $290 million as of June 30, 2020, and $536 million as of December 31, 2019. This CLO equity corresponds to the majority of the non-fee earning CLO AUM, as BlueMountain typically rebates the CLO fees back to Assured Investment Management funds. Assured Investment Management funds sold CLO equity prior to the market dislocation caused by the COVID-19 pandemic in March, which contributed to the increase in fee earning AUM from $7,971 million as of December 31, 2019 to $9,946 million as of June 30, 2020.

The launch of a new liquid asset strategy contributed inflows of $370 million at the end of second quarter 2020. Funds raised in the new liquid strategies include $100 million of capital from the Insurance segment's U.S. insurance subsidiariesthat were invested in a new municipal bond fund, as well as a $250 million IMA with the U.S. insurance subsidiaries to manage a portfolio of municipal obligations. Liquid strategy investment vehicles typically offer investors redemption rights within one year and are largely invested in liquid securities.

Opportunity fund inflows of $118 million for Six Months 2020 consisted mainly of additional investments made by the U.S insurance subsidiaries in the first quarter of 2020.

Total outflows of $1.9 billion for Six Months 2020, were mainly driven by the return of capital in wind down funds, which include certain funds that are in their harvest period.

As of June 30,  2020, the Company has $117 million in goodwill and $69 million in definite lived intangible assets associated with its acquisition of BlueMountain. In the first and Second Quarter 2020, the Company assessed the carrying value of these intangible assets and determined no impairment occurred. The Company continues to evaluate developments in market conditions, changes in key personnel and other factors that may impact the Company’s ability to raise third party funds and

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retain and attract professionals, which may affect the carrying value of, and result in an impairment of, goodwill or intangible assets. 

Corporate Division Results

Corporate Results

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Revenues
Net investment income	$	—		$	1		$	1		$	2
Loss on extinguishment of debt	—			—			(5		)	(1		)
Total revenues	—			1			(4		)	1
Expenses
Interest expense	23			22			48			46
Employee compensation and benefit expenses	3			5			8			9
Other operating expenses	6			4			11			7
Total expenses	32			31			67			62
Equity in net earnings of investees	—			—			(5		)	1
Adjusted operating income (loss) before income taxes	(32		)	(30		)	(76		)	(60		)
Provision (benefit) for income taxes	(6		)	(4		)	(11		)	(9		)
Adjusted operating income (loss)	$	(26	)	$	(26	)	$	(65	)	$	(51	)

The loss on extinguishment of debt, recorded in other income, is related to AGUS's purchase of a portion of the principal amount of AGMH's outstanding Junior Subordinated Debentures. The loss represents the difference between the amount paid to purchase AGMH's debt and the carrying value of the debt, which includes the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.

Interest expense relates to debt issued by AGUS and AGMH. The increase in interest expense was due to the $250 million debt to AGM, AGC and MAC borrowed in October 2019 in connection with the BlueMountain acquisition, which was partially offset by a decrease in interest expense due to AGUS's purchase of $23 million in principal of AGMH's debt in Six Months 2020.

Compensation and benefits expenses allocated to the Corporate division are based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other expenses include Board of Director expenses, legal fees and other direct or allocated expenses.

Equity in net earnings of investees was a loss in Six Months 2020 due to a write down of AGUS' investment in an investment firm that provides investment banking services in the global infrastructure sector.

Other

Other consists of intersegment eliminations, reclassifications of reimbursable fund expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain Assured Investment Management investment vehicles in which the Insurance segment invests. The net effect on adjusted operating income (loss) of these items was a loss of $4 million in Six Months 2020 and a gain of $6 million in Second Quarter 2019 and Six Months 2019. The effect was de minimis in Second Quarter 2020. See Item 1, Financial Statements, Note 2, Segment Information.

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VIE Consolidation Effect on

Net Income (Loss) Attributable to AGL

	Second Quarter				Six Months
	2020		2019		2020			2019
	(in millions)
Effect of consolidating:
FG VIEs	$	—	$	6	$	(4	)	$	6
Investment vehicles	—		—		—			—
VIE consolidation effect	$	—	$	6	$	(4	)	$	6

The types of VIEs the Company consolidates when it is deemed to be the primary beneficiary primarily include (1) entities whose debt obligations the insurance subsidiaries insure, and (2) investment vehicles such as collateralized financing entities and funds managed by the Asset Management subsidiaries, in which the insurance company subsidiaries have a variable interest (consolidated investment vehicles). The Company eliminates the effects of intercompany transactions between consolidated VIEs and its insurance and asset management subsidiaries, as well as intercompany transactions between consolidated VIEs.

Generally, the consolidation of the Company's consolidated investment vehicles and FG VIEs has a significant gross-up effect on the Company's assets, liabilities and cash flows. The consolidation of the investment vehicles have no net effect on the net income attributable to the Company. The economic interest the Company holds in consolidated funds is presented in the Insurance segment. The ownership interests of the Company's consolidated funds, to which the Company has no economic rights, are reflected as either redeemable or nonredeemable noncontrolling interests in the consolidated funds in the Company's consolidated financial statements. See Item 1, Financial Statements, Note 11, Variable Interest Entities, for additional information.

Reconciliation to GAAP

Reconciliation of Net Income (Loss)

Attributable to AGL

To Adjusted Operating Income (Loss)

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Net income (loss) attributable to AGL	$	183		$	142		$	128		$	196
Less pre-tax adjustments:
Realized gains (losses) on investments	4			8			(1		)	(4		)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives	97			(12		)	9			(40		)
Fair value gains (losses) on CCS	(25		)	19			23			10
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves	2			(12		)	(55		)	(3		)
Total pre-tax adjustments	78			3			(24		)	(37		)
Less tax effect on pre-tax adjustments	(14		)	(2		)	—			6
Adjusted operating income (loss)	$	119		$	141		$	152		$	227

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Net Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses).

Net Realized Investment Gains (Losses)

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Gross realized gains on available-for-sale securities	$	16		$	13		$	23		$	19
Gross realized losses on available-for-sale securities	(8		)	(1		)	(9		)	(3		)
Credit impairments	(4		)	(4		)	(15		)	(20		)
Net realized investment gains (losses)	$	4		$	8		$	(1	)	$	(4	)

Credit impairment in Second Quarter 2020 and Six Months 2020 was related primarily an increase in the allowance for credit loss on loss mitigation securities. Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit loss. Credit impairment in Second Quarter 2019 was primarily attributable to foreign exchange losses while Six Months 2019 was primarily attributable to loss mitigation securities and foreign exchange losses.

Non-Credit Impairment Unrealized Fair Value Gains (Losses) on Credit Derivatives

Changes in the fair value of credit derivatives occur because of changes in the Company's own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates, and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-economic changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because it does not represent actual claims or expected losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM's portfolio, changes in AGM's credit spreads do not significantly affect the fair value of these CDS contracts.

The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past several years and as of June 30, 2020, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments. See Item 1, Financial Statements, Note 7, Fair Value Measurement, for additional information.

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During Second Quarter 2020, unrealized fair value gains on credit derivatives were generated primarily as a result of price improvements of the underlying collateral, partially offset by losses due to the tightening of AGC spreads. During Second Quarter 2019 non-credit impairment fair value losses were generated primarily as a result of the tightening of AGC spreads. Except for credit impairment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.

During Six Months 2020, non-credit impairment fair value gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period. These gains were partially offset by the wider spreads of the underlying collateral and lower discount rates.     During Six Months 2019 non-credit impairment fair value losses were generated primarily as a result of wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name during the period. These losses were partially offset by the price improvements.

Sensitivity to Changes in Credit Spread

The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC.

Effect of Changes in Credit Spread

	As of June 30, 2020						As of December 31, 2019
Credit Spreads (1)	Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss) (Pre-Tax)			Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss) (Pre-Tax)
	(in millions)
Increase of 25 bps	$	(274	)	$	(113	)	$	(315	)	$	(130	)
Base Scenario	(161		)	—			(185		)	—
Decrease of 25 bps	(105		)	56			(97		)	88
All transactions priced at floor	(68		)	93			(56		)	129

 ____________________

(1) Includes the effects of changes in the net spreads assumed by the Company.

Fair Value Gains (Losses) on CCS

Fair value losses on CCS in Second Quarter 2020 were caused by the steep reduction in LIBOR during the period. Fair value gains on CCS in Six Months 2020 were primarily due to a widening in market spreads during the period. Fair value gains on CCS recorded in Second Quarter 2019 and Six Months 2019 were primarily due to widening of spreads of comparable securities relative to changes in treasury yields during the periods. Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

Foreign Exchange Gain (Loss) on Remeasurement

Foreign exchange gains and losses in all periods primarily relate to remeasurement of premiums receivable and are mainly due to changes in the exchange rate of the euro and pound sterling relative to the U.S. dollar.

Non-GAAP Financial Measures

To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discloses both financial measures determined in accordance with GAAP and financial measures not determined in accordance with GAAP (non-GAAP financial measures).

Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company.

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By disclosing non-GAAP financial measures, the Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally. The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.

The Company also provides the effect of VIE consolidation that is embedded in each non-GAAP financial measure, as applicable, which the Company believes may also be useful to investors, analysts and financial news media to evaluate Assured Guaranty’s financial results. GAAP requires the Company to consolidate certain FG VIEs and investment vehicles. The Company does not own the consolidated FG VIEs and its exposure is limited to its obligation under the financial guaranty insurance contract. The Insurance segment presents the economic effect of the financial guaranty contracts associated with the consolidated FG VIEs. The Company does own a substantial ownership interest in its consolidated investment vehicles, which is reflected in the Insurance segment.

Management and the Board of Directors use non-GAAP financial measures further adjusted to remove the effect of VIE consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision making process and in its calculation of certain components of management compensation.

Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity, further adjusted to remove the effect of VIE consolidation, as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.

Management believes that many investors, analysts and financial news reporters also use adjusted book value, further adjusted to remove the effect of VIE consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Adjusted operating income further adjusted for the effect of VIE consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.

The core financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of VIE consolidation, (2) adjusted operating shareholders' equity, further adjusted to remove the effect of VIE consolidation, (3) growth in adjusted book value per share, further adjusted to remove the effect of VIE consolidation, and (4) PVP.

In the first quarter of 2020, the Company changed the discount rate used in the calculation of PVP and net present value of estimated future net revenues, which is a component of adjusted book value. Beginning in 2020, the discount rate will be the approximate average pre-tax fixed book yield of fixed-maturity securities purchased in the prior calendar year, excluding loss mitigation bonds. In prior periods the discount rate was a constant 6% discount rate. The Company made these changes and recast prior periods to better reflect the then current interest rate environment. The reconciliation tables of GAAP to non-GAAP financial measures for PVP and ABV indicate the new discount rate for each relevant period. The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.

Adjusted Operating Income

Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the underwriting results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.

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2) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company's credit spreads, and other market factors and are not expected to result in an economic gain or loss.

3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss.

4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.

5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

Adjusted Operating Shareholders’ Equity and Adjusted Book Value

     Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.

Adjusted operating shareholders’ equity is the basis of the calculation of adjusted book value (see below). Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss.

3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss.

4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

Management uses adjusted book value, further adjusted for VIE consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value per share, further adjusted for VIE consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following:

1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.

2) Addition of the net present value of estimated net future revenue. See below.

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3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.

4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.

Reconciliation of Shareholders’ Equity Attributable to AGL

To Adjusted Book Value (1)

	As of June 30, 2020						As of December 31, 2019
	After-Tax			Per Share			After-Tax			Per Share
	(dollars in millions, except per share amounts)
Shareholders’ equity attributable to AGL	$	6,444		$	76.66		$	6,639		$	71.18
Less pre-tax adjustments:
Non-credit impairment unrealized fair value gains (losses) on credit derivatives	(47		)	(0.56		)	(56		)	(0.60		)
Fair value gains (losses) on CCS	76			0.90			52			0.56
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect	510			6.07			486			5.21
Less taxes	(92		)	(1.09		)	(89		)	(0.95		)
Adjusted operating shareholders’ equity	5,997			71.34			6,246			66.96
Pre-tax adjustments:
Less: Deferred acquisition costs	116			1.37			111			1.19
Plus: Net present value of estimated net future revenue	188			2.24			206			2.20
Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed	3,317			39.46			3,296			35.34
Plus taxes	(590		)	(7.04		)	(590		)	(6.32		)
Adjusted book value	$	8,796		$	104.63		9,047			96.99
Gain (loss) related to VIE consolidation included in adjusted operating shareholders' equity (net of tax provision of $2 and $2)	$	8		$	0.09		$	7		$	0.07
Gain (loss) related to VIE consolidation included in adjusted book value (net of tax benefit of $1 and $1)	$	(2	)	$	(0.03	)	$	(4	)	$	(0.05	)

___________________

(1) The discount rate used for net present value of estimated net future revenues as of June 30, 2020 is 3%. The prior period has been recast to present the net present value of net future revenues discounted at 3% instead of 6%.

Net Present Value of Estimated Net Future Revenue

Management believes that this amount is a useful measure because it enables an evaluation of the value of the present value of estimated net future revenue for contracts other than financial guaranty insurance contracts (such as specialty insurance and reinsurance contracts and credit derivatives). This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes.

Future installment premiums are discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to

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a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure.

PVP or Present Value of New Business Production

Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premium on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), whether in insurance or credit derivative contract form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums. 

Future installment premiums are discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction.

Actual installment premiums may differ from those estimated in the Company's PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation. 

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Reconciliation of GWP to PVP (1)

	Second Quarter 2020										Second Quarter 2019
	Public Finance				Structured Finance						Public Finance					Structured Finance
	U.S.		Non - U.S.		U.S.		Non - U.S.		Total		U.S.			Non - U.S.		U.S.			Non - U.S.		Total
	(in millions)
GWP	$	60	$	81	$	8	$	—	$	149	$	43		$	12	$	(4	)	$	—	$	51
Less: Installment GWP and other GAAP adjustments (2)	—		81		8		—		89		(1		)	12		(4		)	—		7
Upfront GWP	60		—		—		—		60		44			—		—			—		44
Plus: Installment premium PVP	—		28		8		—		36		—			8		3			1		12
PVP	$	60	$	28	$	8	$	—	$	96	$	44		$	8	$	3		$	1	$	56

	Six Months 2020										Six Months 2019
	Public Finance				Structured Finance						Public Finance					Structured Finance
	U.S.		Non - U.S.		U.S.		Non - U.S.		Total		U.S.			Non - U.S.		U.S.		Non - U.S.		Total
	(in millions)
Total GWP	$	89	$	115	$	9	$	—	$	213	$	73		$	14	$	2	$	1	$	90
Less: Installment GWP and other GAAP adjustments (2)	—		115		9		—		124		(3		)	14		1		—		12
Upfront GWP	89		—		—		—		89		76			—		1		1		78
Plus: Installment premium PVP	—		49		9		—		58		—			12		7		1		20
Total PVP	$	89	$	49	$	9	$	—	$	147	$	76		$	12	$	8	$	2	$	98

___________________

(1) The discount rate used for PVP as of March 31, 2020 is 3%. The prior period has been recast to present PVP discounted at 3% instead of 6%.

(2) Includes present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions, and other GAAP adjustments.

Insured Portfolio

Financial Guaranty Exposure

The Company measures its financial guaranty exposure in terms of (a) gross and net par outstanding and (b) gross and net debt service, which includes scheduled principal and interest. The Company uses gross and net par outstanding and gross and net debt service to measure and understand the financial guaranty risk it guarantees in its Insurance segment and to understand its relative position in the fixed income markets.

The Company typically guarantees the payment of principal and interest 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 third-party 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.

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The Company purchases securities that it has insured, and for which it has 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, which amounts are included in the investment portfolio, because the Company manages such securities as investments and not insurance exposure. As of both June 30, 2020 and December 31, 2019, the Company excluded $1.4 billion, of net par attributable to loss mitigation securities. See Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure, for additional information.

Gross debt service outstanding represents the sum of all estimated future principal and interest payments on the obligations insured, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any third-party 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.

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 principal and interest 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, RMBS and CLOs), as the total estimated expected future principal and interest 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 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. The anticipated sunset of LIBOR at the end of 2021 has introduced another variable into the Company's calculation of future debt service. See the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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.

The following table presents the insured financial guaranty portfolio by sector, net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or VIE consolidation).

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Financial Guaranty Portfolio

Net Par Outstanding and Average Internal Rating by Sector

	As of June 30, 2020			As of December 31, 2019
Sector	Net Par Outstanding		Avg. Rating	Net Par Outstanding		Avg. Rating
	(dollars in millions)
Public finance:
U.S.:
General obligation	$	73,179	A-	$	73,467	A-
Tax backed	35,419		A-	37,047		A-
Municipal utilities	25,973		A-	26,195		A-
Transportation	15,896		BBB+	16,209		BBB+
Healthcare	7,575		BBB+	7,148		A-
Higher education	5,718		A-	5,916		A-
Infrastructure finance	5,403		A-	5,429		A-
Housing revenue	1,290		BBB	1,321		BBB+
Investor-owned utilities	653		A-	655		A-
Renewable energy	207		A-	210		A-
Other public finance—U.S.	1,830		A-	1,890		A-
Total public finance—U.S.	173,143		A-	175,487		A-
Non-U.S.:
Regulated utilities	17,783		BBB+	18,995		BBB+
Infrastructure finance	16,880		BBB	17,952		BBB
Sovereign and sub-sovereign	11,067		A+	11,341		A+
Renewable energy	2,244		A	1,555		A
Pooled infrastructure	1,319		AAA	1,416		AAA
Total public finance—non-U.S.	49,293		A-	51,259		A-
Total public finance	222,436		A-	226,746		A-
Structured finance:
U.S.:
RMBS	3,281		BBB-	3,546		BBB-
Life insurance transactions	1,977		AA-	1,776		AA-
Pooled corporate obligations	1,310		AA-	1,401		AA-
Consumer receivables	861		A-	962		A-
Financial products	808		AA-	1,019		AA-
Other structured finance—U.S.	585		BBB	596		BBB+
Total structured finance—U.S.	8,822		A-	9,300		A-
Non-U.S.:
RMBS	400		A	427		A
Pooled corporate obligations	55		BB+	55		BB+
Other structured finance	246		A	279		A+
Total structured finance—non-U.S.	701		A	761		A
Total structured finance	9,523		A-	10,061		A-
Total net par outstanding	$	231,959	A-	$	236,807	A-

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The following table sets forth the Company’s net financial guaranty portfolio by internal rating.

Financial Guaranty

Portfolio by Internal Rating

	As of June 30, 2020				As of December 31, 2019
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,111	1.8	%	$	4,361	1.8	%
AA	26,635		11.4		29,037		12.3
A	104,295		45.0		111,329		47.0
BBB	88,542		38.2		83,574		35.3
BIG	8,376		3.6		8,506		3.6
Total net par outstanding	$	231,959	100.0	%	$	236,807	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 $4.4 billion net par as of June 30, 2020, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except for Puerto Rico Aqueduct and Sewer Authority (PRASA), Municipal Finance Agency (MFA) and University of Puerto Rico (U of PR).

The Company groups its Puerto Rico exposure into three categories:

• Constitutionally Guaranteed.

• Public Corporations – Certain Revenues Potentially Subject to Clawback.

• Other Public Corporations.

Additional information about recent developments in Puerto Rico and the individual exposures insured by the Company may be found in Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure.

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Exposure to Puerto Rico

As of June 30, 2020

	Net Par Outstanding
	AGM		AGC		AG Re		Eliminations (1)			Total Net Par Outstanding		Gross Par Outstanding
	(in millions)
Commonwealth Constitutionally Guaranteed
Commonwealth of Puerto Rico - General Obligation Bonds (2)	$	611	$	268	$	375	$	(1	)	$	1,253	$	1,294
Puerto Rico Public Buildings Authority (PBA) (2)	7		140		—		(7		)	140		145
Public Corporations - Certain Revenues Potentially Subject to Clawback
Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) (2)	254		480		187		(79		)	842		842
PRHTA (Highway revenue) (2)	406		74		35		—			515		515
Puerto Rico Convention Center District Authority (PRCCDA)	—		152		—		—			152		152
Puerto Rico Infrastructure Financing Authority (PRIFA)	—		15		1		—			16		16
Other Public Corporations
PREPA (2)	528		71		226		—			825		838
PRASA	—		284		89		—			373		373
MFA	176		33		62		—			271		282
U of PR	—		1		—		—			1		1
Total exposure to Puerto Rico	$	1,982	$	1,518	$	975	$	(87	)	$	4,388	$	4,458

 ___________________

(1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary.

(2) As of the date of this filing, the seven-member financial oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) has certified a filing under Title III of PROMESA for these exposures.

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The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. 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. In the event that obligors default on their obligations, the Company would only pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.     

Amortization Schedule

of Net Par Outstanding of Puerto Rico

As of June 30, 2020

	Scheduled Net Par Amortization
	2020 (3Q)		2020 (4Q)		2021		2022		2023		2024		2025 - 2029		2030 - 2034		2035 - 2039		2040 - 2044		2045 - 2047		Total
	(in millions)
Commonwealth Constitutionally Guaranteed
Commonwealth of Puerto Rico - General Obligation Bonds	$	141	$	—	$	15	$	37	$	14	$	73	$	289	$	419	$	265	$	—	$	—	$	1,253
PBA	5		—		13		—		7		—		58		38		19		—		—		140
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA (Transportation revenue)	25		—		18		28		33		4		165		180		307		82		—		842
PRHTA (Highway revenue)	22		—		35		40		32		33		58		192		103		—		—		515
PRCCDA	—		—		—		—		—		—		19		76		57		—		—		152
PRIFA	—		—		—		—		2		—		—		—		7		7		—		16
Other Public Corporations
PREPA	49		—		28		28		95		93		386		142		4		—		—		825
PRASA	—		—		—		—		—		1		109		—		2		15		246		373
MFA	49		—		44		43		23		18		89		5		—		—		—		271
U of PR	—		—		—		—		—		—		—		1		—		—		—		1
Total	$	291	$	—	$	153	$	176	$	206	$	222	$	1,173	$	1,053	$	764	$	104	$	246	$	4,388

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Amortization Schedule

of Net Debt Service Outstanding of Puerto Rico

As of June 30, 2020

	Scheduled Net Debt Service Outstanding
	2020 (3Q)		2020 (4Q)		2021		2022		2023		2024		2025 - 2029		2030 - 2034		2035 - 2039		2040 - 2044		2045 - 2047		Total
	(in millions)
Commonwealth Constitutionally Guaranteed
Commonwealth of Puerto Rico - General Obligation Bonds	$	173	$	—	$	74	$	95	$	70	$	128	$	514	$	572	$	294	$	—	$	—	$	1,920
PBA	9		—		20		6		13		6		81		50		20		—		—		205
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA (Transportation revenue)	47		—		61		69		74		42		340		314		371		89		—		1,407
PRHTA (Highway revenue)	36		—		61		64		54		53		144		253		111		—		—		776
PRCCDA	3		—		7		7		7		7		52		103		61		—		—		247
PRIFA	—		—		1		1		3		1		4		3		10		8		—		31
Other Public Corporations
PREPA	66		3		63		62		128		122		467		157		5		—		—		1,073
PRASA	10		—		19		19		19		20		190		68		70		82		272		769
MFA	55		—		54		52		29		24		103		6		—		—		—		323
U of PR	—		—		—		—		—		—		—		1		—		—		—		1
Total	$	399	$	3	$	360	$	375	$	397	$	403	$	1,895	$	1,527	$	942	$	179	$	272	$	6,752

Financial Guaranty Exposure to U.S. RMBS

The table below provides information on certain risk characteristics of the Company’s U.S. RMBS exposures. U.S. RMBS exposures represent 1.4% of the total net par outstanding, and BIG U.S. RMBS represent 18.6% of total BIG net par outstanding. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid, for a discussion of expected losses to be paid on U.S. RMBS exposures.

Distribution of U.S. RMBS by Year Insured and Type of Exposure as of June 30, 2020

Year insured:	Prime First Lien		Alt-A First Lien		Option ARMs		Subprime First Lien		Second Lien		Total Net Par Outstanding
	(in millions)
2004 and prior	$	19	$	18	$	—	$	525	$	40	$	602
2005	45		207		22		215		117		606
2006	40		39		10		238		197		524
2007	—		307		25		916		260		1,508
2008	—		—		—		41		—		41
Total exposures	$	104	$	571	$	57	$	1,935	$	614	$	3,281
Exposures rated BIG	$	59	$	320	$	31	$	982	$	162	$	1,554

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Specialty Insurance and Reinsurance Exposure

The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. All specialty insurance and reinsurance exposures shown in the table below were rated investment grade internally as of December 31, 2019. As of June 30, 2020, $30 million of aircraft residual value insurance exposure was rated BIG.

Specialty Insurance and Reinsurance Exposure

	Gross Exposure				Net Exposure
	As of June 30, 2020		As of December 31, 2019		As of June 30, 2020		As of December 31, 2019
	(in millions)
Life insurance transactions (1)	$	1,063	$	1,046	$	915	$	898
Aircraft residual value insurance policies	391		398		236		243
Total	$	1,454	$	1,444	$	1,151	$	1,141

____________________

(1) The life insurance transactions net exposure is projected to increase to approximately $1.0 billion by September 30, 2026.

Reinsurer Exposures

The Company has exposure to reinsurers through reinsurance arrangements (both as a ceding company and as an assuming company). In recent years, the Company has reassumed most of its previously ceded exposure but continues to cede portions of certain specialty exposures to reinsurers to mitigate risk. In recent years, the Company has also assumed additional financial guaranty exposures (from financial guarantors no longer writing new business). See Item 1, Financial Statements, Note 6, Reinsurance.

Liquidity and Capital Resources

Liquidity Requirements and Sources

AGL and its Holding Company Subsidiaries

The liquidity of AGL, AGUS and AGMH is largely dependent on dividends from their operating subsidiaries and their access to external financing. The operating liquidity requirements of AGL and the U.S. Holding Companies include the payment of operating expenses, interest on debt issued by AGUS and AGMH, and dividends on AGL's common shares. AGL and its holding company subsidiaries may also require liquidity to fund acquisitions of new businesses, to make capital investments in their operating subsidiaries, purchase the Company's outstanding debt, or in the case of AGL, to repurchase its common shares pursuant to its share repurchase authorization. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See “—Distributions From Subsidiaries” below for a discussion of the dividend restrictions of its insurance subsidiaries.

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AGL (Guarantor) fully and unconditionally guarantees all of the AGUS and AGMH (Issuers) debt. The following tables includes summarized financial information for AGL and the U.S. Holding Company subsidiaries, excluding their investments in subsidiaries. AGUS and AGMH are shown on a combined basis as "U.S. Holding Companies" in the tables below.

	As of June 30, 2020				As of December 31, 2019
	AGL		U.S. Holding Companies		AGL		U.S. Holding Companies
	(in millions)
Investments and cash (1)	$	12	$	116	$	135	$	243
Receivables from affiliates (2)	24		—		29		—
Receivable from U.S. Holding Companies	50		—		40		—
Other assets	3		80		2		59
Long term debt	—		1,219		—		1,231
Loans payable to affiliate	—		290		—		290
Payable to affiliates (2)	6		9		9		5
Payable to AGL	—		50		—		40
Other liabilities	6		137		8		130

____________________

(1) As of June 30, 2020 and December 31, 2019, weighted average duration of U.S. Holding Companies' fixed-maturity securities (excluding AGUS' investment in AGMH's debt) was 1.9 years and 4.4 years, respectively.

(2) Represents receivable and payables with non-guarantor subsidiaries.

	Six Months 2020
	AGL			U.S. Holding Companies
	(in millions)
Revenues	$	—		$	(4	)
Interest expense	—			48
Other expenses	18			1
Income (loss) before provision for income taxes	(18		)	(53		)
Equity in net earnings of investees	—			(5		)
Net income (loss)	(18		)	(46		)

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The following table presents significant holding company cash flow activities (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities.

AGL and U.S. Holding Company Subsidiaries

Significant Cash Flow Items

	AGL			U.S. Holding Companies
	(in millions)
Second Quarter 2020
Intercompany sources	$	170		$	24
Intercompany (uses)	—			(170		)
External sources (uses):
Dividends paid to AGL shareholders	(17		)	—
Repurchases of common shares (1)	(164		)	—
Interest paid (2)	—			(32		)
Second Quarter 2019
Intercompany sources	$	132		$	128
Intercompany (uses)	—			(87		)
External sources (uses):
Dividends paid to AGL shareholders	(19		)	—
Repurchases of common shares (1)	(110		)	—
Interest paid (2)	—			(33		)
Six Months 2020
Intercompany sources	210			181
Intercompany (uses)	—			(240		)
External sources (uses):
Dividends paid to AGL shareholders	(37		)	—
Repurchases of common shares (1)	(280		)	—
Interest paid (2)	—			(41		)
Six Months 2019
Intercompany sources	232			244
Intercompany (uses)	—			(147		)
External sources (uses):
Dividends paid to AGL shareholders	(39		)	—
Repurchases of common shares (1)	(190		)	—
Interest paid (2)	—			(42		)

____________________

(1) See Item 1, Financial Statements, Note 14, Shareholders' Equity, for additional information about share repurchases and authorizations.

(2) See Long-Term Obligations below for interest paid by subsidiary.

Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.

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For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 15, Long-Term Debt and Credit Facilities of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Commitments and Contingencies, and Long-Term Debt Obligations

The Company has outstanding long-term debt issued primarily by AGUS and AGMH. All of AGUS' and AGMH's debt is fully and unconditionally guaranteed by AGL; AGL's guarantee of the junior subordinated debentures is on a junior subordinated basis.

Principal Outstanding of

Long-Term Debt and Intercompany Loans

	As of June 30, 2020						As of December 31, 2019
	Principal			Carrying Value			Principal			Carrying Value
	(in millions)
AGUS	$	850		$	845		$	850		$	844
Intercompany loans	290			290			290			290
Total AGUS	1,140			1,135			1,140			1,134
AGMH	730			479			730			476
AGM	4			4			4			4
AGMH's debt purchased by AGUS (1)	(154		)	(106		)	(131		)	(89		)
Elimination of intercompany loans	(290		)	(290		)	(290		)	(290		)
Total	$	1,430		$	1,222		$	1,453		$	1,235

 ____________________

(1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS. Loss on extinguishment of debt was $5 million in Six Months 2020 and $1 million in Six Months 2019. There was no loss on extinguishment of debt in Second Quarter 2020 and Second Quarter 2019.

Issued by AGUS:

7% Senior Notes.  On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 for net proceeds of $197 million. Although the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest at the date of redemption or, if greater, the make-whole redemption price.

5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 for net proceeds of $495 million. The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of common shares of AGL. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest at the date of redemption or, if greater, the make-whole redemption price.

Series A Enhanced Junior Subordinated Debentures.  On December 20, 2006, AGUS issued $150 million of Debentures due 2066. The Debentures paid a fixed 6.4% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%. LIBOR may be discontinued. For more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Risks Related to the Financial, Credit and Financial Guaranty Markets in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019. AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date. The debentures are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption.

Issued by AGMH:

6 7/8% QUIBS.  On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due December 15, 2101, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption. 

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6.25% Notes.  On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption. 

5.6% Notes.  On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption.

Junior Subordinated Debentures.  On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.4%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. LIBOR may be discontinued. For more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Risks Related to the Financial, Credit and Financial Guaranty Markets in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is twenty years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH. In Six Months 2020 and Six Months 2019, AGUS purchased $23 million and $3 million of principal of the debentures, which resulted in a loss on extinguishment of debt on a consolidated basis of $5 million and $1 million for Six Months 2020 and 2019, respectively. There were no purchases in Second Quarter 2020 and Second Quarter 2019. The Company may choose to make additional purchases of this or other Company debt in the future.

Intercompany Loans and Guarantees

On October 1, 2019 AGM, AGC and MAC made 10-year, 3.5% interest rate intercompany loans to AGUS totaling $250 million to fund the BlueMountain Acquisition and the related capital contributions. See the Company's 2019 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 2, Business Combinations and Assumption of Insured Portfolio, for additional information.

In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. In 2018, the maturity date was extended to November 2023. As of June 30, 2020, $40 million remained outstanding.

From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility.

Furthermore, AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130 million aggregate principal amount of senior notes issued by AGUS and AGMH, and the $450 million aggregate principal amount of junior subordinated debentures issued by AGUS and AGMH, in each case, as described under "Commitments and Contingencies -- Long-Term Debt Obligations" above.

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Insurance Subsidiaries

Liquidity of the insurance subsidiaries is primarily used to pay for:

• operating expenses,

• claims on the insured portfolio,

• dividends or other distributions to AGL, AGUS and/or AGMH, as applicable,

• posting of collateral in connection with reinsurance and credit derivative transactions, if necessary,

• reinsurance premiums,

• principal of and, where applicable, interest on surplus notes, and

• capital investments in their own subsidiaries, where appropriate.

Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios. The Company targets a balance of its most liquid assets including cash and short-term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold temporarily impaired debt securities until the date of anticipated recovery of amortized cost.

The insurance subsidiaries intend to invest $500 million in Assured Investment Management funds. As of June 30, 2020, the Insurance segment had invested $354 million in Assured Investment Management funds which are accounted for under the equity method, using net asset value as a practical expedient. On a consolidated basis, these investments are eliminated and the underlying funds and CLOs are consolidated. The insurance subsidiaries have committed an additional $112 million to the four Assured Investment Management funds that may be drawn in the future. See Item 1, Financial Statements, Note 11, Variable Interest Entities.

Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company's insurance subsidiaries, insurance regulations and rating agency capital requirements.

Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option.

 Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. Direct and indirect consequences of COVID-19 are causing financial distress to many of the obligors and assets underlying obligations guaranteed by the Company, and may result in increases in claims and loss reserves. The Company believes that 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 shelter-in-place guidelines and related restrictions or an economic downturn, are most at risk for increased claims. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it are unknown, so the Company cannot predict the ultimate size of any increases in claims that may result from the pandemic.

In addition, the Company has net par exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.4 billion, all of which is rated BIG. Beginning in 2016, the Commonwealth and certain related authorities and public corporations have defaulted on obligations to make payments on its debt. Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public corporations is set forth in Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure.

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Claims (Paid) Recovered

	Second Quarter						Six Months
	2020			2019			2020			2019
Public finance	$	21		$	(9	)	$	(73	)	$	(237	)
Structured finance:
U.S. RMBS	23			43			44			52
Other structured finance	(3		)	—			(4		)	1
Structured finance	20			43			40			53
Claims (paid) recovered, net of reinsurance (1)	$	41		$	34		$	(33	)	$	(184	)

____________________

(1) Includes $0.3 million and $11 million recovered for consolidated FG VIEs for Second Quarter 2020 and 2019, respectively, and de minimis amount paid and $12 million recovered for Six Months 2020 and Six Months 2019, respectively.

In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.

If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.

Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $660 million as of June 30, 2020. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As of June 30, 2020, approximately $1.7 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM. 

The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled "pay-as-you-go" basis and to replicate the terms of a traditional financial guaranty insurance policy. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis.

The transaction documentation with one counterparty for $148 million of the CDS insured by the Company requires the Company to post collateral, subject to a cap, to secure its obligation to make payments under such contracts. As of June 30, 2020, AGC did not have to post collateral to satisfy these requirements and the maximum posting requirement was $148 million.

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Ratings Impact on Financial Guaranty Business

A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay. See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Distributions From Insurance Subsidiaries

The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of its liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Insurance Company Regulatory Requirements, of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a complete discussion of the Company's dividend restrictions applicable to AGC, AGM, MAC, AG Re and AGRO.

Dividend restrictions by insurance subsidiary are as follows:

• The maximum amount available during 2020 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $193 million, of which approximately $87 million is estimated to be available for distribution in the third quarter of 2020.

• The maximum amount available during 2020 for AGC to distribute as ordinary dividends is approximately $166 million, of which approximately $15 million is available for distribution in the third quarter of 2020.

• The maximum amount available during 2020 for MAC to distribute to MAC Assurance Holdings Inc. (MAC Holdings) as dividends without regulatory approval is estimated to be approximately $19 million, none of which is available for distribution in the third quarter of 2020.

• Based on the applicable law and regulations, in 2020 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $128 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $274 million as of June 30, 2020. Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $226 million as of June 30, 2020, and (ii) the amount of statutory surplus, which as of June 30, 2020 was $311 million.

• Based on the applicable law and regulations, in 2020 AGRO has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $103 million as of June 30, 2020. Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $399 million as of June 30, 2020, and (ii) the amount of statutory surplus, which as of June 30, 2020 was $286 million.

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Distributions from

Insurance Company Subsidiaries

	Second Quarter				Six Months
	2020		2019		2020		2019
					(in millions)
Dividends paid by AGC to AGUS	$	24	$	24	$	109	$	66
Dividends paid by AGM to AGMH	—		4		72		78
Dividends paid by AG Re to AGL	—		45		—		85
Dividends paid by MAC to MAC Holdings (1)	20		100		20		105

____________________

(1) MAC Holdings distributed substantially all amounts to AGM and AGC, in proportion to their ownership percentages.

External Financing

From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company.

Commitments and Contingencies-Committed Capital Securities

Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company does not consider itself to be the primary beneficiary of the trusts and the trusts are not consolidated in Assured Guaranty's financial statements.

The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.

Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities is one-month LIBOR plus 200 bps. LIBOR may be discontinued. Fore more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Operational Risks in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019.

Assured Investment Management Sources and Uses of Liquidity

The Asset Management segment's sources of liquidity are (1) net working capital, (2) cash from operations, including management and performance fees (which are unpredictable as to amount and timing), and (3) capital contributions from AGUS (in the first quarter of 2020 $30 million had been contributed to supplement working capital). As of June 30, 2020, the Assured Investment Management platform subsidiaries had $26 million in cash.

Liquidity needs in the Asset Management segment primarily include (1) paying operating expenses including compensation, (2) paying dividends to AGUS, and (3) capital to support growth and expansion of the asset management business.

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Condensed Consolidated Cash Flows

Condensed Consolidated Cash Flow Summary

	Second Quarter						Six Months
	2020			2019			2020			2019
	(in millions)
Net cash flows provided by (used in) operating activities before effect of VIE consolidation	$	176		$	136		$	79		$	(197	)
Effect of VIE consolidation (1)	(457		)	(2		)	(524		)	(1		)
Net cash flows provided by (used in) operating activities	(281		)	134			(445		)	(198		)
Net cash flows provided by (used in) investing activities before effect of VIE consolidation	166			67			408			535
Effect of VIE consolidation (1)	178			72			325			96
Net cash flows provided by (used in) investing activities	344			139			733			631
Dividends paid	(17		)	(19		)	(37		)	(39		)
Repurchases of common stock	(164		)	(110		)	(280		)	(190		)
Repurchase of debt	—			—			(21		)	(3		)
Net cash flows provided by (used in) financing activities before effect of VIE consolidation	(2		)	(2		)	(13		)	(16		)
Effect of VIE consolidation (1)	372			(70		)	360			(95		)
Net cash flows provided by (used in) financing activities (2)	189			(201		)	9			(343		)
Effect of exchange rate changes	—			(1		)	(7		)	—
Cash and restricted cash at beginning of period	221			123			183			104
Total cash and restricted cash at the end of the period	$	473		$	194		$	473		$	194

____________________

(1) VIE consolidation includes the effects of FG VIEs and consolidated investment vehicles.

(2) Claims paid on consolidated FG VIEs are presented in the condensed consolidated cash flow statements as a component of paydowns on FG VIEs' liabilities in financing activities as opposed to operating activities.

Cash flows from operations, excluding the effect of consolidating VIEs, was an inflow of $79 million in Six Months 2020 and an outflow of $197 million in Six Months 2019. The increase in cash inflows was primarily due to cash received from a commutation and higher premiums (offset in part by cash outflows for the Asset Management segment) in Six Months 2020 compared to Six Months 2019, which included a claim payment for Puerto Rico COFINA exposures in the first quarter of 2019, and no Asset Management activity. Cash flows from operations attributable to the effect of consolidated VIEs was negative in Six Months 2020 due to the inclusion of investing activities of consolidated investment vehicles, which included purchases of investments in consolidated funds and purchases of loans in consolidated CLOs.

Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs’ assets. The increase in investing cash inflows was mainly attributable to sales of securities to fund share repurchases and, in first quarter of 2019, the COFINA claim payment.

Financing activities primarily consisted of share repurchases, dividends, debt extinguishment and paydowns of FG VIEs’ liabilities. In Second Quarter 2020 and Six Months 2020 it also included issuances of CLOs of consolidated investment vehicle and contributions from minority interest holders into consolidated investment funds.

From July 1, 2020 through August 6, 2020, the Company repurchased an additional 0.8 million of common shares. As of August 6, 2020, the Company was authorized to purchase $149 million of its common shares, including a $250 million authorization that was approved by the Board on February 26, 2020. For more information about the Company's share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders' Equity.

148

Leases

AGL and its subsidiaries lease office space and certain other items. Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed since December 31, 2019. See Item 1, Financial Statements, Note 13, Commitments and Contingencies.

Investment Portfolio

The disruption in the financial markets related to COVID-19 has contributed to credit impairment losses on certain loss mitigation securities in the investment portfolio, which are recognized in the condensed consolidated statements of operations. The disruption in the financial markets caused by COVID-19 has also contributed to unrealized losses in the investment portfolio due to reduced market valuations. Losses in the Company’s investment portfolio impact its U.S GAAP financial statements. Credit impairment losses also impact its capital as measured by insurance regulators and rating agencies.

The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income.

The Company’s fixed-maturity securities and short-term investments had a duration of 4.3 years as of June 30, 2020 and 4.1 years as of December 31, 2019. Generally, the Company’s fixed-maturity securities are designated as available-for-sale. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Item 1, Financial Statements, Note 8, Investments and Cash.

Fixed-Maturity Securities and Short-Term Investments

by Security Type 

	As of June 30, 2020				As of December 31, 2019
	Amortized Cost (1)		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	$	3,789	$	4,113	$	4,036	$	4,340
U.S. government and agencies	160		174		137		147
Corporate securities	2,327		2,389		2,137		2,221
Mortgage-backed securities (2):
RMBS	649		635		745		775
Commercial mortgage-backed securities (CMBS)	384		411		402		419
Asset-backed securities	780		768		684		720
Non-U.S. government securities	148		140		230		232
Total fixed-maturity securities	8,237		8,630		8,371		8,854
Short-term investments	821		821		1,268		1,268
Total fixed-maturity and short-term investments	$	9,058	$	9,451	$	9,639	$	10,122

 ____________________

(1) In 2020, the Company established allowance for credit looses which was $75 million as of June 30, 2020.

(2) U.S. government-agency obligations were approximately 39% of mortgage backed securities as of June 30, 2020 and 42% as of December 31, 2019, based on fair value.

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Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time 

For Which an Allowance for Credit Loss was Not Recorded

As of June 30, 2020

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	35	$	(1	)	$	—	$	—		$	35	$	(1	)
Corporate securities	341		(8		)	61		(12		)	402		(20		)
Mortgage-backed securities:
RMBS	30		(2		)	1		—			31		(2		)
CMBS	—		—			1		—			1		—
Asset-backed securities	468		(10		)	118		(3		)	586		(13		)
Non-U.S. government securities	74		(1		)	40		(8		)	114		(9		)
Total	$	948	$	(22	)	$	221	$	(23	)	$	1,169	$	(45	)
Number of securities (1)			196					65					244

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time 

As of December 31, 2019

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	45	$	(1	)	$	—	$	—		$	45	$	(1	)
U.S. government and agencies	5		—			5		—			10		—
Corporate securities	61		—			119		(19		)	180		(19		)
Mortgage-backed securities:
RMBS	10		—			75		(7		)	85		(7		)
CMBS	—		—			4		—			4		—
Asset-backed securities	24		—			183		(2		)	207		(2		)
Non-U.S. government securities	—		—			56		(5		)	56		(5		)
Total	$	145	$	(1	)	$	442	$	(33	)	$	587	$	(34	)
Number of securities			57					119					176
Number of securities with OTTI			1					7					8

___________________

(1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.

Of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, as of June 30, 2020, 25 securities had unrealized losses in excess of 10% of their carrying value.The total unrealized loss for these securities was $18 million as of June 30, 2020. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of June 30, 2020 were not related to credit quality. In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss position prior to expected recovery in value.

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Of the securities in an unrealized loss position for 12 months or more as of December 31, 2019, 19 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 2019. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of December 31, 2019 were not related to credit quality.

Changes in interest rates affect the value of the Company’s fixed-maturity portfolio. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of high-quality, liquid instruments.

The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Fixed-Maturity Securities

by Contractual Maturity

As of June 30, 2020

	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	338	$	335
Due after one year through five years	1,577		1,631
Due after five years through 10 years	1,994		2,078
Due after 10 years	3,295		3,540
Mortgage-backed securities:
RMBS	649		635
CMBS	384		411
Total	$	8,237	$	8,630

The following table summarizes the ratings distributions of the Company’s investment portfolio as of June 30, 2020 and December 31, 2019. Ratings reflect the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or other risk management strategies, which use Assured Guaranty’s internal ratings classifications.

Distribution of

Fixed-Maturity Securities by Rating

Rating	As of June 30, 2020		As of December 31, 2019
AAA	15.7	%	16.2	%
AA	41.6		45.1
A	24.2		21.2
BBB	10.1		8.2
BIG (1)	7.7		8.6
Not rated	0.7		0.7
Total	100.0	%	100.0	%

____________________

(1) Includes primarily loss mitigation and other risk management assets. See Item I, Financial Statements, Note 8, Investments and Cash, for additional information.

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Based on fair value, investments and restricted assets that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted totaled $290 million and $280 million as of June 30, 2020 and December 31, 2019, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,422 million and $1,502 million, based on fair value, as of June 30, 2020 and December 31, 2019, respectively.

Consolidated VIEs

The Company manages its liquidity needs by evaluating cash flows without the effect of consolidated VIEs; however, the Company's consolidated financial statements reflect the financial position of Assured Guaranty as well as Assured Guaranty's consolidated VIEs. The primary sources and uses of cash at Assured Guaranty's consolidated VIEs are as follows:

• FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting its insured debt obligations, and the primary uses of cash are the payment of principal and interest due on the insured obligations.

• Investment Vehicles. The primary sources and uses of cash in the consolidated investment vehicles are raising capital from investors, using capital to make investments, generating cash flows from operations, distributing cash flow to investors and issuing debt to finance investments (CLOs).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2020, there were no material changes in the market risks that the Company is exposed to since December 31, 2019.

ITEM 4. CONTROLS AND PROCEDURES

Assured Guaranty’s management, with the participation of AGL’s President and Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are effective in recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission’s rules and forms, information required to be disclosed by AGL in the reports that it files or submits under the Exchange Act and ensuring that such information is accumulated and communicated to management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2020. Based on their evaluation as of June 30, 2020 covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.

There were no changes in the Company's internal control over financial reporting during the Second Quarter 2020 which were identified in connection with the evaluation required pursuant to Rules 13a-15 or 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and in Part I, Item 1, Financial Statements, Note 13, Commitments and Contingencies – Legal Proceedings contained in this Form 10-Q. There were no material developments to such proceedings during the three months ended June 30, 2020.

ITEM 1A. RISK FACTORS

See the risk factors set forth in Part I, "Item 1A. Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, "Item 1A, Risk Factors" of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. There have been no material changes to the risk factors disclosed in such Annual Report on Form 10-K and such Quarterly Report on Form 10-Q during the three months ended June 30, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer’s Purchases of Equity Securities

The following table reflects purchases of AGL common shares made by the Company during Second Quarter 2020.

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (1)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program (2)
April 1 - April 30	2,994,809	$	27.92	2,994,809	$	248,027,315
May 1 - May 31	1,856,218	$	27.02	1,847,911	$	198,117,218
June 1 - June 30	1,113,702	$	27.16	1,113,702	$	167,873,537
Total	5,964,729	$	27.50	5,956,422

____________________

(1) After giving effect to repurchases since the beginning of 2013 through August 6, 2020, the Company has repurchased a total of 116.1 million common shares for approximately $3,515 million, excluding commissions, at an average price of $30.27 per share. The Board of Directors authorized, on February 26, 2020, an additional $250 million of share repurchases. As of August 6, 2020, the remaining authorization the Company was authorized to purchase was $149 million of its common shares, on a settlement basis.

(2) Excludes commissions.

ITEM 5.    OTHER INFORMATION

On August 6, 2020, the Company mutually agreed with Andrew Feldstein, the Company’s Chief Investment Officer and Head of Asset Management, that Mr. Feldstein would resign as Chief Investment Officer and Head of Asset Management of the Company, and as the Chief Executive Officer and Chief Investment Officer of the Company’s subsidiary BlueMountain and its associated entities. Mr. Feldstein and the Company have entered into a separation agreement (the Separation Agreement) dated August 6, 2020 to document certain rights and obligations in connection with his separation. Pursuant to the Separation Agreement, Mr. Feldstein has resigned as an executive officer of the Company effective August 6, 2020, and will remain employed in a non-executive officer position, serving as Senior Advisor to the Chief Executive Officer and Chief Investment Officer of BlueMountain, for a transition period beginning on August 7, 2020 and ending on October 31, 2020 (the Transition Period). During the Transition Period, Mr. Feldstein will be responsible for supporting a smooth transition of his duties and responsibilities and will continue to receive a base salary (at his current rate) and be eligible to participate in the employee benefit plans of the Company. The Separation Agreement also provides that certain of Mr. Feldstein’s obligations under his employment agreement dated August 7, 2019 with BlueMountain and the Company’s subsidiary AG US Group Services Inc. (the Employment Agreement) will survive past the transition period, including certain restrictive covenants and his obligations to co-invest in certain BlueMountain and affiliated funds, but modifies some of those obligations including by reducing the maximum Required Investment Amount, as defined under the Employment Agreement, from $150,000,000 to $100,000,000. In addition, the Separation Agreement provides that the Forfeiture Amount, as defined under the Employment Agreement, which

153

would have been $24,000,000 as of October 31, 2020 in accordance with the terms of the Employment Agreement, will be reduced to $12,000,000 as of August 6, 2020.

David Buzen, BlueMountain’s Deputy Chief Investment Officer, will succeed Mr. Feldstein as the Company’s new Chief Investment Officer and Head of Asset Management and as the Chief Executive Officer and Chief Investment Officer of BlueMountain and its associated entities, in each case, as of August 6, 2020.

ITEM 6. EXHIBITS

The following exhibits are filed with this report:

Exhibit Number
10.1	Separation Agreement, dated as of August 6, 2020, between AG US Group Services, Inc., BlueMountain Capital Management, LLC, Assured Guaranty Ltd., Assured Guaranty US Holdings Inc., and Andrew Feldstein*
31.1	Certification of CEO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of CFO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
32.2	Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
101.1	The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019; (ii) Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2020 and 2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months ended June 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months ended June 30, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and 2019; and (vi) Notes to Condensed Consolidated Financial Statements.
104.1	The Cover Page Interactive DataFile from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted, in Inline XBRL (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101).

* Management contract or compensatory plan

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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 thereunto duly authorized.

	ASSURED GUARANTY LTD. (Registrant)
Dated August 7, 2020	By:	/s/ ROBERT A. BAILENSON
		Robert A. Bailenson Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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