The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. 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), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ 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 is 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.

The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure 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 insurance 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 zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered).

As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them 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 insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ 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 insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them 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 insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed no longer to have those protective rights, the VIE is deconsolidated.

As of September 30, 2021 and December 31, 2020, the Company consolidated 24 and 25 FG VIEs, respectively. During Nine Months 2021, there was one FG VIE that was deconsolidated. During Nine Months 2020, there were two FG VIEs that matured and two FG VIEs that were consolidated. There were no other consolidations or deconsolidations for the periods presented. Net loss on consolidation was $1 million in Nine Months 2020 and was recorded in fair value gains (losses) on FG VIEs.

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


	As of
	September 30, 2021		December 31, 2020
	(in millions)
FG VIEs’ assets:
U.S. RMBS first lien	$	227	$	243
U.S. RMBS second lien	44		53
Total FG VIEs’ assets	$	271	$	296

FG VIEs’ liabilities with recourse:
U.S. RMBS first lien	$	235	$	260
U.S. RMBS second lien	46		56
Total FG VIEs’ liabilities with recourse	$	281	$	316

FG VIEs’ liabilities without recourse:
U.S. RMBS first lien	$	20	$	17
U.S. RMBS second lien	—		—
Total FG VIEs’ liabilities without recourse	$	20	$	17

The change in the instrument-specific credit risk (ISCR) of the FG VIEs’ assets held as of September 30, 2021 that was recorded in the condensed consolidated statements of operations for Third Quarter 2021 and Nine Months 2021 were gains of $5 million and $9 million, respectively. The change in the ISCR of the FG VIEs’ assets held as of September 30, 2020 was a gain of $14 million for Third Quarter 2020 and a loss of $2 million for Nine Months 2020. 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 insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. In general, if the insurance subsidiaries’ CDS spread tightens, more value will be assigned to insurance subsidiaries’ credit; however, if the insurance subsidiaries’ CDS spread widens, less value is assigned to the insurance subsidiaries’ credit.


	As of
	September 30, 2021		December 31, 2020
	(in millions)
Excess of unpaid principal over fair value of:
FG VIEs’ assets	$	262	$	274
FG VIEs’ liabilities with recourse	14		15
FG VIEs’ liabilities without recourse	16		16
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due	57		68
Unpaid principal for FG VIEs’ liabilities with recourse (1)	295		330

During Nine Months 2021, six new CIVs were consolidated and one CIV was deconsolidated. Three CLO warehouses were securitized and became CLOs during the period. There were no gains or losses on deconsolidation in Third Quarter 2021 and Nine Months 2021. As of September 30, 2021, the Company’s CIVs consist of seven AssuredIM Funds, seven CLOs and two CLO warehouses. Substantially all of the CIVs are VIEs. The Company consolidates these investment vehicles because it is

The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are recorded in “fair value gains (losses) on consolidated investment vehicles” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates.

Assets and Liabilities of CIVs


	As of
	September 30, 2021		December 31, 2020
	(in millions)
Assets:
Fund assets:
Cash and cash equivalents	$	88	$	117
Fund investments, at fair value
Obligations of state and political subdivisions	93		61
Structured products	53		39
Corporate securities	2		9
Equity securities (1)	43		18
Due from brokers and counterparties	25		35
Other	2		—
CLO and CLO warehouse assets:
Cash	50		17
CLO investments:
Loans in CLOs, fair value option, collateralized financing entity (CFE)	3,174		1,291
Loans in CLO warehouses, fair value option	498		170
Short-term investments, at fair value	252		139
Due from brokers and counterparties	91		17
Total assets (2)	$	4,371	$	1,913
Liabilities:
CLO obligations, fair value option, CFE (3)	2,937		1,227
Warehouse financing debt, fair value option (4)	275		25
Securities sold short, at fair value	31		47
Due to brokers and counterparties	642		290
Other liabilities	1		1
Total liabilities	$	3,886	$	1,590

(3) The weighted average maturity of CLO obligations was 6.3 years as of September 30, 2021 and 5.6 years as of December 31, 2020. The weighted average interest rate of CLO obligations was 1.9% as of September 30, 2021 and 2.4% as of December 31, 2020. CLO obligations will mature at various dates from 2032 to 2034.

(4) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.1 years as of September 30, 2021 and 1.7 years as of December 31, 2020. The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.3% as of September 30, 2021 and 1.7% as of December 31, 2020. Warehouse financing debt will mature at various dates from 2022 to 2023.

As of September 30, 2021, the CIVs included forward currency contracts and interest rate swaps with a notional of $26 million and $23 million, respectively, and average notional of $19 million and $15 million, respectively. As of December 31, 2020, the CIVs included forward currency contracts and interest rate swaps with a notional of $11 million and $8 million, respectively, and average notional of $6 million and $4 million, respectively. The fair value of the forward contracts and interest rate swaps is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of forward currency contracts and interest rate swaps were gains of $1 million in Nine Months 2021. The net change in fair value of forward currency contracts was de minimis in Third Quarter 2021, Third Quarter 2020 and Nine Months 2020.

Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or the Company. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or the Company.

As of September 30, 2021, these credit facilities had varying maturities ranging from April 21, 2022 to April 23, 2023 with the aggregate principal amount not exceeding $777 million. The available commitment was based on the amount of equity contributed to the warehouse which was $279 million. As of September 30, 2021, $216 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 85 basis points (bps) to 3-month LIBOR plus 120 bps (with a floor on the LIBOR/Euribor rates of zero). The CLO warehouses were in compliance with all financial covenants as of September 30, 2021.

As of December 31, 2020, €20 million (or $25 million) and €1 million (or $1 million) had been drawn under a BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1) credit facility dated August 26, 2020 by EUR 2021-1 and AssuredIM, respectively. During the first quarter of 2021, EUR 2021-1 and AssuredIM repaid the borrowings under this credit facility.

The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment) includes (1) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements, (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs, and (3) eliminating the investment balances associated with the insurance subsidiaries' purchases of the debt obligations of the FG VIEs.

The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on assets, liabilities and cash flows, and includes (1) the establishment of the assets and liabilities of the CIVs, and related changes in fair value, (2) eliminating the asset management fees earned by AssuredIM from the CIVs, and (3) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings of investees. The economic effect of the Company’s ownership interest in CIVs is presented in the Insurance segment as equity in earnings of investees as separate line items on a consolidated basis.


	As of
	September 30, 2021		December 31, 2020
	(in millions)
Assets
Investments:
Fixed-maturity securities and short-term investments (1)	$	(50)	$	(32)
Equity method investments (2)	(363)		(254)
Other invested assets	—		(2)
Total investments	(413)		(288)
Premiums receivable, net of commissions payable (3)	(6)		(6)
Salvage and subrogation recoverable (3)	(15)		(9)
FG VIEs’ assets, at fair value	271		296
Assets of CIVs	4,371		1,913
Other assets	—		(3)
Total assets	$	4,208	$	1,903
Liabilities
Unearned premium reserve (3)	$	(36)	$	(38)
Loss and LAE reserve (3)	(34)		(41)
FG VIEs’ liabilities with recourse, at fair value	281		316
FG VIEs’ liabilities without recourse, at fair value	20		17
Liabilities of CIVs	3,886		1,590
Total liabilities	4,117		1,844

Redeemable noncontrolling interests (4)	21		21

Shareholders’ equity
Retained earnings	22		22
Accumulated other comprehensive income (5)	(27)		(25)
Total shareholders’ equity attributable to Assured Guaranty Ltd.	(5)		(3)
Nonredeemable noncontrolling interests (4)	75		41
Total shareholders’ equity	70		38
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	4,208	$	1,903


	Third Quarter				Nine Months
	2021		2020		2021		2020
	(in millions)
Fair value gains (losses) on FG VIEs (1)	$	5	$	—	$	18	$	(8)
Fair value gains (losses) on CIVs (2)	16		18		53		37
Equity in earnings of investees (3)	(11)		(13)		(35)		(29)
Other (4)	(13)		(6)		(26)		(4)
Effect on income before tax	(3)		(1)		10		(4)
Less: Tax provision (benefit)	(2)		(1)		(1)		(2)
Effect on net income (loss)	(1)		—		11		(2)
Less: Effect on noncontrolling interests (5)	3		3		11		5
Effect on net income (loss) attributable to AGL	$	(4)	$	(3)	$	—	$	(7)

The fair value gains on CIVs for Third Quarter 2021 and Nine Months 2021 were attributable to realized gains, changes in underlying investment prices and investment interest, net of fees and expenses. The fair value gains on CIVs for Third Quarter 2020 and Nine Months 2020 were attributable to price appreciation on underlying assets.

Fair value gains on FG VIEs in Third Quarter 2021 and Nine Months 2021 are primarily due to improvements in the underlying collateral. For Third Quarter 2020, the fair value gains on FG VIEs were de minimis. The fair value losses for Nine Months 2020 were primarily due to price depreciation due to the observed widening in the market credit spreads for the underlying collateral.

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 $96 million and liabilities of $9 million as of September 30, 2021, and assets of $96 million and liabilities of $3 million as of December 31, 2020, primarily recorded in investments and credit derivative liabilities on the condensed consolidated balance sheets.

As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 17 thousand policies monitored as of September 30, 2021, approximately 15 thousand policies are not within the scope of FASB Accounting Standards Codification (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 September 30, 2021 and December 31, 2020, the Company identified 80 and 79 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 24 and 25 FG VIEs as of September 30, 2021 and December 31, 2020,

The Company holds variable interests in a healthcare private equity fund, a VIE which is not consolidated, as it has been determined that the Company is not the primary beneficiary, but in which it holds a significant variable interest. This VIE has $214 million of assets and $60 million of liabilities as of September 30, 2021 and $204 million of assets and $9 million of liabilities as of December 31, 2020. As of September 30, 2021, the Company had $102 million maximum exposure to losses relating to this VIE, which is limited to the carrying value of this investment.