UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the fiscal year ended December 31, 20192022
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to
Commission File Number 001-32141
ASSURED GUARANTY LTD.
(Exact name of Registrant as specified in its charter)
| Bermuda | 98-0429991 | |||||||
| (State or other jurisdiction of incorporation) | (I.R.S. employer | |||||||
| identification no.) | ||||||||
30 Woodbourne Avenue Hamilton HM 08 Bermuda
(441) 279-5700
(Address, including zip code, and telephone number, including area code, of Registrant'sRegistrant’s principal executive office)
None
(Former name, former address and former fiscal year, if changed since last report)
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 US Holdings Inc. 5.000% Senior Notes due 2024 (and the related guarantee of Registrant) | AGO 24 | New York Stock Exchange | |||||||||
| Assured Guaranty US Holdings Inc. 3.150% Senior Notes due 2031 (and the related guarantee of Registrant) | AGO/31 | New York Stock Exchange | |||||||||
| Assured Guaranty US Holdings Inc. 3.600% Senior Notes due 2051 (and the related guarantee of Registrant) | AGO/51 | New York Stock Exchange | |||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
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 the definitionsdefinition of "large“large accelerated filer," "accelerated filer," "smallerfiler”, “accelerated filer”, “smaller reporting company,"company”, and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||||||||||||||||||||||||||
| Non-accelerated filer | Smaller reporting company | ☐ | ||||||||||||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||||||||||
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The aggregate market value of Common Shares held by non-affiliates of the Registrant as of the close of business on June 28, 201930, 2022 was $4,084,346,3473,341,929,790 (based upon the closing price of the Registrant's shares on the New York Stock Exchange on that date, which was $42.08)$55.79). For purposes of this information, the outstanding Common Shares which were owned by all directors and executive officers of the Registrant were deemed to be the only shares of Common StockShares held by affiliates.
As of February 25, 2020, 92,581,87824, 2023, 59,056,267 Common Shares, par value $0.01 per share, were outstanding (including 56,02836,403 unvested restricted shares).
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant'sRegistrant’s definitive proxy statement relating to its 20202023 Annual General Meeting of Shareholders to be held on May 3, 2023, are incorporated by reference to Part III of this report.
the failure of Assured Guaranty to successfully integrate the business of BlueMountain Capital Management, LLC (BlueMountain) and its associated entities;
ConventionConventions
In addition, unless otherwise noted, the The Company excludes amounts from its outstanding insured par and debt service relating to securities or assets owned byLoss Mitigation Securities.
Since the acquisition of BlueMountain and establishment of Assured Investment Management, the Company now operateshas been operating in two distinct operating segments, Insurance and Asset Management, and also has a Corporate division. See Part II, Item 7, Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8, Financial Statements and Supplementary Data, Note 4,2, Segment Information, for financial results of the Company'sCompany’s segments.
The Company considers opportunities to acquirehas acquired financial guaranty portfolios, whetherincluding by acquiring financial guarantors whowhich are no longer actively writing new business or acquiring (through reinsurance) their insured portfolios, (including through reinsurance), orand by commuting business that it had previously ceded. In the last several years, the Company has reassumed a number of previously ceded portfolios and has completed the acquisition of Radian Asset, CIFG Holding Inc. (CIFGH, and together with its subsidiaries, CIFG) (the CIFG Acquisition) and MBIA UK Insurance Limited (MBIA UK), the U.K. operating subsidiary of MBIA Insurance Corporation (MBIA) (MBIA UK Acquisition).Corporation. On June 1, 2018, the Company closed a transaction with Syncora Guarantee Inc. (SGI) (SGI Transaction) under which AGC assumed, generally on a 100% quota share basis, substantially all of SGI’s insured portfolio and AGM reassumed a book of business previously ceded to SGI by AGM. The Company continues to investigate additional opportunities related to remaining legacy financial guaranty portfolios, but the number and size of the opportunities have decreased and there can be no assurance of whether or when the Company will find suitable opportunities on appropriate terms.
The Company's financial guaranty direct and assumed businesses provide credit protection on public finance (including infrastructure) and structured finance obligations. When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For information on the geographic breakdown of the Company's financial guaranty portfolio and revenue by country of domicile, see Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Outstanding Insurance Exposure and Note 4, Segment Information.
Sovereign and Sub-Sovereign primarily includes obligations of local, municipal, regional or national governmental authorities or agencies outside of the United States.
Renewable Energy Bonds are obligations backed by renewable energy sources, such as solar, wind farm, hydroelectric, geothermal and fuel cell.
Consumer Receivables Securities are obligations backed by non-mortgage consumer receivables, such as student loans, automobile loans and leases, manufactured home loans and other consumer receivables.
AGMH'sAGMH’s financial products business had also issued medium term notes insured by AGM, reinvesting the proceeds in investments that met AGMH'sAGMH’s investment criteria. As of December 31, 2019,2022, only $199$228 million of insured medium term notes remain outstanding.
Prior to the global financial crisis of 2008, the Company insured non-U.S. structured finance transactions, and continues to seek opportunities to insure such transactions. If it does, it expects its underwriting process generally to be the same as for U.S. structured finance transactions described below, but with additional consideration given to factors specific to the relevant jurisdiction.
Low financial strength ratings or uncertainty over the Company's ability to maintain its financial strength ratings for its insurance operating companies would have a negative impact on issuers' and investors' perceptions of the value of the Company's insurance product. Therefore, the Company manages its business with the goal of achieving high financial strength ratings, preferably the highest that an agency will assign to a financial guarantor. However, the models used by rating agencies differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. In addition, the models are not fully transparent, contain subjective factors and may change.
Insurance financialFinancial strength ratings reflect a rating agency'sagency’s opinion of an insurer'sinsurer’s ability to pay under its insurance policies and contracts in accordance with their terms. When the Company insures an obligation, the issuer or another party may request that one or more rating agencies providing financial strength ratings on the relevant insurance operating company assign a rating equivalent to that insurer’s financial strength rating to the specific obligation it insured. The ability to obtain such specific ratings is one attribute that makes the Company’s insurance products attractive in the market.
FollowingLow financial strength ratings or uncertainty over the Company’s ability to maintain its financial crisis,strength ratings for its insurance operating companies would have a negative impact on issuers’ and investors’ perceptions of the value of the Company’s insurance product. Therefore, the Company manages its business with the goal of achieving high financial strength ratings.
“AAA”Company’s insurance subsidiaries below the ratings implied by their own capital adequacy models. Currently, for example, S&P has concluded that Assured Guaranty’ insurance companies have “AAA” capital adequacy under the S&P model (but subject toapply a downward adjustment due to a “largest obligor test” and rate them “AA”) and Moody’s has concluded that AGM has “Aa” capital adequacy under the Moody’s model (offset by(but rates it A2 based on other factors including the rating agency’s assessment of competitive profile, future profitability and market share). The application of these additional factors make it uncertain whether a rating downgrade could generally be avoided by raising additional capital or otherwise improving capital adequacy under the rating agency’s model.
The Company believes that so long as AGM, AGC and/or MAC continue to have financial strength ratings in the double-A category from at least one of the legacy rating agencies (S&P or Moody’s), they are likely to be able to continue writing financial guaranty business with a credit quality similar to that historically written. However, if neither legacy rating agency maintained financial strength ratings of AGM, AGC and/or MAC in the double-A category, or if either legacy rating agency were to downgrade AGM, AGC and/or MAC below the single-A level, it could be difficult for the Company to originate the current volume of new financial guaranty business with comparable credit characteristics.
BAM's BAM’s higher leverage ratios than those of AGM; BAM’s inability to date to generate profits and to increase its statutory capital meaningfully, its higher leverage ratios than those of AGMmeaningfully; and MAC, and its unpaid debt obligations; and AGM's and MAC'sAGM’s strong financial strength ratings from multiple rating agencies (in the case of AGM, AA+ from KBRA,Kroll Bond Rating Agency (KBRA), AA from S&P and A2A1 from Moody's, and in the case of MAC, AA+ from KBRA and AA from S&P,Moody’s, compared with BAM'sBAM’s AA solely from S&P). Additionally, as a public company with access to both the equity and debt capital markets, Assured Guaranty may have greater flexibility to raise capital, if needed.
The BlueMountain Acquisition and establishment of Assured Investment Management diversifiesdiversify the Company into the asset management industry, with the goal of utilizing Assured Guaranty'sthe Company’s core competency in credit while diversifying its revenues and expanding its marketing reach through a fee-based platform. Additionally,
The Company conducts its Asset Management business principally through BlueMountain Capital Management, LLC, a Delaware limited liability company located in New York. BlueMountain was organized in 2003.
In addition to CLOs and
In addition, withWhen a market dislocation or negative credit cycle causes the deferral of subordinated investment management fees and suspension of CLO Equity distributions, the Company may be impacted in two ways. First, the subordinated fees are deferred and not currently paid to AssuredIM, as occurred in 2020 (all such deferred subordinated fees have since been collected). Second, the investments in the CLO Equity made by an AssuredIM Fund held by the Company through AGAS will typically see a decline in market value, reducing insurance segment adjusted operating income. The fair value of the Insurance segment’s investment in AssuredIM-managed CLO funds at December 31, 2022 was $272 million.
Consistent with its investment capabilities, the Company intends to continue to grow the Assured Investment Management platform's structured finance investment strategies. Since the establishment of the Assured Investment Management platform, the Company launched two opportunity funds, one focused on asset-backed finance and one focused on healthcare structured capital, with capital from the Company's Insurance segment. Also since the establishment of the Assured Investment Management platform, the Company launched two new CLOs and a CLO fund with capital from the Company's insurance segment and capital already managed in the Assured Investment Management platform.
Competition
Approximately 82%On the consolidated balance sheet, approximately 98% of the investment portfolio is externally managedreported total investments, which were $8.4 billion as of December 31, 2022 and $9.6 billion as of December 31, 2021, represent fixed-maturity securities and short-term investments consisting primarily of the following.
The Company internally manages a portion of its investment portfolio, primarily consistingwith a fair value of obligations that the Company purchases in connection with its loss mitigation or risk management strategy for its insured exposure (loss mitigation securities) or obtains$661 million, represents New Recovery Bonds and CVIs obtained as part of negotiated settlements with insured counterparties or under the terms2022 Puerto Rico Resolutions (excluding amounts held in the consolidated
Assured Investment Management and (b) expanding the categories and types of its alternative investments not managed by Assured Investment Management.
The fair value of the Insurance segment’s investments in Assured Investment Management funds as of December 31, 2019 was $77 million. As of December 31, 2019,2022 and December 31, 2021, all fundsAssuredIM Funds in which the Insurance segment invests were consolidated, and the underlying CLOU.S. Insurance Subsidiaries had investments in which oneAssuredIM Funds with a fair value of the consolidated funds invests, were consolidated. Such investment is not included$569 million and $543 million on those dates, respectively. These are reported as a component of CIVs in the amounts reportedCompany's consolidated financial statements. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Investment Portfolio — Other Investments.
The Company'sCompany’s management committees responsible for risk management in its Insurance segment include:
•AssuredIM Investment Committees—These committees focus on application of investment evaluation criteria for the Asset Management segment’s investing activity within each investment strategy. Each Asset Management segment investment committee consists of the Chief Investment Officer and two or more senior investment professionals with deep expertise in the markets relevant to each investment.
AThe Company has established an enterprise level risk appetite statement, approved by the Board, and risk limits, have been established from an enterprise-wide and business unit perspective for specific risk categories, where appropriate.that govern the Company’s risk-taking activities, with similar documents governing the activities of each operating subsidiary. Risk management personnel monitor a variety of key risk indicators on an ongoing basis and work with the business units to take the appropriate steps to manage the Company'sCompany’s established risk appetites and tolerances. Risk management also uses an internally developed economic capital model to project potential credit losses in the insured portfolio as well as potential ultimate losses on investments, and analyze the related capital implications for the Company, and performs stress and scenario testing to both validate model results and assess the potential financial impact of emerging risks.risks and major strategic initiatives such as acquisitions or releases of capital.
Ceded Business
As part of its risk management strategy prior to the global financial crisis of 2008, the Company obtained third party reinsurance or retrocessions for various risk management purposes, and may do so again in the future. Over the past several years the Company has entered into commutation agreements reassuming portions of the previously ceded business from certain reinsurers; as of December 31, 2019, approximately 0.6%, or $1.3 billion, of its principal amount outstanding was still ceded to third party reinsurers, down from 12%, or $86.5 billion, as of December 31, 2009. In the future, the Company may enter into new commutation agreements to reassume portions of its insured business ceded to other reinsurers, but such opportunities are expected to be limited given the small number of unaffiliated reinsurers currently reinsuring the Company.
GeneralOverview
Regulation of Insurance Business
United StatesContingency Reserves
AGL has three operatingEach of AGM, under the New York Insurance Law, and AGC, under Maryland insurance subsidiaries domiciledlaw and regulations, must establish a contingency reserve, as reported on its statutory financial statements, to protect policyholders. The New York Insurance Law and Maryland insurance laws and regulations, as applicable, determine the calculation of the contingency reserve and the period of time over which it must be established and, subsequently, can be released.
AGM isThe NYDFS Superintendent (New York Superintendent) and the Maryland Commissioner each have broad discretion to order a financial guaranty insurer to cease new business originations if the insurer fails to comply with single or aggregate risk limits. In the Company’s experience in New York, domiciled insurance company licensedthe New York Superintendent has shown a willingness to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.work with insurers to address these concerns.
AGC is a Maryland domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia and Puerto Rico.Investments
Insurance Holding Company Regulation
AGL and the Assured GuarantyThe U.S. Insurance Subsidiaries are subject to the insurance holding company laws and regulations that require diversification of their respective jurisdictionsinvestment portfolios and limit the amount of domicile,investments in certain asset categories, such as wellBIG fixed-maturity securities, real estate, equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as other jurisdictions where these insurers are licensed to donon-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. In addition, any investment by a U.S. Insurance Subsidiary must be authorized or approved by that insurance business. These laws generally require eachcompany’s board of directors or a committee thereof that is responsible for supervising or making such investment.
Changealso subject to shareholding restrictions. Such shareholding restrictions of Control
Before a person can acquireAGL and restrictions on changes in control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the insurer is domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider factors such as the financial strength of the applicant, the integrity and management of the applicant's board of directors and executive officers, the acquirer's plans for the management of the applicant's board of directors and executive officers, the acquirer's plans for the futureour foreign operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control involvingof AGL, including through transactions, and, in particular, unsolicited transactions, that some or all of AGL's stockholdersits shareholders might consider to be desirable,desirable. See Item 1A. Risk Factors, Risks Related to GAAP, Applicable Law and Regulations captioned “Applicable insurance laws may make it difficult to effect a change of control of AGL.”
State Insurance RegulationThe Company also provides opportunities for qualified employees to work abroad in another of the Company’s offices as part of its international rotation program.
StateThe Company’s collegial and collaborative culture fosters informal mentoring and learning. The Company also has a formal one-on-one mentoring program to provide an additional learning resource for its employees, facilitate the onboarding of new recruits and reinforce connectedness. The mentoring program is offered to all employees across the Company’s offices. The Company utilizes an outside consultant to provide workshops for both mentors and mentees. In addition, the Company sponsors memberships for its employees in external organizations to provide further opportunities for professional development, mentoring and networking.
The New York State Department of Financial Services (the NYDFS), the regulatory authorityscope of the domiciliary jurisdiction of AGMRPII rules. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may be provided and MAC, and the Maryland Insurance Administration (the MIA), the regulatory authority of the domiciliary jurisdiction of AGC, each conductswhether such guidance will have a periodic examination of insurance companies domiciled in New York and Maryland, respectively, usually at five-year intervals. In 2017, the NYDFS and MIA in coordination commenced examinations, respectively, of AGM and MAC, and AGC, for the period covering the end of the last applicable examination period for each company through December 31, 2016. In 2018, the NYDFS and MIA completed their examinations. The NYDFS issued Reports on Examination of AGM for the five-year period ending December 31, 2016 and MAC for the period July 1, 2012 through December 31, 2016. The reports did not note any significant regulatory issues concerning those companies. The MIA issued an Examination Report with respect to AGC for the five year period ending December 31, 2016; no significant regulatory issues were noted in that report.
State Dividend Limitations
New York. One of the primary sources of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGM. Under the New York Insurance Law, AGM and MAC may only pay dividends out of "earned surplus," which is the portion of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM and MAC may each pay dividends without the prior approval of the New York Superintendent of Financial Services (New York Superintendent) that, together with all dividends declared or distributed by it during the preceding 12 months, do not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income during that period.retroactive effect. See, Part II, Item 7, Management's Discussion8, Financial Statements and AnalysisSupplementary Data, Note 1, Business and Basis of Financial ConditionPresentation and ResultsNote 14, Income Taxes.
Maryland. Another primary source of cash for the repurchases of shares and payment of debt service and dividends by the Companyobligations, until March 31, 2035. This assurance is the receipt of dividends from AGC. Under Maryland's insurance law, AGC may, with prior noticesubject to the MIA, pay an ordinary dividendprovision that togetherit is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda, or to prevent the application of any tax payable in accordance with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders' surplus (asprovisions of the prior December 31)Land Tax Act 1967 or 100% of its adjusted net investment income during that period. A dividendotherwise payable in relation to any land leased to AGL, AG Re or distributionAGRO. AGL, AG Re and AGRO each pays annual Bermuda government fees, and AG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a stockholder in excess of this limitation would constitute an "extraordinary dividend," which mustpayroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.
be paid out of "earned surplus" and reported to, and approved by, the MIA prior to payment. "Earned surplus" is that portion of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized capital gains and appreciation of assets. AGC may not pay any dividend or make any distribution, including ordinary dividends, unless it notifies the Maryland Insurance Commissioner (the Maryland Commissioner) of the proposed payment within five business days following declaration and at least ten days before payment. The Maryland Commissioner may declare that such dividend not be paid if it finds that AGC's policyholders' surplus would be inadequate after payment of the dividend or the dividend could lead AGC to a hazardous financial condition. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
UnderEach of AGM, under the New York Insurance Law, each of AGM and MACAGC, under Maryland insurance law and regulations, must establish a contingency reserve, as reported on its statutory financial statements, to protect policyholders. The New York Insurance Law determinesand Maryland insurance laws and regulations, as applicable, determine the calculation of the contingency reserve and the period of time over which it must be established and, subsequently, can be released.
Likewise, in accordance with Maryland insurance law and regulations, AGC also maintains a statutory contingency reserve for the protection of policyholders. Maryland insurance law determines the calculation of the contingency reserve and the period of time over which it must be established, and subsequently, can be released.
Financial guaranty insurers are also required to maintain a loss and loss adjustment expense (LAE) reserve (on a case-by-case basis) and unearned premium reserve.
InvestmentsU.S. Credit for Reinsurance Requirements for Non-U.S. Reinsurance Subsidiaries
Operations of the Company's Non-U.S. Insurance Subsidiaries
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, the business operations of the Company's reinsurance subsidiariesAGRO, are affected by regulatory requirements in various U.S. states governing the ability of a ceding company domiciled in the ceding companies of the reinsurersstate to receive credit for the reinsurance on theirits statutory financial statements. The Nonadmitted and Reinsurance Reform Act within the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) streamlined the regulation of reinsurance by applying single state regulation for credit for reinsurance. Under the Nonadmitted and Reinsurance Reform Act, creditstatements for reinsurance determinations are controlledprovided by the ceding company’s state of domicile and non-domiciliary states are prohibited from applying their credit for reinsurance laws extraterritorially.a reinsurer. In general, under such requirements, a ceding company whichthat obtains reinsurance from a reinsurer that is licensed, accredited or approved by the ceding company'scompany’s state of domicile is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), and loss and LAE reserves ceded to the reinsurer. The greatsubstantial majority of states, however, also permit a credit on the statutory financial statements of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer secures its reinsurance obligations to the ceding insurer by providing collateral in the form of a letter of credit, trust fund or other acceptable security arrangement. Certain of those states also permit such non-licensed/non-accredited reinsurers that meet certain specified requirements to apply for certified reinsurer“certified reinsurer” status. If granted, such status allows the certified reinsurer to post less than 100% collateral (the exact percentage depends on the certifying state's view of the reinsurer's financial strength) and the applicable ceding company will still qualify, on the basis of such reduced collateral, for full credit for reinsurance on its statutory financial statements with respect to reinsurance contracts renewed or entered into with the certified reinsurer on or after the date the reinsurer becomes certified. Certain states have eliminated the reinsurance collateral requirements for unauthorized reinsurers in certain qualifying jurisdictions that (i) meet specified requirements, such as minimum capital and surplus amounts and minimum solvency or capital ratios, and (ii) provide certain commitments to the ceding insurer’s domiciliary state, such as submission to such state’s jurisdiction and the filing of annual audited financial statements with the state. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited. The Company's reinsurance subsidiaries
U.S. Federal Regulation of Swap Transactions Under Dodd-Frank
Each of AG Re and AGRO is required annually to file statutorily mandated financial statements and returns, audited by an auditor approved by the Authority (no approved auditor of an insurer may have an interest in that insurer, other than as an
insured, and no officer, servant or agent of an insurer shall be eligible for appointment as an insurer's approved auditor), together with an annual loss reserve opinion of the loss reserve specialist, who is approved by the Authority, and in respect of AGRO, the required actuary's certificate with respect to the long-term business. When each of AG Re and AGRO files its statutory financial statements, it is also required to deliver to the Authority a declaration of compliance, declaring whether or not the insurer has, with respect to the preceding financial year, complied with all requirements of the minimum criteria applicable to it; complied with the minimum margin of solvency as at its financial year end; complied with the applicable enhanced capital requirements as at its financial year end; complied with the minimum liquidity ratio for general business as at its financial year end; and complied with applicable conditions, directions and restrictions imposed on, or approvals granted to the insurer. AG Re and AGRO are also required to file annual financial statements prepared in conformity with GAAP, which must be available to the public.
In addition, AG Re and AGRO are each required to file a capital and solvency return that includes its Bermuda Solvency Capital Requirement (BSCR) model (or an approved internal capital model in lieu thereof) together with schedules prescribed by the Insurance Act from time to time. AGRO’s capital and solvency return must also include, among other details, a schedule of long-term premiums written by line of business, a schedule of long-term business data, a schedule of long-term variable annuity guarantees data and reconciliation, a schedule of long-term variable annuity guarantees - internal capital model and the approved actuary’s opinion.
Each of AG Re and AGRO are also required to prepare and file with the Authority, and publish on its website, a financial condition report. The Authority has discretion to approve modifications and exemptions to the public disclosure rules, on application by the insurer if, among other things, the Authority is satisfied that the disclosure of certain information will result in a competitive disadvantage or compromise confidentiality obligations of the insurer. Finally, in lieu of the standard legal and regulatory requirements, AG Re is required to make a modified filing with the Authority, consisting of its board of directors quarterly meeting package (which includes AG Re’s unaudited quarterly financial statements), no later than 30 days after the date of its quarterly board meetings.
Notification of Material Changes
All registered insurers are required to give notice to the Authority of their intention to effect a material change within the meaning of the Insurance Act. For the purposes of the Insurance Act, the following changes are material: (i) the transfer or acquisition of insurance business being part of a scheme falling within, or any transaction relating to a scheme of arrangement under section 25 of the Insurance Act or section 99 of the Companies Act 1981 of Bermuda (the Companies Act), (ii) the amalgamation or merger with or acquisition of another firm, (iii) engaging in unrelated business that is retail business, (iv) the acquisition of a controlling interest in an undertaking that is engaged in non-insurance business which offers services or products to non-affiliated persons, (v) outsourcing all or substantially all of the functions of actuarial, risk management, compliance and internal audit functions, (vi) outsourcing all or a material part of an insurer's underwriting activity, (vii) transferring other than by way of reinsurance all or substantially all of a line of business, (viii) expanding into a material new line of business, (ix) the sale of an insurer, and (x) outsourcing an officer role (in this context meaning a chief executive or senior executive performing the roles of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters).
Registered insurers are not permitted to take any steps to give effect to a material change listed above unless it has first served notice on the Authority that it intends to effect such material change and, before the end of 30 days, either the Authority has notified such company in writing that it has no objection to such change or that period has lapsed without the Authority having issued a notice of objection. A person who fails to give the required notice or who effects a material change, or allows such material change to be effected, before the prescribed period has elapsed or after having received a notice of objection is guilty of an offense.
The minimum solvency margin for Class 3A and Class 3B insurers is the greater of (i) $1 million, or (ii) 20% of the first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 15% of net premiums written in excess of $6 million, or (iii) 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves, or (iv) 25% of that insurer's applicable enhanced capital requirement reported at the end of its relevant year.
In addition, as a Class C long-term insurer, AGRO is required, with respect to its long-term business, to maintain a minimum solvency margin equal to the greater of (i) $500,000, (ii) 1.5% of its assets or (iii) 25% its enhanced capital requirement reported at the end of the relevant year. For the purpose of this calculation, assets are defined as the total assets pertaining to its long-term business reported on the balance sheet in the relevant year less the amounts held in a segregated account. AGRO is also required to keep its accounts in respect of its long-term business separate from any accounts kept in respect of any other business and all receipts of its long-term business form part of its long-term business fund.
Each of AG Re and AGRO is required to maintain available statutory capital and surplus at a level equal to or in excess of itscompany’s applicable enhanced capital requirement, which is established by reference to either its BSCRBermuda Solvency Capital Requirement (BSCR) model or an approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an insurer'sinsurer’s capital requirements (statutory economic capital and surplus) by taking into account the risk characteristics of different aspects of the insurer's business. The BSCR formula establishesestablishing capital requirements for ten categories of risk:risk in the insurer’s business: fixed income investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentration risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk. For each category, the capital requirement is determined by applying factors to asset, premium, reserve, creditor, probable maximum loss and operation items, with higher factors applied to items with greater underlying risk and lower factors for less risky items.
While not specifically referred to in the Insurance Act, the Authority has also established a target capital level (TCL) for each insurer subject to an enhanced capital requirement equal to 120% of its enhanced capital requirement. While such an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the Authority and failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight.
For each insurer subject to an enhanced capital requirement, there is a three-tiered capital system designed to assess the quality of capital resources that a company has available to meet its capital requirements. Under this system, all of an insurer's capital instruments will be classified as either basic or ancillary capital which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics. Highest quality capital is classified as Tier 1 Capital; lesser quality capital is classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital (determined by registration classification) may be used to support the company's minimum solvency margin, enhanced capital requirement and TCL.
TheAGRO, including by prohibiting each company from declaring or paying any dividends during any financial year if it is in breach of its prescribed minimum sharesolvency margin, minimum liquidity ratio or enhanced capital must be always issued and outstanding and cannot be reduced. For AG Re, which is registered as a Class 3B insurer, the minimum share capital is $120,000. For AGRO, which is registered both as a Class 3A and a Class C long-term insurer, the minimum share capital is $370,000.
With respect to the distribution (including repurchase of shares) of any share capital, contributed surplusrequirement, or other statutory capital:
With respect toif the declaration andor payment of dividends:such dividends would cause such a breach. Dividends are paid out of each insurer's statutory surplus and, therefore, dividends cannot exceed such surplus. See “Minimum Solvency Margin and Enhanced Capital Requirements” above and “Minimum Liquidity Ratio” below.
Insurance Code of Conduct
Each of AG Re and AGRO is subject to the Insurance Code of Conduct, which establishes duties, standards, procedures and sound business principles which must be complied with to ensure sound corporate governance, risk management and internal controls are implemented by all insurers registered under the Insurance Act. The Authority will assess an insurer's compliance with the Code of Conduct in a proportionate manner relative to the nature, scale and complexity of its business. Failure to comply with the requirements under the Insurance Code of Conduct will be a factor taken into account by the Authority in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the Insurance Act. Such failure to comply with the requirements of the Insurance Code of Conduct could result in the Authority exercising its powers of intervention and investigation and will be a factor in calculating the operational risk charge applicable in accordance with the insurer's BSCR model or approved internal model.
Under Bermuda law, "exempted" companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an "exempted" company, AGL (as well as each of AG Re and AGRO) may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance (the Minister), participate in certain business and other transactions, including: (1) the acquisition or holding of land in Bermuda (except that held by way of lease or tenancy agreement which is required for its business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for its officers and employees and held with the consent of the Minister, for a term not exceeding 21 years), (2) the taking of mortgages on land in Bermuda to secure a principal amount in excess of $50,000 unless the Minister consents to a higher amount, and (3) the carrying on of business of any kind or type for which it is not duly licensed in Bermuda, except in certain limited circumstances, such as doing business with another exempted undertaking in furtherance of AGL's business carried on outside Bermuda.
The Bermuda government actively encourages foreign investment in "exempted" entities like AGL that are based in Bermuda, but which do not operate in competition with local businesses. AGL is not currently subject to taxes computed on profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual government fees, business fees, payroll tax and other taxes and duties. See "—“— Tax Matters—Taxation of AGL and Subsidiaries—Bermuda."”
Special considerations apply to the Company's Bermuda operations. Under Bermuda law, non-Bermudians, other than spouses of Bermudians and individuals holding permanent resident certificates or working resident certificates, are not permitted to engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda government. A work permit is only granted or extended if the employer can show that, after a proper public advertisement, no Bermudian, spouse of a Bermudian or individual holding a permanent resident certificate or working resident certificate is available who meets the minimum standards for the position. A waiver from advertising is automatically granted in respect of any chief executive officer position and other chief officer positions. The employer can also make a request for a waiver from the requirement to advertise in certain other cases, as expressed in the Bermuda government's work permit policies. Currently, all of the Company's Bermuda based professional employees who require work permits have been granted work permits by the Bermuda government.
The Company combined the operations of its European insurance subsidiaries, AGE UK, AGUK, AGLN and CIFGE, in a transaction that was completed on November 7, 2018. Under the Combination, AGUK, AGLN and CIFGE transferred their insurance portfolios to and merged with and into AGE UK.
General
Insurance companies in the U.K. are authorized by the Prudential Regulation Authority (PRA) and regulated by the PRA and the Financial Conduct Authority (FCA).
While the two regulators coordinate and cooperate in some areas, they have separate and independent mandates and separate rule-making and enforcement powers. AGE UK
The primary source of rules relating to the prudential supervision of AGE UK is the Solvency II Directive (Directive 2009/138/EC) as amended (including by the Omnibus II Directive (Directive 2014/51/EU)) (together, Solvency II), which came into force and effect on January 1, 2016. The Solvency II rules continue to apply to AGE UK during the transition period to December 31, 2020 following the U.K.'s exit from the EU on January 31, 2020 (see also “U.K. referendum vote to leave the European Union” below). The PRA remains the prudential regulator for U.K. insurers such as AGE UK, under Solvency II. Solvency II provides rules on capital adequacy, governance and risk management and regulatory reporting and public disclosure. It is intended to align capital requirements with the risk profile of each European Economic Area (EEA) insurance company and to ensure adequate diversification of an insurer's or reinsurer's exposures to any credit risks of its reinsurers. AGE UK has calculated its minimum required capital according to the Solvency II criteria and is in compliance.The PRA applies threshold conditions, which insurers must meet, and against which the PRA assesses them on a continuous basis. At a high level, these conditions are that:an insurer must be a body corporate (other than a limited liability partnership), a registered friendly society or a member of The Society of Lloyd's;if an insurer is a body corporate incorporated in the U.K., its head office, and in particular its mind and management, must be in the U.K;an insurer's business must be conducted in a prudent manner — in particular, the insurer must maintain appropriate financial and non-financial resources;the insurer must be fit and proper, and be appropriately staffed; andthe insurer and its group must be capable of being effectively supervised.
ahead and will rely significantly on judgments based on evidence and analysis.in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer its risk context and mitigating factors.The key EU legislation that is relevant to AGFOL is the Markets in Financial Instruments Directive (Directive 2014/65/EU)(MiFID II), which harmonizes the regulatory regime for investment services and activities across the EEA and the Insurance Distribution Directive (Directive EU/2016/97) (IDD) (which came into force on October 1, 2018). This EU legislation continues to apply to AGFOL during the transition period to December 31, 2020 following the U.K's exit from the EU on January 31, 2020. AGFOL’s MiFID II activities are limited to receiving and transmitting orders and giving investment advice and it cannot hold client money. Accordingly, although it is subject to MiFID II, AGFOL is exempt from the Capital Requirements Directive and Capital Requirements Regulations, which are the EU regulations on capital for certain MiFID firms. AGFOL has therefore calculated
During the transition period following the U.K.'s exit from the EU on January 31, 2020, the regulatory regime in the U.K. will be consistent with relevant EU legislation, which is either directly applicable in, or must be implemented into national law by, all of the remaining EU member states. The key EU legislation that is relevant to AGE UK is Solvency II, which provides the framework for the solvency and supervisory regime for insurers in the U.K. and in the EEA. The key EU legislation that is relevant to AGFOL is MiFID II and the IDD(see also “U.K. referendum vote to leave the European Union” below.)
Position ofOther U.K. Regulated Entities within the AGL GroupRegulatory RequirementsAGE UK is authorized by the PRA to effect and carry out certain classes of general insurance, specifically: classes 14 (credit), 15 (suretyship) and 16 (miscellaneous financial loss) for eligible counterparties and professional clients only (i.e., not retail clients). This scope of permission is sufficient to enable AGE UK to effect and carry out financial guaranty insurance and reinsurance. The insurance and reinsurance businesses of AGE UK are subject to close supervision by the PRA. AGE UK also has permission to arrange and advise on transactions it guarantees, and to take deposits in the context of its insurance business.
AGE UK also is the principal of Assured Guaranty Credit Protection Ltd. (AGCPL). AGCPL is not PRA or FCA authorized, but is an appointed representative of AGE UK. This means AGCPL can carry on insurance distribution activities without a license, because AGE UK has regulatory responsibility for it.
AGCPL is subject to the requirements of Regulation (EU) No 648/2012 of the European Parliament Solvency II and of the Council of July 4, 2012 on over the counter (OTC) derivatives, central counterparties and trade repositories (EMIR), as amended by Regulation (EU) 2019/834 of the European Parliament and of the Council of May 20, 2019, which, as an EU regulation, is directly applicable in all the member states of the EU andSolvency Requirements
AGFOL, a subsidiary of AGL,the U.K. and is authorized by the FCA as an investment manager in the U.K. with certain permissions. The FSMA and rules promulgated thereunder, together with certain additional legislation, govern all aspects of the U.K. investment business, including sales, research and trading practices, the provision of investment advice, and discretionary management services, the use and safekeeping of client funds and securities, regulatory capital, margin practices and procedures, the approval standards for individuals, anti-money laundering, periodic reporting and settlement procedures.
counterparties or professional customers (i.e., not retail clients), or, when arranging in relation to non-investment insurance contracts, commercial customers. AGFOL is not authorized as anthe future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and does not itself take risk in the transactions it arranges or places, and may not hold funds on behalf of its customers. AGFOL's permissions also allow it to introduce business to AGC and AGM, so that AGFOL can arrange financial guaranties underwritten by AGC and AGM.mitigating factors.
In the U.K.,
In addition to regulatory capital rules, Solvency II also contains a number of “Pillar 2” qualitative requirements, obliging firms to develop and embed systems to identify, measure and proactively manage the risks they are, or may be, exposed to. Among other things, firms must:have in place an effective system of governance that provides for the sound and prudent management of its business;
establish effective risk-management systems; and
take a comprehensive approach to considering their risks through an Own Risk and Solvency Assessment (ORSA) as proportionate to the nature, scale and complexity of the risks inherent in their business.“Pillar 3” reporting and disclosure requirements also exist, including a requirement to prepare a public Solvency and Financial Condition Report and a private Regular Supervisory Report. For more information on reporting requirements and the ORSA, see “Reporting Requirements” below.Solvency II contains a regime for the supervision of groups, including groups in which the parent undertaking has its head office in a country that is outside the EEA. The treatment of such groups in part depends on whether the jurisdiction in which the non-EEA parent has its head office is determined to have a supervisory regime which is equivalent to the Solvency II regime. In the absence of such a determination, the Solvency II rules on supervision apply to the group on a worldwide basis, unless the PRA elects to apply “other methods” which ensure appropriate supervision. AGE UK is a direct subsidiary of a U.S. parent company.The PRA has issued a Direction to AGE UK which confirms the “other methods” that the PRA will apply to ensure appropriate supervision. These include, among other things, requirements for AGE UK to provide the PRA with certain information, in relation to the group's risk management, risk exposures and solvency assessment. The Direction applies from November 12, 2018 until October 1, 2020, unless it is revoked earlier or no longer applicable.
U.K.
Reporting RequirementsU.K. insurance companies must prepare their financial statements under the Companies Act 2006, which requires the filing with Companies House of audited financial statements and related reports. In addition, starting January 1, 2016, the reporting requirements for U.K. insurance companies were modified by Solvency II. AGE UK is required to produce certain key reports including an annual Solvency and Financial Condition Report, Regular Supervisory Report and an ORSA, the latter as part of the so-called “Pillar 2” individual capital assessment requirements.The PRA will review each firm’s ORSA and then consider whether in its view the firm needs to hold capital in excess of its Pillar 1 capital (see “Solvency II and Solvency Requirements” above) and, if so, may impose a “capital add-on.” The prescribed information to be contained in the ORSA, as well as the frequency with which the assessment must be carried out, is subject to guidance issued by the European Insurance and Occupational Pensions Authority in September 2015 and supervisory statements issued by the PRA. The PRA has advised AGE UK that it is not imposing a capital add-on at this time. The PRA may determine to impose a capital add-on in relation to AGE UK in the future.Supervision of ManagementAGE.AGE UK and AGFOL are subject to the rules contained in the Senior Managers and Certification Regime. This requires that individuals undertaking particular roles need to be registered with the relevant UK regulator as undertaking a “Senior Management Function”. This broadly includes individuals undertaking the executive functions and the oversight functions of each entity. For firms that are regulated by both the PRA and FCA, such as AGE UK, certain roles are supervised by the PRA and certain roles are supervised by the FCA. For firms that are regulated by the FCA only, such as AGFOL, all the relevant roles are supervised by the FCA.
Under FSMA, when a person decides to acquire
Intervention and EnforcementThe PRA has extensive powers to intervene in the affairs of an authorized firm, culminating in the sanction of the suspension of authorization to carry on a regulated activity. The PRA can also vary or cancel a firm's permissions under its own initiative if it considers that the firm is failing, or is likely to fail, to satisfy the Threshold Conditions. FSMA gives the PRA significant investigation and enforcement powers. It also gives the PRA a rule-making power, under which it makes the various rules that constitute its Rulebook.The PRA also has the power to prosecute criminal offenses arising under FSMA. The FCA has the power to prosecute offenses under FSMA and to prosecute insider dealing under Part V of the Criminal Justice Act of 1993, and breaches by authorized firms of money laundering and terrorist financing regulations.
“Passporting”During the transition period to December 31, 2020 under the withdrawal agreement, EU directives allow AGE UK and AGFOL to conduct business in the other remaining EU states where they are authorized by the PRA or FCA under a single market directive. This right extends to the EEA. A firm taking advantage of a right under a single market directive to conduct business in an EEA state can rely on its "home state" authorization. This ability to operate in other jurisdictions of the EEA on the basis of home state authorization and supervision is sometimes referred to as “passporting.” Each of AGE UK and AGFOL is passported to conduct business in certain remaining EEA states. Passporting is not applicable to firms not authorized in the EEA or the U.K., such as AGM and AGC. Accordingly, the co-insurance model described above cannot be “passported” throughout the EEA. Instead, it is a question of local law in each remaining EEA member state as to whether AGM's or AGC’s participation in a co-insurance structure, protecting insureds or risks located in that jurisdiction, would amount to the conduct of insurance business in that jurisdiction. (See also “U.K. referendum vote to leave the European Union” below.)Fees and LeviesEach of AGE UK and AGFOL is subject to regulatory fees and levies based on, in respect of AGE UK its gross premium income and gross technical liabilities and, in respect of AGFOL, its annual income. These fees are collected by the FCA (though they relate to regulation by both the PRA and the FCA). The PRA and the FCA also require authorized firms, including authorized insurers, to participate in an investors' protection fund, known as the Financial Services Compensation Scheme. The Financial Services Compensation Scheme was established to compensate consumers of financial services firms, including the buyers of insurance, against failures in the financial services industry. Eligible claimants (identified in the Policyholder Protection section of the PRA Rulebook and the Compensation section of the FCA Handbook) may be compensated by the Financial Services Compensation Scheme when an authorized firm (including an insurer or insurance distributor) is unable, or likely to be unable, to satisfy policyholder claims. General insurance in class 14 (credit) is not protected by the Financial Services Compensation Scheme, nor is reinsurance in any class; however, other direct insurance classes written by AGE UK are covered (namely, classes 15 (suretyship) and 16 (miscellaneous financial loss)).Material Contracts
AGM provides support to AGE UK through a quota share and excess of loss reinsurance agreement (the AGM Reinsurance Agreement) and a net worth maintenance agreement (the AGE UK Net Worth Agreement).
The versions of such agreements currently in force became effective on November 7, 2018 upon completion of the Combination. These new agreements clarified the application of the prior agreements to AGE UK upon the Combination. They also incorporated changes to certain terms of the prior agreements requested by the PRA during its review of the Combination, including a change to the amount of collateral that AGM is obligated to post to secure its reinsurance of AGE UK. Except for such changes, the new agreements do not materially alter the terms or coverage of the prior agreements.The AGM Reinsurance Agreement - Quota Share Reinsurance: Under the quota share cover of the prior AGM Reinsurance Agreement AGM reinsured between approximately 95% - 99% of AGE UK's retention of each AGE UK financial guaranty insurance policy after cessions to other reinsurers. Such range of proportionate reinsurance by AGM was the result of a formula in the prior AGM Reinsurance Agreement that fixed AGM’s reinsurance of AGE UK policies issued during a particular calendar year based upon the respective prior year-end capitalization of AGE UK and AGM.
The AGE UK policies reinsured pursuant to the prior AGM Reinsurance Agreement were limited to ones issued in 2011 and prior years because:
(a) AGE UK and AGM in 2011 implemented a co-guarantee structure pursuant to which (i) AGE UK, rather than guaranteeing directly all of the obligations issued in a particular transaction, directly guarantees, instead, only the portion of the guaranteed obligations in an amount equal to what would have been AGE UK's pro rata retention percentage under the quota share cover of the prior AGM Reinsurance Agreement, (ii) AGM directly guarantees the balance of the guaranteed obligations, and (iii) AGM also provides a second-to-pay guarantee for AGE UK's portion of the guaranteed obligations; and
(b) the prior AGM Reinsurance Agreement excluded AGE UK’s insured portion of the co-guaranteed obligations from reinsurance by AGM, and all AGE UK business since 2011 has consisted of transactions insured pursuant to such co-guarantee structure.
The new AGM Reinsurance Agreement maintains in place AGM’s proportionate reinsurance of all AGE UK policies covered under the prior AGM Reinsurance Agreement. The new agreement provides, however, that to the extent AGE UK issues a future qualifying policy without utilizing the co-guarantee structure described above, AGM will reinsure a fixed 85% share of AGE UK’s gross liabilities under such policy, rather than a percentage share based on AGE UK’s and AGM’s respective prior year-end capitalization. Similarly, the percentages of a future transaction’s obligations that AGE UK and AGM co-guarantee will be split 15% by AGE UK and 85% by AGM, so that AGM’s co-guaranteed portion continues to mirror the percentage of quota share reinsurance AGM otherwise would provide for the transaction under the new AGM Reinsurance Agreement.
The AGM Reinsurance Agreement - Excess of Loss Reinsurance: Under the excess of loss cover of the prior AGM Reinsurance Agreement, AGM was obligated to pay AGE UK quarterly the amount, if any, by which (i) the sum of (a) AGE UK’s incurred losses calculated in accordance with U.K. GAAP as reported by AGE UK in its financial returns filed with the PRA and (b) AGE UK’s paid losses and LAE, in both cases net of all other performing reinsurance, including the reinsurance provided by the Company under the quota share cover of the AGM Reinsurance Agreement, exceeded (ii) an amount equal to (a) AGE UK’s capital resources under U.K. law minus (b) 110% of the greatest of the amounts as might be required by the PRA as a condition for AGE UK to maintain its authorization to carry on a financial guarantee business in the U.K. The new AGM Reinsurance Agreement provides this same form of excess of loss reinsurance; it simply clarifies that such reinsurance covers the legacy portfolios transferred to AGE UK by AGUK, AGLN and CIFGE in addition to the legacy AGE UK policies reinsured under the prior AGM Reinsurance Agreement.
Other Provisions of the AGM Reinsurance Agreement: Under the new AGM Reinsurance Agreement, AGM’s required collateral is 102% of the sum of AGM’s assumed share of the following for all AGE UK policies for which AGM provides proportionate reinsurance: (a) AGE UK’s unearned premium reserve (net of AGE UK’s reinsurance premium payable to AGM); (b) AGE UK’s provisions for unpaid losses and allocated loss adjustment expenses (net of any salvage recoverable), and (c) any unexpired risk provisions of AGE UK, in each case (a) - (c) as calculated by AGE UK in accordance with U.K. GAAP. This new, post-Combination collateral measure is in contrast to (i) AGM’s collateral measure prevailing from December 2014 through 2015, which was based, in part, upon the losses expected to be borne by AGM (and two other affiliated reinsurers of AGE UK, AG Re and AGRO) at the 99.5% confidence interval under the PRA’s FG Benchmark Model; and (ii) AGM’s collateral measure prevailing from 2016 up to the time of the Combination, which was based on the same losses calculated under AGE UK’s internal capital requirement model instead of the FG Benchmark Model. As a result of this new collateral measure, AGM’s total collateral required for AGE UK increased by approximately $52 million upon the Combination. AGM funded such increase promptly following the Combination.
The quota share and excess of loss covers under the prior AGM Reinsurance Agreement excluded transactions guaranteed by AGE UK on or after July 1, 2009 that were not municipal, utility, project finance or infrastructure risks or similar types of risks. The new AGM Reinsurance Agreement retains the same exclusion. The old AGM Reinsurance Agreement also permitted AGE UK to terminate the agreement upon the following events: a downgrade of AGM’s ratings by Moody’s below Aa3 or by S&P below AA- if AGM fails to restore its rating(s) to the required level within a prescribed period of time; AGM's insolvency; failure by AGM to maintain the minimum capital required by its domiciliary jurisdiction; or AGM filing a petition in bankruptcy, going into liquidation or rehabilitation or having a receiver appointed. The new AGM Reinsurance Agreement preserves these same termination rights by AGE UK, and also adds an additional termination right enabling AGE UK to terminate the agreement should AGM fail to maintain its required collateral.
The AGE UK Net Worth Agreement: Pursuant to the prior AGE UK Net Worth Agreement, AGM was obligated to cause AGE UK to maintain capital resources equal to 110% of the greatest of the amounts as may be required by the PRA as a condition for AGE UK to maintain its authorization to carry on a financial guarantee business in the U.K., provided that AGM's contributions (a) did not exceed 35% of AGM's policyholders' surplus on an accumulated basis as determined by the laws of the State of New York, and (b) were in compliance with Section 1505 of the New York Insurance Law. AGM’s obligation remains the same under the new AGE UK Net Worth Agreement, which simply clarifies that it applies to AGE UK’s expanded insurance and investment portfolios resulting from the Combination. AGM has never been required to make a contribution to AGE UK's capital under any version of the AGE UK Net Worth Agreement - either the current agreement or any prior net worth maintenance agreements. The new AGE UK Net Worth Agreement also permits AGE UK to terminate such agreement without also triggering an automatic termination of the AGM Reinsurance Agreement (as would have occurred under the prior AGE UK Net Worth Agreement).
The NYDFS approved each of the changes described above to the AGM Reinsurance Agreement and AGE UK Net Worth Maintenance Agreement.
AGC’s Support Agreements in Respect of AGUK: Prior to the Combination, the Company's affiliate, AGC, provided support to AGUK through a Further Amended and Restated quota share reinsurance agreement (the AGC Quota Share Agreement), a Further Amended and Restated excess of loss reinsurance agreement (the AGC XOL Agreement), and a Further Amended and Restated net worth maintenance agreement (the AGUK Net Worth Agreement). The latter two agreements were terminated effective upon the Combination because AGUK’s legacy policies became part of AGE UK’s portfolio upon the Combination and, therefore, are now covered by the excess of loss portion of the new AGM Reinsurance Agreement and the new AGE UK Net Worth Maintenance Agreement, as described above. The AGC Quota Share Agreement, pursuant to which AGC provided 90% quota share reinsurance of AGUK’s legacy policies, was also terminated upon the Combination, but it was replaced with a new quota share reinsurance agreement between AGE UK and AGC (the New AGC Reinsurance Agreement). This new agreement preserves AGC’s 90% quota share reinsurance of the legacy AGUK policies that are now part of AGE UK’s portfolio, but it has no application to new business written by AGE UK following the Combination. The new AGC Reinsurance Agreement also imposes a new collateral requirement on AGC that is the same as AGM’s collateral requirement under the new AGM Reinsurance Agreement, as described above, except that AGC continues also to post as collateral its share of an AGE UK-guaranteed (formerly, pre-Combination, AGUK-guaranteed) triple-X insurance bond that had been purchased by AGC for loss mitigation (as AGC had similarly done under the prior AGC Quota Share Agreement).
The MIA approved the termination of the prior AGC XOL Agreement, AGUK Net Worth Agreement and the AGC Quota Share Agreement and the replacement of the latter with the New AGC Reinsurance Agreement.
U.K. referendum vote to leave the European Union
On June 23, 2016, the U.K. voted in a national referendum to withdraw from the EU. The result of the referendum did not legally oblige the U.K. to exit the EU (a so-called Brexit). However, on March 29, 2017 the U.K. government served notice to the European Council of its desire to withdraw in accordance with Article 50 of the Treaty on European Union (Article 50).
Article 50 envisages a negotiation period leading to an exit on a mutually agreed date. As part of the negotiations, the U.K. sought a transition period during which it would cease to be a member state of the EU, but would continue to have rights and obligations under EU law, other than the right to participate formally in the EU decision making process, and EU legislation would remain in force. A withdrawal agreement was agreed by the U.K. Government and EU and the U.K. Parliament approved the withdrawal agreement so that the UK left the EU on January 31, 2020. Under the terms of the withdrawal agreement the transition period will end on December 31, 2020 and the U.K. Government is stating that this will not be extended, although the terms of the withdrawal agreement do allow for an extension to the transition period.
As a result of the approval of the withdrawal agreement, the current law relating to the Company's operations in the EU remains the same during the transition period. 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. Given the lack of clarity on the ultimate post-Brexit relationship between the U.K. and the EU, the Company cannot fully determine what, if any, impact Brexit may have on its operations, both inside and outside the U.K. If the U.K. and EU fail to agree the U.K.'s future relationship with the EU during the transition period then the U.K. will leave the EU on December 31, 2020 without a trade deal in place. This would create considerable uncertainty as to the ongoing relationship between the U.K. and the EU and a likely negative impact on all parties.
A further question arising from Brexit is whether U.K. authorized financial services firms such as AGE UK will continue to enjoy passporting rights to the other 27 EEA states after Brexit. As a consequence, Assured Guaranty has established a new subsidiary in Paris, France, in order to continue with the ability to write new business, and to service existing business, in those other EEA states.
Until the end of the transition period under the withdrawal agreement, EU legislation will remain in force and the role of EU institutions will be unchanged. At the end of the transition period, in the absence of any agreement to the contrary, all treaty obligations would lapse, directives, directly effective decisions and regulations (as well as rulings of the Court of Justice of the EU) would cease to apply and the competencies of EU institutions would fall away.
The U.K. Government has passed legislation under which most EU regulation, EU decision or EU tertiary legislation would, to the extent possible, form part of U.K. law on and after the date the U.K. exits the EU. Under this legislation Solvency II is brought into U.K. law in substantially the same form as it has on the day the U.K. exits the EU. Retaining Solvency II in substantially its current form should make it easier for the U.K. to obtain a ruling of “equivalence” from the European Commission under Solvency II, which would accord insurers certain advantages when it comes to the Solvency II rules on reinsurance, the calculation of group capital and group supervision.
The Treasury Select Committee of the House of Commons has conducted a review of Solvency II against the backdrop of Brexit, taking into account certain features which are regarded as unsuitable by the U.K. industry. The results of the Treasury Select Committee’s work have been responded to by the PRA and may feed in to future discussions about potential changes to U.K. insurance regulation.
Any changes to U.K. insurance regulation following Brexit could reduce the chances of the U.K. obtaining (or subsequently preserving) a ruling of equivalence.
See the Risk Factor captioned “Changes in applicable laws and regulations resulting from the withdrawal of the U.K. from the EU may adversely affect the Company” under Risks Related to GAAP, Applicable Law and Litigation, in Item 1A, Risk Factors.France
As an insurance company licensed in France AGE SArequires express or implied approval from the ACPR: (i) where such transaction results directly or indirectly in the proportion of shares or voting rights held by that person or those persons rising above 10%, 20%, one-third or 50% of all shares or voting rights; (ii) where the insurance or reinsurance company becomes a subsidiary of that person or those persons; and (iii) where the transaction allows this person or persons to exercise a significant influence over the management of this company.
Regulationcorporate matches of Asset Management Business
United States
AGL has three operating asset management subsidiaries: BlueMountainCulture. The Company seeks to foster and BlueMountain CLO Management, LLC (BlueMountain CLO Management),maintain strong ethical standards and a reputation as a business that conducts itself professionally and with a high degree of integrity. In addition, the Company works to provide and support a respectful and inclusive environment that values the abilities of each of which is domiciledemployee, leading to enhanced engagement and improved retention. Education and awareness are critical components in promoting the Company’s cultural values across the organization. Upon onboarding and annually, all employees are required to complete training in the United States and is registered as an investment adviser with the SEC, and Blue Mountain Capital Partners (London) LLP (BlueMountain London), a U.K. domiciled “relying adviser” which is not independently registered with the SEC. Registered investment advisers are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). As registered investment advisers, BlueMountain and BlueMountain CLO Management require periodic reports on Forms ADV, which are publicly available. The Advisers Act imposes requirements on registered advisers, including the maintenance of aCompany’s Global Code of Ethics as well as its policies on the prevention of sexual harassment and discrimination. The Company also provides additional targeted training and guidance to specific personnel regarding anti-fraud, anti-bribery and anti-corruption related matters. Transparency towards stakeholders, including shareholders, policyholders, investors and employees, is another hallmark of the Company’s culture. Each quarter after the Company issues its financial results, in addition to meeting with shareholders and policyholders, the AGL Chief Executive Officer and Chief Financial Officer hold a town-hall style meeting for all employees where they provide an update on the Company’s performance and strategy, acknowledge contributions made by employees to the continued success of its business and answer questions.
In addition, private funds advised by BlueMountain, BlueMountain CLO Management and BlueMountain London rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. These exemptions are highly complex and may in certain circumstances depend on compliance by third parties which are not controlledpresentations sponsored by the Company.
United Kingdom
BlueMountain London is authorized by the FCA as an investment manager in the United Kingdom. The FSMA and rules promulgated thereunder, together with certain additional legislation (derived from both EU and U.K. sources), govern all aspects of the U.K. investment business, including sales, research and trading practices, the provision of investment advice, and discretionary management services, the use and safekeeping of client funds and securities, regulatory capital, organizational arrangements, recordkeeping, margin practices and procedures, the approval standards for individuals, anti-money laundering, periodic reporting, and settlement procedures.
Tax reform commonly referred to as theThe 2017 Tax Cuts and Jobs Act (Tax Act) was passed by the U.S. Congress and was signed into law on December 22, 2017. The Tax Actof 2017 (the TCJA) lowered the corporate U.S. tax rate to 21%, eliminated the alternative minimum tax, limited the deductibility of interest expense and required a one-time tax on a deemed repatriation of untaxed earnings of non-U.S. subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies such as the Company, the Tax ActTCJA also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. In addition, the Tax ActTCJA included certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United StatesU.S. but have certain U.S. connections and United StatesU.S. persons investing in such companies. For example, the Tax ActTCJA includes a base erosion and anti-abuse tax (BEAT) that could make affiliate reinsurance between United StatesU.S. and non-U.S. members of the Company'sCompany’s group economically unfeasible. In addition, the Tax ActTCJA introduced a current tax on global intangible low taxedlow-taxed income that may result in an increase in U.S. corporate income tax imposed on the Company'sCompany’s U.S. group members with respect to earnings of their non-U.S. subsidiaries. As discussed in more detail below, the Tax ActTCJA also revised the rules applicable to passive foreign investment companies (PFICs) and controlled foreign corporations (CFCs). Although the Company is currently unable to predict the ultimate impact of the Tax Act on its business, shareholders and results of operations, it is possible that the Tax Act may increase the U.S. federal income tax liability of U.S. members of the group that cede risk to non-U.S. group members and may affect the timing and amount of U.S. federal income taxes imposed on certain U.S. shareholders. Further, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company. Additionally, tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or a PFIC or has related person insurance income (RPII) are subject to change, possibly on a retroactive basis. Currently there are onlyThe Treasury Department recently issued final and proposed regulations regardingintended to clarify the application of the insurance income exception to the classification of a non-U.S. insurer as a PFIC rulesand provide guidance on a range of issues relating to an insurance company. Additionally,PFICs, and recently issued proposed regulations that would expand the regulations regardingscope of the RPII have been in proposed form since 1991.rules. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation and Note 17,14, Income Taxes.
AGL'sAGL’s Tax Residency. AGL is not incorporated in the U.K., but effectivefrom November 6, 2013, the AGL Board manageshas managed its affairs with the intent to maintain its status as a company that is tax resident in the U.K.
AGL'sAGL’s authorized share capital of $5,000,000 is divided into 500,000,000 shares, par value U.S. $0.01 per share, of which 92,525,85059,019,864 common shares were issued and outstanding as of February 25, 2020.24, 2023. Except as described below, AGL'sAGL’s common shares have no pre-emptivepreemptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL'sAGL’s common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL's assets, if any remain after the payment of all AGL'sAGL’s debts and liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a shareholder. See "Acquisition“Acquisition of Common Shares by AGL"AGL” below.
AGL'sAGL’s Board is authorized to require any shareholder to provide information for purposes of determining whether any holder'sholder’s voting rights are to be adjusted, which may be information on beneficial share ownership, the names of persons having beneficial ownership of the shareholder'sshareholder’s shares, relationships with other shareholders or any other facts AGL'sAGL’s Board may deem relevant. If any holder fails to respond to this request or submits incomplete or inaccurate information, AGL'sAGL’s Board may eliminate the shareholder'sshareholder’s voting rights. All information provided by the shareholder will be treated by AGL as confidential information and shall be used by AGL solely for the purpose of establishing whether any 9.5% U.S. Shareholder exists and applying the adjustments to voting power (except as otherwise required by applicable law or regulation).
AGL'sAGL’s Board may decline to register a transfer of any common shares under certain circumstances, including if they have reason to believe that any adverse tax, regulatory or legal consequences to the Company, any of its subsidiaries or any of its shareholders or indirect holders of shares or its Affiliatesaffiliates may occur as a result of such transfer (other than such as AGL'sAGL’s Board considers de minimis). Transfers must be by instrument unless otherwise permitted by the Companies Act.
AGL'sAGL’s Board and Corporate Action
AGL'sAGL’s Bye-Laws provide that AGL'sAGL’s Board shall consist of not less than three and not more than 21 directors, the exact number as determined by the Board. AGL'sAGL’s Board currently consists of ten12 persons who are elected for annual terms.
Employees
As of December 31, 2019, the Company had 441 employees including 134 employees from BlueMountain. None of the Company's employees are subject to collective bargaining agreements. The Company believes that employee relations are satisfactory.
The Company's business, liquidity, financial condition and stock price may be adversely affected by developments•Developments in the U.S. and world-wide financial markets and economy generally.
The Company's profitability, financial position, insured portfolio, investment portfolio, assets under management (AUM), cash flow, statutory capital and stock price could be materially affected by the U.S. and global financial markets and economy generally.
In recent years, the global financial markets•Significant budget deficits and economy generally have been impacted by political events such as trade confrontations between the U.S.pension funding and traditional allies and between the U.S. and China as well as the processrevenue shortfalls of withdrawal of the U.K. from the EU (commonly known as ‘Brexit’). The global economic and political systems also have been impacted by events in the Middle East and Eastern Europe, as well as Africa and Southeast Asia, and could be impacted by other events in the future, including natural and man-made disasters and pandemics.
These and other risks could materially and negatively affect the Company’s ability to access the capital markets, the cost of the Company's debt, the demand for its credit enhancement and asset management products, the amount of losses incurred on transactions it guarantees, the value and performance of its investment portfolio (including its alternative investments), the value of its AUM and amount of its related asset management fees, the financial ratings of its insurance subsidiaries, and the price of its common shares.
Some of thecertain state and local governments and entities that issue obligations the Company insures are experiencing significant budget deficits and pension funding and revenue shortfalls that could result in increased credit losses or impairments and capital charges on those obligations.
In addition, obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, may be adversely affected by revenue declines resulting from reduced demand, changing demographics or other factors associated with an economy in which unemployment remains high, housing prices have not yet stabilized and growth is slow. These obligations, which may not necessarily benefit from financial support from other tax revenues or governmental authorities, may also experience increased losses if the revenue streams are insufficient to pay scheduled interest and principal payments.
Persistently low interest rate levels and credit spreads could adversely affect demand for financial guaranty insurance as well as the Company's financial condition.
Demand for financial guaranty insurance generally fluctuates with changes in market credit spreads. Credit spreads, which are based on the difference between interest rates on high-quality or "risk free" securities versus those on lower-rated or uninsured securities, fluctuate due to a number of factors and are sensitive to the absolute level of interest rates, current credit experience and investors' risk appetite. When interest rates are low, or when the market is relatively less risk averse, the credit spread between high-quality or insured obligations versus lower- rated or uninsured obligations typically narrows. As a result, financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively wider credit spreads. Issuers are less likely to use financial guaranties on their new issues when credit spreads are narrow, this results in decreased demand or premiums obtainable for financial guaranty insurance. The continued persistence of low interest rate levels and or low credit spreads by historical standards could continue to dampen demand for financial guaranty insurance.
Conversely, in a deteriorating credit environment, credit spreads increase and become "wide," which increases the interest cost savings that financial guaranty insurance may provide and can result in increased demand for financial guaranties by issuers. However, if the weakening credit environment is associated with economic deterioration, the Company's insured portfolio could generate claims and loss payments in excess of normal or historical expectations. In addition, increases in market interest rate levels could reduce new capital markets issuances and, correspondingly, cause a decreased volume of insured transactions.
The Company may be subjected to significantSignificant risks from large individual or correlated exposures.
The Company is exposed to the risk that issuers of debt that it insures or other counterparties may default in their financial obligations, whether as a result of insolvency, lack of liquidity, operational failure or other reasons. Similarly, the Company could be exposed to corporate credit risk if a corporation or financial institution is the originator or servicer of loans, mortgages or other assets backing structured securities that the Company has insured.
In addition, because the Company insures or reinsures municipal bonds, it may have significant exposures to single municipal risks; see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Insured Portfolio, for a list of the Company's ten largest municipal risks by revenue source. While the Company's risk of a complete loss, where it would have to pay the entire principal amount of an issue of bonds and interest thereon with no recovery, is generally lower for municipal bonds, most of which are backed by tax or other revenues, than for corporate bonds, there can be no assurance that a single default by a municipality would not have a material adverse effect on the Company's results of operations or financial condition.The Company's ultimate exposure to a single risk may exceed its underwriting guidelines (caused by, for example, acquisitions, reassumptions, or amortization of the portfolio faster than the single risk), and an event with respect to a single risk may cause a significant loss. The Company seeks to reduce this risk by managing exposure to large single risks, as well as concentrations of correlated risks, through tracking its aggregate exposure to single risks in its various lines of business and establishing underwriting criteria to manage risk aggregations. The Company may insure and has insured individual public finance and asset-backed risks well in excess of $1 billion. Should the Company's risk assessments prove inaccurate and should the applicable limits prove inadequate, the Company could be exposed to larger than anticipated losses, and could be required by the rating agencies to hold additional capital against insured exposures whether or not downgraded by the rating agencies.
Claim paymentsLosses on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations insured by the Company significantly in excess of those currently expected by the Company or recoveries significantly below those currently expected by the Company could have a negative effect onCompany.
On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law by the President of the United States. PROMESA established a seven-member federal financial oversight board (Oversight Board) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. PROMESA provides a legal framework under which the debt of the Commonwealth and its related authorities and public corporations may be voluntarily restructured, and grants the Oversight Board the sole authority to file restructuring petitions in a federal court to restructure the debt of the Commonwealth and its related authorities and public corporations if voluntary negotiations fail, provided that any such restructuring must be in accordance with an Oversight Board approved fiscal plan that respects the liens and priorities provided under Puerto Rico law.
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and widespread devastation. Damage to the Commonwealth’s infrastructure, including the power grid, water system and transportation system, was extensive, and has impacted the ability and willingness of Puerto Rican obligors to make timely and full debt service payments and participants’ efforts to resolve the Commonwealth’s financial issues under PROMESA. More recently, beginning on December 28, 2019, and progressing into early 2020, Puerto Rico has been struck by a swarm of earthquakes, including at least 11 that were of magnitude 5 or greater based on the the Richter magnitude scale. While not nearly as deadly or destructive as Hurricane Maria, the earthquakes have damaged buildings and infrastructure, including the power grid.
The final shape, timing and validity of responses to Puerto Rico’s distress eventually enacted or implemented under the auspices of PROMESA and the Oversight Board or otherwise, and the impact, after resolution of any legal challenges, of any such responses on obligations insured by the Company, are uncertain, but could be significant. Additional information about the Company's exposure to Puerto Rico and legal actions it has initiated may be found in Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Outstanding Insurance Exposure, Exposure to Puerto Rico.
The likelihood of debt repayment is impacted by both the ability and the willingness of the obligor to repay their debt. Debtors generally understand that debt repayment is not only a legal obligation but is also appropriate, and that a failure to repay their debt will impede their access to debt in the future. To the extent societal attitudes toward the repayment of debt by struggling obligors softens and such obligors believe there to be less of a penalty for nonpayment, some struggling debtors may be more likely to default and, if they default, less likely to agree to repayment plans they view as burdensome. If the issuers of the obligations in the Company's public finance portfolio become unwilling to raise taxes, decrease spending or receive federal assistance in order to repay their debt, the Company may experience increased levels of losses or impairments on its public finance obligations, which could materially and adversely affect its business, financial condition and results of operations.
Atmospheric concentrations of carbon dioxide and other greenhouse gases have increased dramatically since the industrial revolution, and have been blamed for a gradual increase in global average temperatures and an apparent increase in the frequency and severity of natural disasters. These trends, as well as climate change regulation, are expected to continue in the future and to impact nearly all sectors of the economy to varying degrees.
Climate change and climate change regulation may impact asset prices and general economic conditions and may disproportionately impact particular industries or locations. The Company cannot predict the long-term impacts on the Company from climate change or climate change regulation. The Company manages its insurance and investment risks by maintaining well-diversified insurance and investment portfolios, both geographically and by sector, and monitors these portfolios on an ongoing basis. While the Company can adjust its investment exposure to sectors and/or geographical areas that
face severe risks due to climate change or climate change regulation, the Company has less flexibility in adjusting the exposure in its insurance portfolio because some of the financial guaranties issued by the Company's insurance subsidiaries 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.
The Company's investment portfolio and AUM may be adversely affected by credit, interest rate and other market changes.
Credit losses and changes in interest rates could also have an adverse impact on the amount ofadversely affecting the Company’s AUM, which could impact net income. For example, if interest rates increase or there are credit losses in the portfolios managed by Assured Investment Management, AUM will decrease, reducing the amount of management fees earned by the Company. Conversely, if interest rates decrease, AUMinvestments and management fees will increase.AUM.
Interest rates are highly sensitive to many factors, including monetary policies, domestic and international economic and political conditions and other factors beyond the Company's control. The Company does not engage in active management, or hedging, of interest rate risk in its investment portfolio, and may not be able to mitigate interest rate sensitivity effectively.
The Company is using the investment knowledge and experience acquired in the BlueMountain Acquisition to expand the categories and types of investments included in its investment portfolio by both (a) initially investing $500 million of capital in Assured Investment Management funds plus additional amounts in other accounts managed by Assured Investment Management and (b) expanding the categories and types of its alternative investments not managed by Assured Investment Management. This expansion of categories and types of investments may increase the risk in the Company’s investment portfolio as described above under "The Company's investment portfolio may be adversely affected by credit, interest rate and other market changes." For example, the fair value of alternative investments may be more volatile than other investments made by the Company. In addition, this expansion may result in the Company investing a portion of its portfolio in alternative investments that are less liquid than some of its other investments. While the Company manages its investment portfolio with its liquidity requirements in mind, this expansion may increase the risks described below under “-- Operational Risks -- The ability of AGL and its subsidiaries to meet their liquidity needs may be limited”. Expanding the categories and types of investments in the Company’s investment portfolio may also expose the Company to other types of risks, including reputational risks.
The financial guaranties issued by the Company's insurance subsidiaries insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and, in most circumstances,different, causing the Company has no right to cancel such financial guaranties. As a result, the Company's estimate of ultimate losses 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 as well as changes in lawreserve either too little or industry practices (such as the potential discontinuance of the publication of the London Interbank Offered Rate (LIBOR) over the long duration of most contracts. If the Company's actual losses exceed its current estimate, this may result in adverse effects on the Company's financial condition, results of operations, liquidity, business prospects, financial strength ratings and ability to raise additional capital.too much for future losses.
The determination of expected loss 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, the perceived strength of legal protections, governmental actions, negotiations and other factors that affect credit performance. The Company does not use traditional actuarial approaches to determine its estimates of expected losses. Actual losses will ultimately depend on future events or transaction performance. As a result, the Company's current estimates of losses may not reflect the Company's future ultimate claims paid.
Certain sectors and large risks within the Company's insured portfolio have experienced credit deterioration in excess of the Company’s initial expectations, which has led or may lead to losses in excess of the Company’s initial expectations. The Company's expected loss models take into account current and expected future trends, which contemplate the impact of current and possible developments in the performance of the exposure. These factors, which are integral elements of the Company's reserve estimation methodology, are updated on a quarterly basis based on current information. Because such information changes over time, sometimes materially, the Company’s projection of losses may also change materially. Much of the recent development in the Company's loss projections relate to the Company's insured Puerto Rico exposures. The Company had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations as of December 31, 2019 and December 31, 2018 aggregating to $4.3 billion and $4.8 billion, respectively, all of which was rated BIG under the Company’s rating methodology. For a discussion of the Company's Puerto Rico risks, see Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Outstanding Insurance Exposure.
The Company carries a significant portion of its assets and liabilities and reports a significant portion of its AUM at fair value. The approaches used by the Company to calculate the fair value of those assets and liabilities it carries at fair value are described under Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement. The determination of fair values is made at a specific point in time, based on available market information and judgments about the assets and liabilities being valued, including estimates of timing and amounts of cash flows and the credit rating of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on estimated fair value amounts.
During periods of market disruption, including periods of rapidly changing credit spreads or illiquidity, it may be difficult to value certain of the Company’s assets and liabilities and AUM, particularly if trading becomes less frequent or market data becomes less observable. An increase in the amount of the Company’s alternative investments may increase the amount of the Company’s assets subject to this risk. During such periods, more assets and liabilities may fall to the Level 3 valuation level, which describes model derived valuations in which one or more significant inputs or significant value drivers are unobservable, thereby resulting in values that may not be indicative of net realizable value or reflective of future fair values. Rapidly changing credit and equity market conditions could materially impact the valuation of assets and liabilities as reported within the financial statements, and period-to-period changes in value could vary significantly.
As described in greater detail under Item 1, Business, Insurance Segment "--Competition," the Company can face competition in its insurance business, either in the form of current or new providers of credit enhancement or in terms of alternative structures, including uninsured offerings, or pricing competition. Increased competition could have an adverse effect on the Company's insurance business.
The Company’s Asset Management segment operates in highly competitive markets. The Company competes with many other firms in every aspect of the asset management industry, including raising funds, seeking investments, and hiring and retaining professionals. The Company’s ability to 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. In addition, if the Company’s successful competitors charge lower fees for substantially similar products, the Company may face pressure to lower fees to attract and retain asset management clients.Some of the Company’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by the Company. Some of these competitors also may have a lower cost of capital and access to funding sources that are•Strategic transactions not available to the Company, which may create further competitive disadvantages with
respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships.
Acquisitions may not result in the benefits anticipated and may subject the Company to non-monetary consequences.From time to time the Company evaluates acquisition opportunities and conducts diligence activities with respect to transactions with other financial services companies. For example, during 2019 the Company acquired BlueMountain Capital Management, LLC. Prior to that, the Company acquired several legacy financial guaranty insurance companies and financial guaranty portfolios. These acquisitions as well as any future acquisitions of other asset managers or asset management contracts or financial guaranty portfolios or companies or other financial services companies may involve some or all of the various risks commonly associated with acquisitions, including, among other things: (a) failure to adequately identify and value potential exposures and liabilities of the target portfolio or entity; (b) difficulty in estimating the value of the target portfolio or entity; (c) potential diversion of management’s time and attention; (d) exposure to asset quality issues of the target entity; (e) difficulty and expense of integrating the operations, systems and personnel of the target entity; and (f) concentration of exposures, including exposures which may exceed single risk limits, due to the addition of the target portfolio. Such acquisitions may also have unintended consequences on ratings assigned by the rating agencies to the Company or its insurance subsidiaries or on the applicability of laws and regulations to the Company’s existing businesses. These or other factors may cause any past or future acquisitions of financial services companies not to result in the benefits to the Company anticipated when the acquisition was agreed. Past or future acquisitions may also subject the Company to non-monetary consequences that may or may not have been anticipated or fully mitigated at the time of the acquisition.
The recent BlueMountain Acquisition may negatively impact the Company's relationships with its investors, regulators, rating agencies, employees or obligors it insures, or Assured Investment Management's business or its relationships with its clients and employees.
The BlueMountain Acquisition represents a significant step in the Company's development of its asset management business and involves a significant investment by the Company. The Company discussed the BlueMountain Acquisition with its relevant regulators and with the rating agencies prior to closing and does not believe that the BlueMountain Acquisition has had a negative impact on its relationship with those regulators or the rating agencies. There can be no assurance, however, that the BlueMountain Acquisition will not in the future negatively impact the Company's relationships with its investors, regulators, rating agencies, employees or obligors it insures or its business or results of operations.
Assured Investment Management's ability to generate new business and to retain current clients is dependent on the performance of its clients' investments as well as its relationship with its clients. There can be no assurance that the BlueMountain Acquisition will not negatively impact Assured Investment Management's relationship with any investor or potential investor. Any such negative impact could prevent the Company from realizing the benefits it expects from the BlueMountain Acquisition.
Assured Investment Management may present risks that could have a negative effect on the Company's business, results of operations or financial condition.
The expansion of the Company’s asset management business line, which the Company believes is in line with its risk profile and benefits from its core competencies, may present new risks that could have a negative effect on the Company's business, results of operations or financial condition.
Now that the Company has established Assured Investment Management, the Company’s business, results of operations and financial condition may be impacted by some of the risks faced by asset managers. Asset management services are primarily a fee-based business, and the Company's asset management and performance fees are based on the amount of its AUM as well as the performance of those assets. Volatility or declines in the markets in which the Company invests as an asset manager, or poor performance of its investments, may negatively affect its AUM and its asset management and performance fees and may deter future investment in the Company’s asset management products. The Company’s asset management business is also subject to legal, regulatory, compliance, accounting, valuation and political risks that differ from those involved in the Company’s business of providing credit protection products. In addition, the asset management business is an intensely competitive business, creating new competitive risks.
Alternative investments may not resultresulting in the benefits anticipated.
From time to time, and in order to deploy a portion of the Company's excess capital, the Company may invest in alternative•Alternative investments that are in line with its risk profile and benefit from its core competencies, and the Company has chosen to use the knowledge base gained in the BlueMountain Acquisition to increase the amount of the excess capital it invests in alternative assets. Alternative assets may be riskier than many of the other investments the Company makes, and may not resultresulting in the benefits anticipated at the time of the investment. In addition, although the Company uses what it believes to be excess capital to make alternative investments, measures of required capital can fluctuate and such investments may not be given much, or any, value under the various rating agency, regulatory and internal capital models to which the Company is subject. Also, alternative investments may be less liquid than most of the Company's other investments and so may be difficult to convert to cash or investments that do receive credit under the capital models to which the Company is subject. See “Operational Risks - The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”anticipated.
The financial strength and financial enhancement ratings assigned by S&P, Moody’s, KBRA and Best to each of the Company's insurance and reinsurance subsidiaries represent such rating agencies' opinions of the insurer's financial strength and ability to meet ongoing obligations to policyholders and cedants in accordance with the terms of the financial guaranties it has issued or the reinsurance agreements it has executed. Issuers, investors, underwriters, ceding companies and others consider the Company's financial strength or financial enhancement ratings an important factor when deciding whether or not to utilize a financial guaranty or purchase reinsurance from one of the Company'sCompany’s insurance or reinsurance subsidiaries. A downgrade by a rating agency of the financial strength or financial enhancement ratings of one or more of the Company's insurance subsidiaries could impair the Company's financial condition, results of operation, liquidity, business prospects or other aspects of the Company's business. The ratings assigned by the rating agencies to the Company's insurance subsidiaries are subject to review and may be lowered by a rating agency at any time and without notice to the Company.
The rating agencies have evaluated the Company’s insurance subsidiaries under a variety of scenarios and assumptions, and have changed their methodologies and criteria from time to time. Factors influencing the rating agencies are beyond management's control and not always known to the Company. In the event of an actual or perceived deterioration in creditworthiness of large risks in the Company’s insurance portfolio, or a change in a rating agency's capital model or rating methodology, a rating agency may require the Company to increase the amount of capital it holds to maintain its financial strength ratings under the rating agencies' capital adequacy models, which may require the Company to seek additional capital, or a rating agency may identify an issue that additional capital would not address. The amount of such capital required may be substantial, and may not be available to the Company on favorable terms and conditions or at all. The failure to raise additional required capital, or successfully address another issue or issues raised by a rating agency, could result in a downgrade of the ratings of the Company’s insurance subsidiaries and thus have an adverse impact on its business, results of operations and financial condition.
The Company periodically assesses the value of each rating assigned to each of its subsidiaries, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its subsidiaries. Rating agencies may choose not to honor the Company’s request, and continue to rate a subsidiary after the Company’s request to drop the rating, as Moody’s did with respect to AGC.
The insurance subsidiaries' financial strength ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of one or more of the Company's insurance subsidiaries were reduced below current levels, the Company expects that would reduce the number of transactions that would benefit from the Company's insurance; consequently, a downgrade by rating agencies could harm the Company's new business production, results of operations and financial condition.
In addition, a downgrade may have a negative impact on the Company’s insurance subsidiaries in respect of transactions that they have insured or reinsurance that they have assumed. For example, under interest rate swaps insured by AGM, downgrades past specified rating levels could entitle the municipal obligor's swap counterparty to terminate the swap; if the municipal obligor owed a termination payment as a result and were unable to make such payment, AGM may receive a claim if its financial guaranty guaranteed such termination payment. In certain other transactions, beneficiaries of financial guaranties issued by the Company's insurance subsidiaries may have the right to cancel the credit protection provided by them, which would result in the loss of future premium earnings and the reversal of any fair value gains recorded by the Company. In
addition, a downgrade of AG Re, AGC or AGRO could result in certain ceding companies recapturing business that they had ceded to these reinsurers.
The Company's financial position, results of operations and cash flows may be adversely affected by fluctuations•Fluctuations in foreign exchange rates.
The Company does not engage in active management, or hedging, of its foreign exchange rate risk. Therefore, fluctuation in exchange rates between the U.S. dollar and the British pound sterling or the EU euro could adversely impact the Company's financial position, results of operations and cash flows. See Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Sensitivity to Foreign Exchange Risk.
The Company may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the U.K.’s FCA announced that after 2021 it would no longer compel banks to submit the rates required to calculate 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 impactloss 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) committed capital securities (CCS) from which the Company benefits that also pay interest tied to LIBOR. See Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Long-Term Debt and Credit Facilities.
The Company has reviewed its insured portfolio to identify insured transactions that it believes may be vulnerable to the transition from LIBOR, as well as relevant language in the documents relating to the debt issued by the Company and the CCS that benefit the Company. See Part II, Item 7, Management's Discussion and Analysis, Executive Summary “-- Other Events -- LIBOR Sunset”. Under their current documents, 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. 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 transition from LIBOR, if it occurs, on every obligor and obligation the Company enhances or on its own debt issuances.
The Company's international operations expose it to less predictable political, credit and legal risks.
The Company pursues new business opportunities in international markets. The underwriting of obligations of an issuer in a foreign country involves the same process as that for a domestic issuer, but additional risks must be addressed, such as the evaluation of foreign currency exchange rates, foreign business and legal issues, and the economic and political environment of the foreign country or countries in which an issuer does business. Changes in such factors could impede the Company's ability to insure, or increase the risk of loss from insuring, obligations in the countries in which it currently does business and limit its ability to pursue business opportunities in other countries.
The Company is dependent onCompany’s key executives and the loss of any of these executives or its inability to retain other key personnel, could adversely affect its business.personnel.
The Company's success substantially depends upon its ability to attract and retain qualified employees and upon the ability of its senior management and other key employees to implement its business strategy. The Company believes there are only a limited number of available qualified executives in the insurance business lines in which the Company competes, and that there is strong competition for qualified asset management executives. The Company relies substantially upon the services of Dominic J. Frederico, President and Chief Executive Officer, and other executives. Although the Company has designed its executive compensation with the goal of retaining and creating incentives for its executive officers, the Company may not be successful in retaining their services. The loss of the services of any of these individuals or other key members of the Company's management team could adversely affect the implementation of its business strategy.
The Company’s success in asset management will depend in part upon the ability of the Company to attract, motivate and retain key management personnel and other key employees, including key investment professionals. Uncertainties associated with the integration of BlueMountain may result in the departure of management personnel and other key employees, including key investment professionals, at the Company, and the Company may have difficulty attracting and motivating management personnel and other key employees, including key investment professionals, to the same extent it did prior to the BlueMountain Acquisition.
The Company is dependent on its information technology and that of certain third parties, and a•A cyberattack, security breach or failure in such systems could adversely affect the Company’s business.
The Company relies uponor a vendor's information technology and systems, including technology and systems provided bysystem, or interfacing with thosea data privacy breach of third parties, to support a variety of its business processes and activities. In addition, the Company has collected and stored confidential information including personally identifiable information in connection with certain loss mitigation and due diligence activities related to its structured finance and asset management businesses, along with information regarding employees and directors and asset management clients, among others. Information technology security threats and events are reportedly increasing in frequency and sophistication. While the Company does not believe that the financial guaranty insurance or alternative asset management industries are as inherently prone to cyberattacks as industries relating to, for example, payment card processing, banking, retail investment advisors, critical infrastructure or defense contracting, the Company’s data systems and those of third parties on which it relies are still vulnerable to security breaches due to cyberattacks, viruses, malware, ransomware, hackers and other external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct. Problems in or security breaches of these systems could, for example, result in lost business, reputational harm, the disclosure or misuse of confidential or proprietary information, incorrect reporting, legal costs and regulatory penalties, including under the EU's General Data Protection Regulation, the California Consumer Privacy Act and similar laws and regulations.
The Company’s business operations rely on the continuous availability of its computer systems as well as those of certain third parties. In addition to disruptions caused by cyberattacks or other data breaches, such systems may be adversely affected by natural and man-made catastrophes. The Company’s failure to maintain business continuity in the wake of such events, particularly if there were an interruption for an extended period, could prevent the timely completion of critical processes across its operations, including, for example, claims processing, treasury and investment operations and payroll. These failures could result in additional costs, loss of business, fines and litigation.
The Company and its subsidiaries are subject to numerous laws and regulations of a number of jurisdictions regarding its information systems, particularly with regard to personally identifiable information. The Company's failure to comply with these requirements, even absent a security breach, could result in penalties, reputational harm or difficulty in obtaining desired consents from regulatory authorities.
The Board oversees the risk management process, including cybersecurity risks, and engages with management on risk management issues, including cybersecurity issues. The Audit Committee of the Board of Directors has specific responsibility for overseeingvendor’s information technology matters, including cybersecurity risk, and the Risk Oversight Committee of the Board of Directors addresses cybersecurity matters as part of its enterprise risk management responsibilities.system.
The Company uses models for numerous purposes in its business. For example, it uses models to project future cash flows associated with pricing models, calculating reserves, evaluating risks in its insurance and investment portfolios, valuing assets and projecting liquidity needs. It also uses models to determine and project capital requirements under its own risk model as
well as under regulatory and rating agency requirements. While the Company has a model validation function and has adopted procedures to protect its models, the models may not operate properly (including as a result of errors or damage) and may rely on assumptions that are inherently uncertain and in hindsight are incorrect.
Claim payments reduce the Company's invested assets and•A sudden need to raise additional capital as a result in reduced liquidity and net investment income, even if the Company is reimbursed in full over time and does not experience ultimate loss on a particular policy. In the years after the financial crisis in 2008, many of the claims paid by the Company were with respectinsurance losses, whether related to insured U.S. RMBS securities. More recently, there has been credit deterioration with respect to certain insured Puerto Rico exposures, and the Company has been paying material claims with respector otherwise, or as a result of changes in regulatory or rating agency capital requirements applicable to its insurance companies, at a number of those exposures since 2016. The Company had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.3 billion and $4.8 billion, respectively, as of December 31, 2019 and December 31, 2018, all of which was rated BIG under the Company’s rating methodology. For a discussion of the Company's Puerto Rico risks, see Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Outstanding Insurance Exposure.
The Company plans for future claim payments. If the amount of future claim payments is significantly more than that projected by the Company, the Company's ability to make other claim payments and its financial condition, financial strength ratings and business prospects could be adversely affected.
The Company may requiretime when additional capital from time to time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on unfavorable terms.
The Company's capital requirements depend on many factors, primarily•Large insurance losses, whether related to its in-force book of business and rating agency capital requirements. Failure to raise additional capital if and as needed may result in the Company being unable to write new business and may result in the ratings of the Company and its subsidiaries being downgraded by onePuerto Rico or more rating agency. The Company's access to external sources of financing, as well as the cost of such financing, is dependent on various factors, including the market supply of such financing, the Company's long-term debt ratings and insurance financial strength ratings and the perceptions of its financial strength and the financial strength of its insurance subsidiaries. The Company's debt ratings are in turn influenced by numerous factors, such as financial leverage, balance sheet strength, capital structure and earnings trends. If the Company's need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for the Company to raise the necessary capital.
Future capital raises for equity or equity-linked securities could also result in dilution to the Company's shareholders. In addition, some securities that the Company could issue, such as preferred stock or securities issued by the Company's operating subsidiaries, may have rights, preferences and privileges that are senior to those of its common shares.
Financial guaranty insurers and reinsurers typically rely on providers of lines of credit, excess of loss reinsurance facilities and similar capital support mechanisms (often referred to as "soft capital") to supplement their existing capital base, or "hard capital." The ratings of soft capital providers directly affect the level of capital credit which the rating agencies give the Company when evaluating its financial strength. The Company currently maintains soft capital facilities with providers having ratings adequate to provide the Company's desired capital credit. For example, the Company cedes modest amounts of insurance to certain third-party reinsurers. See Part II, Item 8, Financial Statements and Supplementary Data, Note 8, Reinsurance. In addition, the Company benefits from $400 million of CCS. See Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Long-Term Debt and Credit Facilities. No assurance can be given that one or more of the rating agencies will not downgrade or withdraw the applicable ratings of the Company's reinsurers in the future. Furthermore, the rating agencies may in the future change their methodology and no longer give credit for soft capital, which may necessitate the Company having to raise additional capital in order to maintain its ratings.
An increase inotherwise, substantially increasing the Company’s insurance subsidiaries'subsidiaries’ leverage ratio may preventratios, and preventing them from writing new insurance.
Insurance regulatory authorities impose capital requirements on the•The Company’s insurance subsidiaries. These capital requirements, which include leverage ratios and surplus requirements, may limit the amount of insurance that the subsidiaries may write. The insurance subsidiaries have several alternatives available to control their leverage ratios, including obtaining capital contributions from affiliates, purchasing reinsurance or entering into other loss mitigation agreements, or reducing the amount of new business written. However, a material reduction in the statutory capital and surplus of an insurance subsidiary, whether resulting from underwriting or investment losses, a change in regulatory capital requirements or another event, or a disproportionate increase in the amount of risk in force, could increase a subsidiary's leverage ratio. This in turn could require that subsidiary to obtain reinsurance for existing business (which may not be available, or may be available on terms that the
Company considers unfavorable), or add to its capital base to maintain its financial strength ratings. Failure to maintain regulatory capital levels could limit that subsidiary's ability to write new business.
The Company's holding companies' ability to meet their obligations may be constrained.
Each of AGL, AGUS and AGMH is a holding company and, as such, has no direct operations of its own. None of the holding companies expects to have any significant operations or assets other than its ownership of the shares of its subsidiaries. The Company expects that dividends from the insurance companies will be the primary source of funds for AGL, AGUS and AGMH while it is building its asset management business.
The insurance subsidiaries’ ability to pay dividends and make other payments depends, among other things, upon their financial condition, results of operations, cash requirements, 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. Restrictions applicable to AGM, AGC and MAC, and to AG Re and AGRO, are described under the sections of Item 1. Business "-- Regulation, United States, State Dividend Limitations" and "-- Regulation, Bermuda, Restrictions on Dividends and Distributions." Such dividends and permitted payments are currently expected to be the primary source of funds for the holding companies to meet ongoing cash requirements, including operating expenses, any future debt service payments and other expenses, and to pay dividends to their respective shareholders. Accordingly, if the insurance subsidiaries cannot pay sufficient dividends or make other permitted payments at the times or in the amounts that are required, that would have an adverse effect on the ability of AGL, AGUS and AGMH to satisfy their ongoing cash requirements and on their ability to pay dividends to shareholders.
If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.
Each of AGL, AGUS and AGMH requires liquidity, either in the form of cash or in the ability to easily sell investment assets for cash, in order to meet its payment obligations, including, without limitation, its operating expenses, interest on debt and dividends on common shares, and to make capital investments in operating subsidiaries. The Company's operating subsidiaries require substantial liquidity in order to meet their respective payment and/or collateral posting obligations, including under financial guaranty insurance policies or reinsurance agreements. They also require liquidity to pay operating expenses, reinsurance premiums, dividends to AGUS or AGMH for debt service and dividends to AGL, as well as, where appropriate, to make capital investments in their own subsidiaries. In addition, the Company may require substantial liquidity to fund any future acquisitions. The Company cannot give any assurance that the liquidity of AGL and its subsidiaries will not be adversely affected by adverse market conditions, changes in insurance regulatory law or changes in general economic conditions.
AGL anticipates that its liquidity needs will be met by the ability of its operating subsidiaries to pay dividends or to make other payments; external financings; investment income from its invested assets; and current cash and short-term investments. The Company expects that its subsidiaries' need for liquidity will be met by the operating cash flows of such subsidiaries; external financings; investment income from their invested assets; and proceeds derived from the sale of their investment portfolios, significant portions of which are in the form of cash or short-term investments. All of these sources of liquidity are subject to market, regulatory or other factors that may impact the Company's liquidity position at any time. As discussed above, AGL's insurance subsidiaries are subject to regulatory and rating agency restrictions limiting their ability to declare and to pay dividends and make other payments to AGL. As further noted above, external financing may or may not be available to AGL or its subsidiaries in the future on satisfactory terms.
In addition, investment income at AGL and its subsidiaries may fluctuate based on interest rates, defaults by the issuers of the securities AGL or its subsidiaries hold in their respective investment portfolios, the performance of alternative investments, or other factors that the Company does not control. Also, the value of the Company's investments may be adversely affected by changes in interest rates, credit risk and capital market conditions and therefore may adversely affect the Company's potential ability to sell investments quickly and the price which the Company might receive for those investments. Part of the Company’s investment strategy is to invest more of its excess capital in alternative investments, which may be particularly difficult to sell at adequate prices or at all.
Each 10% U.S. shareholder ofIf AGL and/or a non-U.S. corporationsubsidiary is considered a CFC, a U.S. Person that is a CFC at any time during a taxable year that ownstreated as owning 10% or more of AGL’s shares in the non-U.S. corporation directly or indirectly through non-U.S. entities on the last day of the non-U.S. corporation's taxable year on which it is a CFC mustmay be required to include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart Fcertain income" of AGL and its non-U.S. subsidiaries for a taxable year, even if the subpart Fsuch income is not distributed. In addition, upon a sale of shares of a CFC, 10% U.S. shareholdersdistributed and may be subject to U.S. federal income tax on a portion of theirany gain upon a sale or other disposition of its shares at ordinary income tax rates.
The Company believes that because of the dispersion of the share ownership in AGL, no U.S. Person who owns AGL's shares directly or indirectly through non-U.S. entities should be treated as a 10% U.S. shareholder of AGL or of any of its non-U.S. subsidiaries. However, AGL’s shares may not be as widely dispersed as the Company believes due to, for example, the application of certain ownership attribution rules, and noNo assurance may be given that a U.S. Person who owns the Company'sCompany’s shares will not be characterized as aowning 10% U.S. shareholder,or more of AGL and/or its non-U.S. subsidiaries under the CFC rules, in which case such U.S. Person may be subject to taxation under U.S. CFCsuch rules. See Item 1. Business — Tax Matters, — Taxation of Shareholders ─ United States Taxation ─ Classification of AGL or its Non-U.S. Subsidiaries as a CFC.
the Company is 25% or more owned directly, indirectly through non-U.S. entities or by attribution by U.S. Persons;
the gross RPII of AG Re or any other AGL non-U.S. subsidiary engaged in the insurance business that has not made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. tax purposes or are CFCs owned directly or indirectly by AGUS (each, with AG Re, a Foreign Insurance Subsidiary) equals or exceeds 20% of such Foreign Insurance Subsidiary's gross insurance income in any taxable year;distributed and
direct or indirect insureds (and persons related to such insureds) own (or are treated as owning directly or indirectly through entities) 20% or more of the voting power or value of the Company's shares.
In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income.
The amount of RPII earned bysubject to U.S. federal income tax on a Foreign Insurance Subsidiary (generally, premium and related investment income from the direct or indirect insurance or reinsuranceportion of any directgain upon a sale or indirect U.S. holderother disposition of its shares or any person relatedat ordinary tax rates (even if an exception to such holder) will depend on a number of factors, including the geographic distribution of a Foreign Insurance Subsidiary's business and the identity of persons directly or indirectly insured or reinsured by a Foreign Insurance Subsidiary. RPII rules applies).
The meaningrules with respect to certain insurance income of the RPII provisions and the application thereof to AGL and its Foreign Insurance Subsidiaries is uncertain. The RPII rules in conjunction with section 1248 of the Code provide that if a Subsidiaries.
In the case of AGL's shares, theseCFC or RPII rules should not apply to dispositionsas unrelated business taxable income. See Item 1. Business — Tax Matters — Taxation of shares because AGL is not itself directly engaged in the insurance business. However, the RPII provisions have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form, what changes or clarifications might ultimately be made thereto, or whether any such changes, as well as any interpretation or application of the RPII rules by the IRS, the courts, or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII.Shareholders — United States Taxation — Tax-Exempt Shareholders.
In addition, the IRS recently issued the 2019 Proposed Regulations intended to clarify the application of the PFIC provisions to an insurance company and provide guidance on a range of issues relating to PFICs including the application of the look-through rule, the treatment of income and assets of certain U.S. insurance subsidiaries for purposes of the look-through rule and extension of the look-through rule to 25% or more owned partnerships. The 2019 Proposed Regulations define insurance liabilities for purposes of the Reserve Test, tighten the Reserve Test and the statutory cap on insurance liabilities, and provide guidance on the runoff-related and rating-related circumstances for purposes of the 10% test. The 2019 Proposed Regulations provide that a non-U.S. insurance company may only qualify for an exception to the PFIC rules if, among other things, the non-U.S. insurance company’s officers and employees perform its substantial managerial and operational activities (taking into account activities of officers and employees of certain related entities in certain cases). The 2019 Proposed Regulations also provide that an active conduct percentage test must be satisfied for the insurance company exception to apply, which test compares the expenses for services of officers and employees of the non-U.S. insurer and certain related entities incurred for the production of premium and certain investment income to all such expenses regardless of the service provider. The 2019 Proposed Regulations also introduce attribution rules that, taken together with other provisions of the regulations, could result in a U.S. person that directly owns any shares in a non-PFIC being treated as an indirect shareholder of a lower tier PFIC subject to the general PFIC rules described herein. This proposed regulation will not be effective unless and until adopted in final form. The Company cannot predict the likelihood of finalization of the proposed regulations or the scope, nature, or impact of the proposed regulations on it, should they be formally adopted or enacted or whether its Foreign Insurance subsidiaries will be able to satisfy the Reserve Test in future years, and the interaction of the PFIC look-through rules is not clear, no assurance may be given that the Company will not be characterized as a PFIC.
The Tax Act was passed by the U.S. Congress and was signed into law on December 22, 2017, with certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections and United States persons investing in such companies. For example, the Tax Act includes a BEAT that could make affiliate reinsurance between United States and non-U.S. members of the group economically unfeasible and a current tax on global intangible income that may result in an increase in U.S. corporate income tax imposed on U.S. group members with respect to certain earnings at their non-U.S. subsidiaries, and revises the rules applicable to PFICs and CFCs. Although the Company is currently unable to predict the ultimate impact of the Tax ActTCJA on its business, shareholders and results of operations, it is possible that the Tax ActTCJA may increase the U.S. federal income tax liability of the U.S. members of its group that cede risk to non-U.S. group members and may affect the timing and amount of U.S. federal income taxes imposed on certain U.S. shareholders. Furthermore, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company.
Assured Guaranty's financial results may be affected by measures taken in response to the OECD BEPS project.
A U.K. tax, the diverted profits tax (DPT), which is currently levied at 25%, came into effect (and due to increase to 31% from April 1, 2015, and, in substance, effectively anticipated some of the recommendations emerging from the BEPS Reports. This2023), is an anti-avoidance measure, aimed at protecting the U.K. tax base against the diversion of profits away from the U.K., tax charge. In particular, DPT may apply to profits generated by economic activities carried out in the U.K., that are not taxed in the U.K.
The fair value of a credit derivative will be affected by any event causing changes in the credit spread (i.e., the difference in interest rates between comparable securities having different credit risk) on an underlying security referenced in the credit derivative. Common events that may cause credit spreads on an underlying public finance or structured finance security referenced in a credit derivative to fluctuate include changes in the state of national or regional economic conditions, industry cyclicality, changes to a company's competitive position within an industry, management changes, changes in the ratings of the underlying security, movements in interest rates, default or failure to pay interest, or any other factor leading investors to revise expectations about the underlying issuer's ability to pay principal and interest on its debt obligations. Similarly, common events that may cause credit spreads on an underlying structured security referenced in a credit derivative to fluctuate may include the occurrence and severity of collateral defaults, changes in demographic trends and their impact on the levels of credit enhancement, rating changes, changes in interest rates or prepayment speeds, or any other factor leading investors to revise expectations about the risk of the collateral or the ability of the servicer to collect payments on the underlying assets sufficient to pay principal and interest. 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. For discussion of the Company's fair value methodology for credit derivatives, see Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement.
Changes in the fair value of financial guaranty variable interest entities or the funds it both manages and invests in and certain CLOs it manages, or the Company’s decision to consolidate or deconsolidate one or more entities during a financial reporting period, may subject the Company’s assets and liabilities to volatility.The Company is required to consolidate VIEs with respect to which it has provided financial guaranties (FG VIE) if it concludes that it is the primary beneficiary of that FG VIE. The effects 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. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of FG VIEs and, accordingly, where the Company is obligated to absorb FG VIE losses or receive benefits that could potentially be significant to the FG VIE. The Company is deemed to be the control party for certain FG 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 FG VIE is not consolidated. If the Company is deemed no longer to have those protective rights, the FG VIE is deconsolidated. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14, Variable Interest Entities.
The Company is also required to consolidate VIEs with respect to funds which it both manages and invests in (AM VIE) and certain CLOs it manages (CLO VIE) if it concludes that it is the primary beneficiary of the VIE. The effects of consolidating AM VIEs and CLO VIEs includes (i) changes in fair value gains (losses) on consolidated investments’ assets and liabilities, (ii) the elimination of intercompany investments and debt between CLO VIEs and underlying CLOs, (iii) the elimination of investment balances related to the insurance subsidiaries’ purchase of AM VIEs, and (iv) the recording of noncontrolling interests representing the portion of such AM VIEs that are not owned by the Company’s insurance subsidiaries. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of AM VIEs and CLO VIEs, which is typically the management of their assets. The Company is deemed to be the control party
for certain VIEs under GAAP, typically when it both manages the investment vehicle or fund, and has a significant investment in such vehicle or fund. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14, Variable Interest Entities.
AGL'sAGL’s ability to pay dividends and fund share repurchases and other activities may be constrained by certain insurance regulatory requirements and restrictions.
Changes in applicable laws and regulations resulting from the withdrawal of the U.K. from the EU may adversely affect the Company.
The U.K. is withdrawing from the EU in a process commonly known as Brexit. See Item 1, Business, Regulation above. Given the lack of clarity on the ultimate post-Brexit relationship between U.K. and the EU, the Company cannot fully determine what, if any, impact Brexit may have on its operations, both inside and outside the U.K., or what impact Brexit may have on the economies of the markets the Company serves. The Company has established and obtained authorization for a new subsidiary in France, AGE SA, to facilitate its operations. The current intention of AGE UK, the Company’s U.K. subsidiary, is to transfer those of its existing policies that are affected by Brexit to AGE SA, in order for the new subsidiary to administer them. AGE SA is also able to originate new guarantee business in the EU.
AGL's common shares are equity securities and are junior to existing and future indebtedness.
As equity interests, AGL's common shares rank junior to indebtedness and to other non-equity claims on AGL and its assets available to satisfy claims on AGL, including claims in a bankruptcy or similar proceeding. For example, upon liquidation, holders of AGL debt securities and shares of preferred stock and creditors would receive distributions of AGL's available assets prior to the holders of AGL common shares. Similarly, creditors, including holders of debt securities, of AGL's subsidiaries, have priority on the assets of those subsidiaries. Future indebtedness may restrict payment of dividends on the common shares.
Additionally, unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the case of common shares, dividends are payable only when and if declared by AGL's Board or a duly authorized committee of the Board. Further, the common shares place no restrictions on its business or operations or on its ability to incur indebtedness or engage in any transactions, subject only to the voting rights available to stockholders generally.
AGL'sAGL’s Board may decline to approve or register a transfer of any common sharesshares: (1) if it appears to the Board, after taking into account the limitations on voting rights contained in AGL'sAGL’s Bye-Laws, that any adverse tax, regulatory or legal consequences to AGL, any of its subsidiaries or any of its shareholders may occur as a result of such transfer (other than such as the Board considers to be de minimis),; or (2) subject to any applicable requirements of or commitments to the NYSE, if a written opinion from counsel supporting the legality of the transaction under U.S. securities laws has not been provided or if any required governmental approvals have not been obtained.
AGL'sAGL’s Bye-Laws also provide that if the Board determines that share ownership by a person may result in adverse tax, legal or regulatory consequences to the Company, any of the subsidiaries or any of the shareholders (other than such as the Board considers to be de minimis), then AGL has the option, but not the obligation, to require that shareholder to sell to AGL or to third parties to whom AGL assigns the repurchase right for fair market value the minimum number of common shares held by such person which is necessary to eliminate such adverse tax, legal or regulatory consequences.
In •New York, City, the U.S. insurance subsidiaries lease office spaces consisting of :
Management believes its office space
Lawsuits ariseprovided in the ordinary course“Legal Proceedings” and “Litigation” sections 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 the AGL's insurance subsidiaries are in litigation with third parties to recover losses paid in prior periods or prevent losses in the future. For example, the Company has commenced a number of legal actions in the U.S. District Court for the District of Puerto Rico to enforce its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See the "Exposure to Puerto Rico" section of Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Outstanding Insurance Exposure, for a description of such actions. See also18, Commitments and Contingencies, the "Recovery Litigation"“Recovery Litigation” section of Part II, Item 8, Financial Statements and Supplementary Data, Note 6,4, Expected LossesLoss to be Paid for a description of recovery litigation unrelated to Puerto Rico. Also in the ordinary course of their respective business, certain of AGL's investment management subsidiaries(Recovered), and the funds managed“Puerto Rico Litigation” section of Note 3, Outstanding Exposure, and is incorporated by them are involved in litigation with third parties regarding fees, appraisals, or portfolio company investments. The amounts, if any, the Company will recover in these and other proceedings are uncertain, and recoveries, or failure to obtain recoveries, in 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 establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is disclosed, including matters discussed below. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
The Company receives subpoenas duces tecum and interrogatories from regulators from time to time.
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 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 nine 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 nine 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. A trial has been scheduled for March 2020.ITEM 4. MINE SAFETY DISCLOSURES
Howard W. AlbertDavid A. Buzen has been the Chief RiskInvestment Officer (CIO) and Head of AGLAsset Management of the Company’s U.S. Insurance Subsidiaries and Chief Executive Officer and CIO of AssuredIM since May 2011.August 2020. Previously, Mr. Buzen served as Deputy CIO of BlueMountain (now AssuredIM LLC). Prior to that, he was Chief Credit Officer of AGL from 2004 to April 2011. Mr. Albert joined Assured Guaranty in September 1999 as Chief Underwriting Officer of Capital Re Company, the predecessor to AGC. Before joining Assured Guaranty, he was a Senior Vice President with Rothschild Inc. from February 1997 to August 1999. Prior to that, he spent eight years at Financial Guaranty Insurance Company from May 1989 to February 1997,Managing Director, Alternative Investments, where he was responsible for underwriting guarantiesleading the Company’s efforts to enter the asset management business. Mr. Buzen joined Assured Guaranty in 2016 after the acquisition of asset-backed securitiesCIFG Holding Inc., where he was President and international infrastructure transactions.CEO. Prior to his years at CIFG, Mr. Buzen was Chief Financial Officer of Churchill Financial, a commercial finance and asset management company after heading DEPFA Bank’s municipal reinvestment and U.S. financial guarantee businesses. Earlier, he served as Chief Operating Officer of ACE Financial Solutions, an operating division of ACE Limited. Before that, he was employed by Prudential Capital, an investment arm of The Prudential Insurance Company of America, from September 1984 to April 1989, where he underwrote investments in asset-backed securities, corporate loans and project financings.
Laura Bieling has been the Chief Accounting Officer and Controller of AGL since May 2019 and the Controller of AGM and AGC since 2011. Ms. Bieling has been with AGM since 2000, and was the Chief Accounting Officer and Controller of AGMH from 2004 until July of 2009. Prior to joining AGM, Ms. Bieling was a Senior Manager at PricewaterhouseCoopers, LLP.
Russell B. Brewer II has been Chief SurveillanceFinancial Officer of AGL since November 2009Capital Re Corp., a company that was acquired by ACE Limited in 1999 and Chief Surveillance Officer of AGC and AGM since July 2009 and has also been responsible for information technology atwhich owned the company now known as Assured Guaranty since April 2015. Mr. Brewer has been with AGM since 1986. Mr. Brewer was Chief Risk Management Officer of AGM from September 2003Corp. until July 2009 and Chief Underwriting Officer of AGM from September 1990 until September 2003. Mr. Brewer was also a member ofAssured Guaranty’s 2004 IPO. He began his career in the Executive Management Committee of AGM. He was a Managing Director of AGMH from May 1999 until July 2009. From March 1989 to August 1990, Mr. Brewer was Managing Director, Asset Finance Group, of AGM. Prior to joining AGM, Mr. Brewer was an Associate Director of Moody's Investors Service, Inc.financial guaranty industry at Ambac Financial Group.
Andrew FeldsteinJorge A. Gana has been Chief Risk Officer of AGL and Chair of the Chief Investment OfficerU.S. Risk Management and Head of AssetPortfolio Risk Management Committees since January 1, 2023. Mr. Gana also maintains primary responsibility for the environmental aspect of Assured Guaranty’s ESG efforts. Prior to that, Mr. Gana served as Deputy Chief Risk Officer of AGM and AGC. Mr. Gana joined Assured Guaranty since October 2019.in 2005 as a Director in structured finance. Over the years, Mr. Feldstein co-founded BlueMountain, which the Company acquired in 2019,Gana has held a number of positions at Assured Guaranty, including Managing Director, Structured Finance at AGC, Senior Managing Director of Workouts and Government & Corporate Affairs at AGM and AGC, and chair of AGM's and AGC's Workout Committees. Mr. Gana continues to serve as its Chief Executive Officera voting member of AGM's and Chief Investment Officer.AGC's Credit and Workout Committees. Prior to co-founding BlueMountainjoining Assured Guaranty, Mr. Gana served as a Director of Global Commercial Asset Securitization for XLCA (now Syncora). Prior to XLCA, Mr. Gana worked at Natexis Banques Populaires (now Natixis) and at Banco Santander in global capacities dealing with credit and risk, managing investment portfolios, originating complex transactions, and issuing repackaged debt. Mr. Gana also worked for the Chile Economic Development Agency, New York Office, and as Editor of the Chile Economic Report until 1996.
AGL'sITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following selected financial data should be read together with the other information contained in this Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Form 10-K. Certain prior year balances have been reclassified to conform to the current year's presentation.
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Executive Summary
Beginning in fourth quarter 2019, after the acquisition
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.
Fees in respect of investment advisory services are the largest components of revenues for the Asset Management segment. Assured Investment Management is compensated for its investment advisory services generally through management fees which are based on AUM. In addition, with respect to CLOs and certain hedge and opportunity funds, Assured Investment Management may receive performance fees if certain thresholds are met.
The Company reviews its segment results before giving effect to Other activities include the consolidation of VIEs. The effect of consolidating FG VIEs as well as intersegment eliminations and certain reclassification are presented separately in the Company's reconciliationsCIVs (FG VIE and CIV consolidation). See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of segment results to GAAPPresentation, and non-GAAP measures.Note 2, Segment Information.
As Real gross domestic product (GDP) increased 2.1% in 2022, compared to an increase of 5.9% in 2021, according to the second estimate released by the U.S. Bureau of Economic Analysis (BEA). Additionally, the BEA second estimate reported real GDP increased at an annual rate of 2.7% in the fourth quarter of 2022. At the end of December 2022, the U.S. unemployment rate, seasonally adjusted, stood at 3.5%, lower than where it started the year at 3.9%, and down from the COVID-19 pandemic high of 14.7% in April 2020. The Company believes a financial guaranty insurer and asset manager, the Company is affected by numerous factors, including themore robust economy and the condition of financial markets. Interest rates, credit spreads, fluctuations in equity, credit and foreign exchange markets, which may be volatile, can significantly affect the ability of the Company to write new insurance business and attract third-party assets for its asset management business. Such factors can also affect the Company's expected losses in its Insurance segment, valuation of its investments and the investments of the fundsmakes it manages. less likely that obligors whose obligations it guarantees will default.
The U.S. experienced sustained positive economic momentum in 2019. According to the U.S. Bureau of Labor Statistics, (BLS)the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending December 2022, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 6.5%, as compared to 8.2% for the unemployment12-month period ending September 2022. According to the U.K.’s Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose 9.2% in the 12 months to December 2022, up from 8.8% in September 2022. The CPIH 12-month rate beganstarted the year at 3.9%4.8%. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $19.8 billion of net par outstanding as of December 31, 2022, and endedalso increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally.
As reported byhome prices declining across the U.S. Census Bureau, with the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reporting a seasonally adjusted month-over-month decrease of 0.3%, and the U.S. Department10-City and 20-City Composites both posting decreases of Housing0.5%. The National Association of Realtors reported existing-home sales in 2022 declined 17.8% from 2021 as 2022’s rapidly escalating interest rate environment weighed on the residential real estate market. Higher interest rates may also reduce the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, dampen municipal bond issuance and Urban Development, new home sales were up 23% on a year-over-year basis. The median sale pricenegatively impact the finances of new homes soldsome of the obligors whose payments the Company insures.
In 2019, municipal interest rates reached new lows and credit spreads tightened further.debt. The 30-year AAA Municipal Market Data (MMD) rate started the year off at 3.02% and ended the year at 2.09%. Credit spreads tightened during the year as the spread between "A" and "AAA" 30-year general obligation fell from 51 basis points (bps) to start the year to as low as 35 bps on July 24th. It remained near that relatively narrow level through the endcarrying value of the year. This is compareddebt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.
When interest rates are low,this or when the market is relatively less risk averse, the credit spread between high-quality or insured obligations versus lower-rated or uninsured obligations typically narrows. As a result, financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively wider credit spreads. Issuers are less likely to use financial guaranties on their new issues when credit spreads are narrow, which results in decreased demand or premiums obtainable for financial guaranty insurance, and a resulting reductionother Company debt in the Company's results of operations.future. See “Key Business Strategies” below for market volume“— Liquidity and penetration.
US equity markets were largely negative for 2018 due to equities dropping sharply in the fourth quarter of 2018, but experienced a very strong 2019. The Dow Jones Industrial Average, Nasdaq Composite IndexCapital Resources — AGL and the S&P 500 Index all finished markedly higher for the full year.
During 2019, theits U.S. dollar remained stable against other currencies on a trade-weighted basis according to data from the Federal Reserve Bank of St. Louis. The Company believes this was the result of the Federal Reserve shifting its monetary policy path to a more accommodating one, bringing it more in line with other key central banks (e.g.Holding Companies”, Bank of Japan, the Bank of England and the European Central Bank). See Item 8, Financial Statements and Supplementary Data, Note 7, Contracts Accounted for as Insurance12, Long-Term Debt and Note 10, Investments and Cash, for gains/losses on foreign exchange rate changes on the consolidated statements of operations.Credit Facilities.
Executive SummaryFinancial Performance of Assured Guaranty
Financial results include the results of BlueMountain after the date of acquisition on October 1, 2019.
Financial Results
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SeveralThe primary drivers of volatility in the Company’s 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 CCS,include: changes in fair value of credit derivatives, related toFG VIEs, CIVs, and CCS, as well as loss and LAE, foreign exchange gains (losses), 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 claims and recoveries, the amount and timinglevel of the refunding and/or terminationrefundings of insured obligations, realized gains and losses on the investment portfolio (including other-than-temporary impairments (OTTI)), changes in foreign exchange rates,the value of the Company’s alternative investments, the effects of any large settlements, commutations acquisitions, the effects of the Company's variousand loss mitigation strategies, and changesamong other factors. Changes in the fair value of investments in Assured Investment Management funds. In the Asset Management segment, changes in the fair valueAssuredIM Funds and amount of Assured Investment Management fundsAUM 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.
Consolidated Results
Year EndedAdding distributed gains from inception through December 31, 2019 Compared with Year Ended2022 to the original $750 million allocation, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through their jointly owned investment subsidiary, AGAS. As of December 31, 20182022, AGAS had committed $755 million to AssuredIM Funds, including $219 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, healthcare structured capital, and asset-based finance.
Net income attributableUnder the IMA with AssuredIM, AGM and AGC have together invested $250 million in municipal obligation strategies and $300 million to AGL for 2019 was lower compared 2018 primarily due to:
fair value losses on credit derivatives and CCS in 2019 compared with gains in 2018,
lower earned premiumsCLO strategies. All of these strategies are consistent with the scheduled decline net par outstanding, as well as lower accelerations for refundingsinvestment strengths of AssuredIM and terminations,the Company’s plans to continue to grow its investment strategies.
higher compensation and other operating expenses attributable to the BlueMountain Acquisition and its related fourth quarter 2019 expenses, andCapital Management
higher loss and loss adjustment expenses in 2019.
These decreases were offset in part by foreign exchange gains in 2019 compared with losses in 2018, realized gains on investment portfolio in 2019 compared with losses in 2018, higher gains on FG VIEs in 2019, and asset management fees from BlueMountain for fourth quarter 2019.
Shareholders' equity attributable to AGL increased since December 31, 2018 primarily due to net income and unrealized gains on available for sale investment securities, offset in part by share repurchases and dividends. Adjusted operating shareholders' equity decreased in 2019primarily due to share repurchases and dividends, partially offset by positive adjusted operating income. Adjusted book value increased slightly in 2019 primarily due to new business development, partially offset by share repurchases and dividends.
Shareholders' equity attributable to AGL per share, adjusted operating shareholders' equity per share and adjusted book value per share all increased in 2019 to $71.18, $66.96 and $96.86, respectively, which benefited fromBoard authorized the repurchase of an additional 11.2$350 million sharesand $250 million, respectively, of its common shares. As of February 28, 2023, the Company was authorized to purchase $201 million of its common shares. Shares may be repurchased from time to time in 2019.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. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See “Accretive EffectItem 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity, for additional information about the Company’s repurchases of Cumulative Repurchases” table below.its common shares.
Year EndedSummary of Share Repurchases
Key Business StrategiesAsset Management
InsuranceAsset Management and Alternative InvestmentsCapital Management
Insurance
The Company seeks to grow the insurance business through new business production, acquisitionsgoal 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 ofmaximizing the value of bond insurance and stimulated demandthis business for the product.its stakeholders. The Company believesremains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will be continued demandresult in any transaction. Please see Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in the benefits anticipated.”
encourages retail investors, whoAsset Management Strategies
enables institutional investors
allows smaller, less well-known issuers
In certain segmentsexposures, the Company also will undertake an independent analysis and remodeling of the global infrastructureexposure. The Company’s surveillance personnel also take steps to ensure that the ceding insurer is managing the risk pursuant to the terms of the applicable reinsurance agreement.
Assumption of Insured Portfolio. On June 1, 2018, the Company closedhad a transaction with Syncora Guarantee Inc. (SGI) (SGI Transaction) under which AGC assumed, generally on a 100% quota share basis, substantially all of SGI’s insured portfolio and AGM reassumed a book of business previously ceded to SGI by AGM. The net parcarrying value of exposures reinsured and commuted as of June 1, 2018 totaled approximately $12 billion. The SGI Transaction reduced shareholders' equity by $0.16 per share, due to a commutation loss on the reassumed bookDecember 31, 2022, of business,$157 million for goodwill and increased adjusted book value by $2.25 per share. Additionally, beginning on June 1, 2018, on behalf of SGI, AGC began providing certain administrative services on the assumed portfolio, including surveillance, risk management, and claims processing.
Acquisitions: On January 10, 2017, AGC completed its acquisition of MBIA UK, which added a total of $12 billion in net par. At acquisition, MBIA UK contributed shareholders' equity of $84 million and adjusted book value of $322 million.
Commutations. The Company entered into various commutation agreements to reassume previously ceded business in 2019, 2018 and 2017 that resulted in gains of $1 million in 2019, losses of $16 million in 2018 and gains of $328 million in 2017. The commutations added net unearned premium reserve of $15 million in 2019 and $64 million in 2018. In the future, the Company may enter into new commutation agreements to reassume portions of its insured business ceded to other reinsurers, but such opportunities are expected to be limited given the small number of unaffiliated reinsurers currently reinsuring the Company.
U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)Based on Sale Date
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Loss MitigationIn 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 lossesintangible assets established in connection with the acquisition of BlueMountain (now known as AssuredIM LLC). External factors, such as the impact of the war in Ukraine or the COVID-19 pandemic on global financial markets, general macroeconomic factors, and industry conditions, as well as the financial performance of AssuredIM relative to the Company’s expectations at the time of acquisition, could impact the Company’s assessment of the goodwill and other intangible assets carrying value. The Company’s goodwill impairment assessment also is sensitive to the Company’s assumptions of discount rates, market multiples, projections of AUM growth and other factors, which may vary. A change in the Company’s assessment may, in the future, result in an impairment, which could adversely affect the Company’s financial condition, results of operations and share price.
In some instances,COVID-19 pandemic. Despite the termssignificant increase in MMD rate for 2022, the pace of credit spread widening was more modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat at 8.0% of the Company's policy givepar amount of new issuances sold for 2022 versus 8.2% in 2021. The Company believes that a widening of credit spreads in 2023, should it the optionoccur, could permit it to pay principalincrease its premium rates on an accelerated basis on an obligation on which it has paid a claim, thereby reducingnew business. In addition, over time, higher interest rates may also increase 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 insurancecan earn on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief.its largely fixed-maturity securities.
Assured Investment Management product types generally haveAdditionally, the following contractual duration profile:
CLO products are typically issuedCompany believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a quarterly basis when market conditions permit and generally have a stated maturity of 12-13 years with a potential reinvestment period. Once the reinvestment period expires, CLO noteholders will receive distributions through the maturityportion of the CLO, unless Assured Investment Managementinvestment portfolio and potentially increasing the noteholders agreeamount of dividends certain of its insurance subsidiaries are permitted to reset the period of the CLOs for an extended reinvestment period.
Opportunity funds invest in a mix of strategies that may have higher concentrations in illiquid strategies. Typically, opportunity funds have limited withdrawal or redemption rights, and instead offer contractual cashflow distributions based on the legal agreement of each respective opportunity fund.
In addition to CLOs and opportunity funds, Assured Investment Management also manages legacy hedge and opportunity funds now subject to an orderly wind-down.
Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased assets under management 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.
In recent years, theThe Company has developed strategies to efficiently manage capital within the Assured Guaranty group more efficiently.group.
Accretive EffectAs of Cumulative Repurchases (1)
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In March 2019, MAC received approval from the NYDFS to dividend to Municipal Assurance Holdings Inc. (MAC Holdings) a $100 million in 2019, an amount that exceeds the amount available to dividend without such approval in 2019 under applicable law. MAC distributed $100 million dividend to MAC Holdings during the second quarter of 2019.
In 2019, the MIA approved and AGC implemented the repurchase of $100 million of its shares of common stock from AGUS.shares since the beginning of 2013 was approximately: $37.11 per share in shareholders’ equity attributable to AGL, $42.91 per share in adjusted operating shareholders’ equity, and $76.76 per share in adjusted book value.
BrexitRussia’s Invasion of Ukraine
On June 23, 2016,Russia’s invasion of Ukraine has led to the imposition of economic sanctions by many western countries against Russia and certain Russian individuals, dislocation in global energy markets, massive refugee movements, and payment default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to reduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company cannot predict all of the potential effects of the conflict on the world or on the Company.
•Currency Impact. The Company reports its accounts in U.S. dollars, while some of its income, expenses, assets and liabilities are denominated in other currencies, primarily the pound sterling and the euro. During 2016, the year in which a majority in the U.K. voted for Brexit, the value of pound sterling dropped from £0.68 per dollar to £0.81 per dollar, while the euro dropped from €0.83 per dollar to €0.95 per dollar. For the year ended 2016 the Company recognized losses of approximately $21 million in the consolidated statement of operations, net of tax, and approximately $32 million in other comprehensive income (OCI), net of tax, for foreign currency translation, that were primarily driven by the exchange rate fluctuations of the pound sterling. Currency exchange rates may also move materially as the terms of Brexit become known, especially in the event of the U.K. and EU failing to agree the U.K.'s future relationship with the EU by the end of the transition period.
•U.K. Business. As of December 31, 2019, approximately $38.5 billion of the Company’s insured net par is to risks located in the U.K., and most of that exposure is to utilities, with much of the rest to hospital facilities, government accommodation, universities, toll roads and housing associations that the Company believes are not overly vulnerable to Brexit pressures. AGE UK is currently authorized by the PRA of the Bank of England with permissions sufficient to enable AGE UK to effect and carry out financial guaranty insurance and reinsurance in the U.K. Most of the new transactions insured by AGE UK since 2008 have been in the U.K.
•Business Elsewhere in the EU. As of December 31, 2019, approximately $7.0 billion of the Company’s insured net par is to risks located in EU and EEA countries. During the transition period under the withdrawal agreement, EU directives allow AGE UK to conduct business in those other remaining EU or EEA states based on its PRA permissions. This is sometimes called “passporting." The Company cannot determine whether U.K. authorized financial services firms such as AGE UK will continue to enjoy passporting rights to those other remaining EEA states after Brexit. As a consequence, Assured Guaranty has established a new subsidiary in Paris, France, AGE SA,appropriate in order to continue with the abilityattain a stance of monetary policy that is sufficiently restrictive to write new business, andreturn inflation to service existing business, in those other remaining EEA states. While2% over time.
•Employees. All of the employees working in AGE UK’s London office are either U.K. citizens or have U.K. resident status.
InIBA and FCA first announced in 2017 the United Kingdom’s FCA announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. This announcement indicates that the continuationpublication of LIBOR onwould cease at the current basis cannotend of 2021. Many legal documents entered into prior to that time did not include robust fallback language contemplating the permanent suspension of the publication of LIBOR. On March 5, 2021, IBA and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extentFCA confirmed a representative panel of banks will continue setting 1, 3, 6 and 12-month U.S. dollar LIBOR through June 2023, rather than December 31, 2021 as originally announced. The publication of all sterling LIBOR rates ceased on December 31, 2021, as originally announced. To address the permanent cessation of U.S. dollar LIBOR, the U.S. Congress enacted the Adjustable Interest Rate (LIBOR) Act (AIRLA) on March 15, 2022, to provide submissionsa federal solution for replacing references to U.S. dollar LIBOR in existing contracts that either lack, or contain insufficient, LIBOR fallback provisions. In accordance with AIRLA, the calculationBoard of LIBOR. While regulators have suggested substitute rates, includingGovernors of the Federal Reserve System adopted final rule 12. C.F.R. Part 253 “Regulation Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ)” (Rule 253), which identifies Secured Overnight FinancingFinance Rate (SOFR)-based benchmark rates that will replace U.S. dollar LIBOR in certain financial contracts after June 30, 2023. Rule 253 confirms that the impactAIRLA safe harbor provisions for LIBOR contracts that change over to SOFR, either by operation of law or the discontinuancechoice of LIBOR, if it occurs,a determining person, will be contract-specific. apply.
debt issuedOutstanding Debt Issued by AGMH and AGUS
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. 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.
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.CIVs. The Asset Management segment consists of the Company's Assured Investment Management subsidiaries, which provide asset management services to outside investors as well as to the Company's Insurance segment.
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, reclassifications, and consolidation adjustments, including the effect of consolidating FG VIEs and certain Assured Investment Management investment vehicles in which Insurance segment invests.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 following table summarizes adjusted operating income from the Company's business segment operations. See also Item 8, Financial Statements and Supplementary Data, Note 4, Segment Information.
Results of Operations by Segment
Insurance New Business Production
InsuranceGross Written Premiums andNew 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),contracts such 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 estimated future installments on new business at the time of issuance, discounted at 6% for all contracts whether in insurance or credit derivative form.Excluding amounts assumed in the SGI Transaction in 2018, GWP and PVP increased in 2019 compared with 2018. GWP was $677 million in 2019, compared with $282 million in 2018 (excluding the SGI Transaction), and PVP was $463 million in 2019 compared with $272 million in 2018 (excluding the SGI Transaction). 2019 GWP and PVP were the highest reported direct new business production since 2009.
In 2019, the Company generated non-U.S.public finance GWP of $417 million, representing PVP of $211 million, on $6.3 billion of investment-grade par with an average rating of A+. Excluding the SGI Transaction in 2018, GWP and PVP for non-U.S. public finance transactions was $65 million and $44 million, respectively. GWP and PVP in 2019 were driven primarily by:
privately executed, bilateral guarantees on a large number of European sub-sovereign credits,
additional premiums upon the conversion of several existing transactions from credit default swaps to financial guaranty insurance contracts,
several U.K financings for the construction of new student accommodations, and
debt refinancings, including a Spanish solar plant transaction, which was the first insured issuance in Spain since the 2008 financial crisis, and a previously insured regulated utility transaction.Global structured finance GWP and PVP was also higher in 2019 compared with 2018 (excluding the SGI Transaction), as the Company wrote insurance on more transactions and par in the collateralized loan obligation, life insurance reserve, and residual value reinsurance asset classes.
In 2019, Assured Guaranty once again guaranteed the majority of U.S. public finance insured par issued. 2019 U.S. public finance GWP of $198 million was consistent with 2018 GWP of $197 million, excluding the SGI Transaction. Similarly, PVP of $201 million in FY 2019 was consistent with PVP of $206 million in FY 2018, excluding the SGI Transaction.Infrastructure and structured finance transactions tend to have long lead times, causing production levels to vary significantly from period to period.
2018Assumed SGI Insured Portfolio
GWP and PVP for 2018 included the assumption of substantially all of the insured portfolio of SGI. On a GAAP basis, the SGI Transaction generated GWP of $330 million, plus $86 million in undiscounted expected future credit derivative revenue, including transactions with $131 million in expected losses (discounted at a risk-free rate on a GAAP basis). On a non-GAAP basis, PVP was $391 million, including transactions with expected losses of $83 million (discounted at 6% consistent with the PVP discount rate). See also Item 8, Financial Statements and Supplementary Data, Note 2, Business Combinations and Assumption of Insured Portfolio, for additional information. The components of new business production generated by the SGI Transaction are presented below.
Assumed SGI Insured PortfolioAs of June 1, 2018
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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 8, Financial Statements and Supplementary Data, Note 7, 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 is 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 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.
2019 compared with 2018:
2018 comparedNew Business Production
Credit derivative revenues have declined in 2019, 2018 and 2017 primarily due to the decline in the net par outstanding. The Company has not written new credit derivatives since 2009. Other than credit derivatives acquired in business combinations and reinsurance agreements, or as part of loss mitigation strategies, credit derivative exposure is expected to decline.
Net Investment Income from Investments
Company currently intends U.S. Insurance Subsidiaries are authorized to invest up to $500$750 million in Assured Investment Management funds, and asAssuredIM Funds. Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds. As of December 31, 20192022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested $79 million.Net Investment Incomecapital and $219 million was undrawn.
2019 compared with 2018:
2018 compared with 2017: Net investment income decreased compared with 2017Equity in earnings of AssuredIM Funds in 2022 was a loss primarily attributable to the dilutive impact of a subsequent close of a healthcare fund. Equity in earnings of other investments was a loss in 2022 primarily due to the accretion on the Zohar II 2005-1 notes prior to the MBIA UK Acquisition date in January 2017. The overall pre-tax book yield was 3.86% as of December 31, 2018 and 3.78% as of December 31, 2017, respectively. Excluding the internally managed portfolio, pre-tax book yield was 3.24% as of December 31, 2018 compared with 3.20% as of December 31, 2017.
Bargain Purchase Gain and Settlement of Pre-existing Relationships
In connection with the MBIA UK Acquisition in 2017, the Company recognized bargain purchase gain of $56 million and gain on settlements of pre-existing relationships of $2 million. See Item 8, Financial Statements and Supplementary Data, Note 2, Business Combinations and Assumption of Insured Portfolio, for additional information.
Commutation Gains (Losses)
In connection with the reassumption of previously ceded books of business, the Company recognized commutation gains of $1 million in 2019 and $328 million in 2017, respectively, and commutation losses of $16 million in 2018. Themark-to-market losses in 2018 related to the commutation component of the SGI Transaction.
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.
a private equity fund.
Other Income (Loss)
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•Note 11 for contracts accounted for as credit derivatives•Note 14 for FG VIEsliabilities.
The composition of economic loss development (benefit) by accounting model and by sector are presented in the tables that follow, and the drivers of economic loss development (benefit) are discussed below.
Byby Accounting Model
By Sector
Risk-Free Rates
2019 Net Economic Loss Development
The economic benefit of approximately $9 million on non-U.S. exposures during 2019 was mainly attributable to the improved internal outlook of certain Spanish sovereigns and sub-sovereigns.
Other Structured Finance: The economic loss development attributable to structured finance, excluding U.S. RMBS, was $18loans, a $27 million mainlybenefit related to LAE.loss mitigation activity, a $26 million benefit related to updates in projected default curves, and a $17 million benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider. These items were all partially offset by loss of $79 million related to lower excess spread.
20182021 Net Economic Loss Development
Public Finance: Public finance expected loss to be paid primarily related to U.S. exposure, which had BIG net par outstanding of $6.4 billion as of December 31, 2018 compared with $7.1 billion as of December 31, 2017. The Company projects that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2018 will be $832 million, compared with $1,157 million as of December 31, 2017. 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 December 31, 2018, that credit was $586 million compared with $385 million at December 31, 2017. Economic loss development on U.S. exposures in 2018 was $70 million, which was primarily attributable to Puerto Rico exposures, partially offset by the release of reserves on the Company's exposure to the City of Hartford following the State of Connecticut's (CT) agreement to pay the debt service costs of certain bonds of the City of Hartford, including those insured by the Company.
The economic benefit of approximately $14 million on non-U.S. exposures during 2018 was mainly attributable to a U.K. arterial road and changes in certain probability of default assumptions.
U.S. RMBS: The net benefit attributable to U.S. RMBS of $69 million was mainly related to improvement in the performance of second lien U.S. RMBS transactions. The net expected loss to be paid for U.S RMBS increased from 2017 to 2018 mainly due losses assumed in the SGI Transaction and the collection of a large R&W settlement in 2018.
Other Structured Finance: The economic loss development attributable to structured finance, excluding U.S. RMBS, was $8 million, related to progress on efforts to workout life insurance transactions and LAE.
2017 Net Economic Loss Development
Loss and LAE reported in Insurance segment adjusted operating income (i.e., adjusted loss and LAE)expense includes loss and LAE on financial guaranty insurance contracts (withoutand losses on credit derivatives without giving effect to eliminations related to the consolidation of FG VIEs), plus credit derivative losses.VIEs.
The amount of loss and LAE recognized in 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.
2019 was mainly driven by higher lossesrecognized for the remaining deferred premium revenue on certainthe extinguished Puerto Rico exposures, partially offset by improved recoveries in U.S. RMBS,
2018 was mainly driven by higher loss reserves on certain Puerto Rico exposures, partially offset by the reduction of loss reserves on the City of Hartford, CT, exposure and a benefit on structured finance exposures, and
2017 was mainly driven by higher loss reserves on certain Puerto Rico exposures, partially offset by a benefit from R&W settlements of $105 million, and a life insurance litigation settlement.
Compensation, Benefits, Other Operating Expenses
2019 compared with 2018:
Employee compensation
2018 compared with 2017: Employee compensation and benefit expenses increased in 2018 compared with 2017 primarily due to higher salary and bonus accruals and share-based compensation expenses, which were offset by higher deferred costs as a result of increased new business production. Other operating expenses and amortization of DAC decreased in 2018 compared with 2017 primarily due to lower acquisition related expenses (SGI Transaction in 2018 versus MBIA UK Acquisition in 2017) and amortization of DAC resulting from reduced premium earned for specific underwriting years.Capital Resources — Insurance Subsidiaries” section below.
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 closeattributable 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.healthcare and asset-based funds.
the net asset value of the opportunity and wind-down funds plus any unfunded commitments;
CLOs AUM includes $536 million of CLO equityEquity that is held by various Assured Investment Management funds.AssuredIM Funds. This CLO equityEquity corresponds to the majority of the non-fee earning CLO AUM, as Assured Investment ManagementAssuredIM typically rebates the CLO fees back to Assured Investment Management funds.AssuredIM Funds.
Net outflows were $290 million, primarily driven by the return of capital in wind-down funds, which includes funds that are now subject to orderly wind-down and certain funds in their harvest period, partially offset by the issuance of two new CLOs and a CLO fund, as well as the launch of opportunity funds focused on asset-backed finance and healthcare structured capital strategies. The new funds launched in the fourth quarter of 2019 were primarily funded with capital from the Insurance segment.
_____________________(1) Primarily loss on extinguishment of debt.
Adjusted operating loss for theThe Corporate division for all periods consistedloss in 2021 was primarily of interest expense and compensation expense, and also included losses ondue to the extinguishment of debt recorded in other income.
Revenues
The loss on extinguishment of debt recorded in other income, is related to AGUS' purchase of $175 million on a portionpre-tax basis ($138 million after-tax) associated with the redemption of the principal amount of AGMH's outstanding Junior Subordinated Debentures. The loss representsAGMH and AGUS debt, which represented the difference between the amount paid to purchase AGMH'sredeem the debt and the carrying value of the debt. The loss on extinguishment of debt which includes theprimarily consisted of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the
Interest Expense
Interest expense primarily relates to debt issued by2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS and AGMH. Decrease in interest expense for all years relates to purchase of AGMH's debt by AGUS.5% Senior Notes. See Item 8, Financial Statements and Supplementary Data, Note 15,12, Long-Term Debt and Credit Facilities,Facilities.
Compensation, Benefits and Other Operating Expenses
CompensationCorporate division employee compensation and benefits expenses allocated to the Corporate division are an allocation of expenses based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other operating expenses increased in 2019 compared with 2018 primarily due to higher professionalinclude Board of Director expenses, legal fees related to AGUS' acquisition of BlueMountain.and other direct or allocated expenses.
Other items consist of intersegment eliminations, reclassifications, and consolidation adjustments, including the The effect of consolidating FG VIEs and certain Assured Investment Management investment vehiclesCIVs, intersegment eliminations, and reclassifications of reimbursable fund expenses to revenue are presented in which Insurance segment invests. The net effect on adjusted operating income (loss) of these adjustments was a loss of $4 million in 2018 and a gain of $12 million in 2017. The effect was de minimis in 2019.“Other”. See Item 8, Financial Statements and Supplementary Data, Note 4,2, Segment Information.
VIE Consolidation Effect onNet Income (Loss) Attributable to AGL
Generally, the consolidation of the Company's consolidated investment vehicles and Consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), has a significant gross-up effect on the Company'sconsolidated financial statements, and includes: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the consolidated financial statements; (ii) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs.
Toto Adjusted Operating Income (Loss)
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2019 mainly related2022 relate primarily to the sale of the COFINA Exchange Senior Bonds.2018 mainly related to foreign exchange gains.2017 mainly relate to sales of internally managed investments, including the gain on saleone of the Zohar II 2005-1 notes exchangedCompany’s alternative investments. The change in the MBIA UK Acquisition.
OTTIallowance for 2019, 2018 and 2017credit losses in 2022 was primarily attributabledue to securities purchased for loss mitigation and other risk management purposes and changes in foreign exchange rates.Loss Mitigation Securities.
During 2017, non-credit impairment fair value gains were primarily generated by CDS terminations, run-offSome of net par outstanding, and price improvements on the underlying collateral of the Company’s CDS. The majority of the CDS transactions that were terminated were as a result of settlement agreements with several CDS counterparties. During 2017, the cost to buy protection in AGC’s name, specifically the five-year CDS spread, did not change materially during the period, and therefore did not have a material impact on the Company’s unrealized fair value gainslosses were partially offset by price improvement in certain underlying collateral and losses on CDS. the termination of certain CDS transactions.
The following table presents the foreign exchange rates as of balance sheet dates.
To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, theThe Company discloses bothboth: (a) financial measures determined in accordance with GAAPGAAP; and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures).
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.
Management believes that many investors, analysts and financial news reporters also use adjusted book value,operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Company’s capital adequacy.
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.
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:
Toto Adjusted Operating Shareholders’ Equity and Adjusted Book Value
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.
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 December 31, 2019 and December 31, 2018, the Company excluded $1.4 billion and $1.9 billion, respectively, of net par attributable to loss mitigation securities. See Item 8, Financial Statements and Supplementary Data, Note 5,3, Outstanding Insurance Exposure, for additional information.Exposure.
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;
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 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. 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. denominated insured obligations and other factors.
The following table sets forth 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 netobligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty portfolio by internal rating.Financial Guaranty Portfolio by Internal Rating
Financial Guaranty Portfolio by Geographic Area
The following table sets forth the geographic distribution of the Company's financial guaranty portfolio.
Geographic Distributionof Financial Guaranty Portfolio
As of December 31, 2019
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 $4.3 billion net par as of December 31, 2019, 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 8, Financial Statements and Supplementary Data, Note 5, Outstanding Insurance Exposure.
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Amortization Scheduleof Net Debt Service Outstanding of Puerto Rico
As of December 31, 2019
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 are rated investment grade internally.
Specialty Insurance and ReinsuranceExposure
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Reinsurer ExposuresThe Company has exposure to reinsurers through reinsurance arrangements (both as a ceding company and as an assuming company). Most of the Company's exposure as a ceding company and as an assuming company relates to financial guaranty contracts written before 2009, although the Company has assumed or reassumed (from financial guarantors no longer writing new business) some of those exposures more recently. The Company continues to cede portions of certain specialty exposures to reinsurers to mitigate its risk. See Item 8, Financial Statements and Supplementary Data, Note 8, Reinsurance.
Liquidity Requirements and Sources
SignificantSelected Cash Flow Items
Distributions From 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. Dividend restrictions applicable to the insurance subsidiaries are described insubsidiary.
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 $218 million, of which $72 million is estimated to be available for distribution in the first quarter of 2020.
The maximum amount available during 2020 for AGC to distribute as ordinary dividends is approximately $166 million, of which approximately $85 million is available for distribution in the first quarter of 2020.
The maximum amount available during 2020 for MAC to distribute to MAC Holdings as dividends without regulatory approval is estimated to be approximately $21 million, none of which is available for distribution in the first 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 Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $274 million as of December 31, 2019. 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 $264 million as of December 31, 2019, and (ii) the amount of statutory surplus, which as of December 31, 2019 was $240 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 December 31, 2019. 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 $383 million as of December 31, 2019, and (ii) the amount of Statutory surplus, which as of December 31, 2019 was $273 million.
Each of the Company's insurance subsidiaries may, with the approval of the relevant regulator, repurchase shares of its stock from its parent, so providing its parent with additional liquidity. AGC made such repurchases in 2019 and 2018, AGM and MAC made such repurchases in 2017. See For more information, see also Item 8, Financial Statements and Supplementary Data, Note 18, Insurance Company Regulatory Requirements, for more information.12, Long-Term Debt and Credit Facilities.
Cash and Investments
As of December 31, 2019, AGL had $135 million in cash and short-term investments, and AGUS and AGMH had a total of $223 million in cash and short-term investments. In addition, AGUS and AGMH have $7 million in fixed-maturity securities (excluding AGUS' investment in AGMH's debt) with weighted average duration of 4.4 years.
Commitments and Contingencies -Long-Term Debt ObligationsThe 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. The outstanding principal, and interest paid, on long-term debt were as follows:
Principal Outstandingand Interest Paid on Long-Term Debt and Intercompany Loans
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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. 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. AGUS may select 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.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. 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. 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. As of December 31, 2019, AGUS has purchased $131 million of these debentures, and may chose 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. AGUS paid $157 million to acquire BlueMountain, contributed $60 million of cash to BlueMountain at closing and contributed an additional $30 million in cash in February 2020. See Item 8, Financial Statements and Supplementary Data, Note 15, Long-Term Debt and Credit Facilities, 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. During 2019, 2018 and 2017, AGUS repaid $10 million, $10 million and $10 million, respectively, in outstanding principal as well as accrued and unpaid interest. As of December 31, 2019, $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 above.
posting of collateral in connection with reinsurance and credit derivative transactions, if necessary,
The insurance subsidiaries initially intend to invest $500 million in Assured Investment Management funds. As of December 31, 2019, the Insurance segment had invested $79 million in Assured Investment Management funds which are accounted for under the equity method, using NAV 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 $114 million to the three Assured Investment Management Funds that may be drawn in the future. See Item 8, Financial Statements and Supplementary Data, Note 14, Variable Interest Entities.
In addition, For example, the Company hasmade substantial claim payments in 2022 in connection with the resolution of certain Puerto Rico credits. The Company is continuing its efforts to resolve the one remaining unresolved Puerto Rico insured exposure that is in payment default, PREPA. The Company had $720 million net par exposureoutstanding to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.3 billion, all of which is rated BIG. Beginning in 2016, the Commonwealth and certain related authorities and public corporations have defaultedPREPA 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 forthDecember 31, 2022. As described in Item 8, Financial Statements and Supplementary Data, Note 5,3, Outstanding Insurance Exposure.Exposure, in connection with the implementation of the GO/PBA Plan and the HTA Plan, certain insured bondholders elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and CVIs, as relevant, that constitute distributions under the GO/PBA Plan or HTA Plan. For those who made the election, distributions under the GO/PBA Plan and HTA Plan are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust, and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions under the GO/PBA Plan or HTA Plan, as applicable, are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. As of December 31, 2022, the remaining net par outstanding for HTA and GO/PBA Resolved Puerto Rico exposures where the bondholders elected to receive custody receipts, or where the Company assumed exposure from another financial guarantor, was $509 million.
Claims (Paid) RecoveredEstimated Expected Claim Payments
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As of December 31, 2022, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $268 million, including $234 million by AGC and $34 million by AG Re.Commitments and Contingencies -Committed
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 (through February 2020, $90 million had been contributed to supplement working capital). As of December 31, 2019, the Assured Investment Management subsidiaries had $11 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.
Consolidated Cash Flows
The consolidated statements of cash flow include the cash flows of the Insurance and Asset Management subsidiaries and holding companies as well as the cash flows of the consolidated FG VIEs and, beginning October 1, 2019, the consolidated investment vehicles. Consolidated Cash Flow Summary
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Cash flows from operations, excluding the effect of consolidating VIEs, was an outflow of $255 million in 2019, inflows of $451 million and $414 million in 2018 and 2017, respectively. Cash flows from operations in 2018 and 2017 included significant inflows from strategic initiatives. In 2018, the Company received $363 million as consideration for the SGI Transaction and in 2017 the Company received $426 million in commutation premiums upon the re-assumption of a previously ceded book of business. In 2019, however, cash flows from operations included a significant claim payment for Puerto Rico COFINA exposures. Premium receipts have declined in 2018 and 2019. Cash flows from operations attributable to the effect of consolidated VIEs was negative in 2019 due to the inclusion of investing activities of consolidated investment vehicles.
Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, paydowns on FG VIEs’ assets, outflows for the BlueMountain Acquisition in 2019 and inflows for the MBIA UK Acquisition in 2017. The higher investing inflows in 2019 primarily related to sales of securities whose proceeds were used to fund the BlueMountain Acquisition and claim payments.Financing activities primarily consisted of share repurchases, dividends, paydowns of FG VIEs’ liabilities and debt extinguishment. It also included issuances of CLO's in consolidated investment vehicles. The inflows in 2019 compared to the outflows in 2018 and 2017 attributable to consolidated VIEs was due to the consolidation of Assured Investment Management CLO.
From January 1, 2020 through February 27, 2020, the Company repurchased an additional 0.8 million common shares. On February 26, 2020, the Board authorized share repurchases for an additional $250 million. As of February 27, 2020, after combining the remaining authorization and the new authorization, the Company was authorized to purchase $408 million of its common shares. For more information about the Company's share repurchases and authorizations, see Item 8, Financial Statements and Supplementary Data, Note 21, Shareholders' Equity.Commitments and ContingenciesLeases
Contractual Obligations
The following table summarizes the Company's obligations under its contracts, including debt and lease obligations, and also includes estimated claim payments,rate based on its loss estimation process, under financial guaranty policies it has issued.SOFR. See “— Executive Summary — Other Matters — LIBOR Sunset” above.
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The Company’s fixed-maturity securities and short-term investments had a duration of 4.1 years and 4.9 years as of December 31, 2019 and December 31, 2018, respectively. Generally, the Company’s fixed-maturity securities are designated as available-for-sale. For more information about the Investment Portfolio and a detailed description Approximately 67% of the Company’s valuationtotal investment portfolio is managed by external parties. Each of investments see Item 8, Financial Statementsthe three external investment managers must maintain a minimum average rating of A+/A1/A+ by S&P, Moody’s and Supplementary Data, Note 9, Fair Value Measurement and Note 10, Investments and Cash.
Fixed-Maturity Securities and Short-Term InvestmentsFitch Ratings Inc., respectively.by Security Type
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The following tables summarize, for all fixed-maturity securities in an unrealized loss position as of December 31, 2019 and December 31, 2018, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
Fixed-Maturity SecuritiesGross Unrealized Loss by Length of TimeAs of December 31, 2019
Fixed-Maturity SecuritiesGross Unrealized Loss by Length of TimeAs of December 31, 2018
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Of the securities in an unrealized loss position for 12 months or more as of December 31, 2019 and December 31, 2018, 19 and 38 securities, respectively, had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 2019 and $43 million as of December 31, 2018. 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 and December 31, 2018 were not related to credit quality.
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ConsolidatedCommitments
Investment Vehicles.•CIVs. The primary sources and uses of cash in the consolidated investment vehiclesCIVs are raising capital from investors, using capital to make investments, generating cash flowsincome from operations,investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs)(CLOs and warehouses). 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.
Asset management revenues are sensitive to changes in the fair value of investments.
The fair value of consolidated investment vehicles are sensitive to changes in market risk.
UnrealizedFair value gains and losses on credit derivatives are a function ofsensitive to changes in credit spreads of the underlying obligations and the Company'sCompany’s own credit spread. Market liquidity could also impact valuations of the underlying obligations. The Company considers the impact of its own credit risk, together with credit spreads on the exposures that it insured through CDS contracts, in determining their fair value.
Historically, the price of CDS traded on AGC moved directionally the same as general market spreads, although this may not always be the case. An overall narrowing of spreads generally results in an unrealized gain on credit derivatives for the Company, and an overall widening of spreads generally results in an unrealized loss for the Company. In certain circumstances, due to the fact that spread movements are not perfectly correlated, the narrowing or widening of the price of CDS traded on AGC can have a more significant financial statement impact than the changes in risks it assumes.
Sensitivity to Change
Insurance
FluctuationFluctuations in interest rates also affectsaffect the demand for the Company'sCompany’s product. When interest rates are lower or when the market is otherwise relatively less risk averse, the spread between insured and uninsured obligations typically narrows and, as a result, financial guaranty insurance typically provides lower cost savings to issuers than it would during periods of relatively wider spreads. These lower cost savings generally lead to a corresponding decrease in demand and premiums obtainable for financial guaranty insurance. In addition, increases in prevailing interest rate levels can lead to a decreased volume of capital markets activity and, correspondingly, a decreased volume of insured transactions. ChangesSee Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations — Insurance Segment — New Business Production, for additional information.
In addition, fluctuationsFluctuations in interest rates also impact the performance of insured transactions where there are differences between the interest rates on the underlying collateral and the interest rates on the insured securities. For example, a rise in interest rates could increase the amount of losses the Company projects for certain RMBS and student loan transactions. The impact of fluctuations in interest rates on such transactions varies, depending on, among other things, the interest rates on the underlying collateral and insured securities, the relative amounts of underlying collateral and liabilities, the structure of the transaction, and the sensitivity to interest rates of the behavior of the underlying borrowers and the value of the underlying assets.
Interest Expense
FluctuationsIn addition, the value of expected recoveries that are in the form of bonds or other securities (which are sensitive to changes in interest rates), also affects the net expected loss to be paid (recovered), such that increases in interest rates also impactgenerally reduce the estimated value of such recoveries and therefore increase the net expected loss to be paid. In the case of the Company’s Puerto Rico exposures and other troubled transactions, changes in interest expense. The series A enhanced junior subordinated debentures issued by AGUS accrues interest at a floating rate, reset quarterly, equalrates affect the value of expected recoveries described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure and Note 4, Expected Loss to three-month LIBOR plus a margin equal to 2.38%be Paid (Recovered). Three-month LIBOR of 1.89% and 2.79% were used for the interest rate resets for December 15, 2019 and December 15, 2018, respectively. Increases to three-month LIBOR will cause the Company’s interest expense to rise while decreases to three month LIBOR will lower the Company’s interest expense. For example, if three-month LIBOR increases by
100 bps, the Company’s annual interest expense will increase by $1.5 million. Conversely, if three-month LIBOR decreases by 100 bps, the Company’s annual interest expense will decrease by $1.5 million. LIBOR may be discontinued. 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.
Sensitivity to ChangeIncrease (Decrease) in Carrying Value
In addition to management fees, the Company's asset management fees are also comprised of performance fees generally expressed as a percentage of the returns on AUM. Movements in credit markets, equity market prices, interest rates or foreign exchange rates could cause the value of AUM to fluctuate, the returns realized on AUM to change, and clients to reallocate assets away from the Company, which could result in lower performance fees.
The following table presents As of December 31, 2022 and 2021, a decline of 10% in the pre-tax decline infair value of AssuredIM Funds would not have had a material effect on total asset management fees reported in the consolidated statements of operations.
Sensitivity ofSee Part II, Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, to Market Riskfor additional information.
The fair value of the Company’s consolidated CLOs is generally sensitive to changes related to 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); reinvestment assumptions; yields implied by market prices for similar securities; changes to the market prices of similar loans held by the CLOs. Significant changes to some of these inputs could materially change the market value of the consolidated CLOs as these are all inputs used to project and discount future cashflows.
The fair value of the Company’s consolidated Assured Investment Management funds is generally sensitive to changes in prices of comparable or similar investments; changes in financial projections of subject companies; changes in company specific risk premium, changes in the risk free rate of return; changes in equity risk premium; and new information obtained from issuers. These 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.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded BlueMountain Capital Management, LLC (“BlueMountain”) and its associated entities from its annual assessment of internal control over financial reporting as of December 31, 2019 because it was acquired by the Company in a purchase business combination during 2019. We have also excluded BlueMountain from our audit of internal control over financial reporting. BlueMountain is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 2% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.
Valuation of Credit Derivatives
As described in Notes 9 and 11 to the consolidated financial statements, the credit derivatives consist primarily of financial guaranty contracts that are accounted for as derivatives. As of December 31, 2019, credit derivative liabilities were $191 million, and credit derivative assets were included within other assets on the consolidated balance sheet. The fair value of credit derivatives is reflected as either net assets or net liabilities determined on a contract by contract basis in the consolidated balance sheets. The fair value of the credit derivative contracts represents the difference between the present value of remaining premiums that management expected to receive or pay and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay at the reporting date for the same protection. Management determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. The significant unobservable inputs include hedge cost, bank profit, year one loss, internal credit rating and internal floor.
The principal considerations for our determination that performing procedures relating to the valuation of credit derivatives is a critical audit matter are (i) there was significant judgment by management in determining the significant unobservable inputs used in determining the estimate, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures related to the valuation of credit derivatives; (ii) there was a high degree of auditor judgment in evaluating audit evidence relating to the significant unobservable inputs used in the internally developed, proprietary models; and (iii) the audit effort included the involvement of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s valuation of credit derivatives, including controls over the internally developed, proprietary models and the development of the significant unobservable inputs. These procedures also included, among others, testing management’s process for determining the valuation of credit derivatives, including the use of professionals with specialized skill and knowledge to assist in (i) evaluating the appropriateness of the models and (ii) evaluating the reasonableness of the significant unobservable inputs used in the valuation, including hedge cost, bank profit, year one loss, internal credit rating and internal floor used in developing the estimate of the fair value of credit derivatives. Performing these procedures involved testing the completeness and accuracy of data provided by management.
February 28, 2020March 1, 2023
Years Ended December 31, 2019, 2018 and 2017
December 31, 2019, 2018
Municipal Assurance Corp. (MAC), domiciled in New York;
The Company’s organizational structure includes variousAGL directly or indirectly owns several holding companies, 2two of which - Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (collectively, the U.S. Holding Companies) - have public debt outstanding. See Note 15, Long-Term Debt and Credit Facilities and Note 25, Subsidiary Information.
Accounting Policies
AdoptedRecent Accounting Standards Adopted
LeasesReference Rate Reform
Premium Amortization on Purchased Callable Debt Securities
Future Application of Accounting Standards
Credit Losses on Financial Instruments
The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For reinsurance recoverables, premiums receivable and debt instruments such as loans and held to maturity securities, entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted. The changes to the impairment model for available-for-sale securities are to be applied using a modified retrospective approach, and purchased financial assets with credit deterioration are to be applied prospectively. The Company is adopting this ASU, including certain amendments, effective January 1, 2020. ASU 2016-13 will not have a material effect on shareholders' equity at the date of adoption.
Simplification ofstatements upon 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.January 1, 2023.
Consistent with one of its key business strategies, the Company has acquired 1 asset management company, 1 financial guaranty company and completed 1 reinsurance transaction, during the three-year period covered by this report, as described below.
Business Combinations
Accounting Policies
The Company's business combinations are accounted for under the acquisition method of accounting which requires that the assets and liabilities of the acquired entities be recorded at fair value. The Company exercised significant judgment to determine the fair value of the assets it acquired and liabilities it assumed in each of the acquisitions. The most significant of these determinations related to the valuation of the acquired financial guaranty insurance contracts and investment management contracts.
Contractual premium for financial guaranty insurance contracts charged by acquired legacy financial guarantors were generally less than their fair value, which is based on the premium a market participant of similar credit quality would demand to acquire those contracts at the date of acquisition. Accordingly, a significant amount of the purchase price was allocated to below-investment grade (BIG) transactions. The excess of the fair value of net assets acquired over the consideration transferred was recorded as a bargain purchase gain in the statement of operations. In addition, the Company and the acquired legacy financial guarantor had pre-existing reinsurance relationships, which were effectively settled at fair value on their respective acquisition dates. The gain or loss on settlement of these pre-existing reinsurance relationships represents the net difference between the historical assumed or ceded balances that were recorded by the Company and the fair value of ceded or assumed balances acquired and was also recorded in the statement of operations. While the fair value of the Company's stand-ready obligation on the date of acquisition is recorded in unearned premium reserve, thereafter, loss reserves and loss and loss adjustment expenses (LAE) are recorded in accordance with the Company's accounting policy for insurance contracts.
BlueMountain's finite-lived intangible assets consist mainly of investment management and CLO contracts and its CLO distribution network, which were recorded at fair value on the date of acquisition. The fair value of the contracts and CLO distribution network were determined using the multi-period excess earnings method and the replacement cost method, respectively. The excess of the purchase price over fair value of the net assets of the acquired BlueMountain subsidiaries was recorded as goodwill.
In assumed reinsurance agreements, the Company allocates premiums it receives to each financial guaranty or credit derivative contract on the effective date of the agreement. Thereafter, loss reserves and LAE are recorded in accordance with the Company's accounting policy for financial guaranty insurance contracts, and changes in fair value are recorded for credit derivatives.
BlueMountain
On October 1, 2019 (the BlueMountain Acquisition Date), AGUS completed the acquisition of all of the outstanding equity interests in BlueMountain and its associated entities, for a purchase price of $157 million (BlueMountain Acquisition). As of the date of acquisition, BlueMountain managed assets across 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. In addition, AGUS contributed $60 million of cash to BlueMountain at closing and contributed an additional $30 million in cash in February 2020. To fund the BlueMountain Acquisition and the related capital contributions, AGM, AGC and MAC made 10 year, 3.5% interest rate intercompany loans to AGUS totaling $250 million.
The BlueMountain Acquisition is expected to broaden and further diversify the Company's revenue sources with a fee-generating platform.
The following table shows the net effect of the BlueMountain Acquisition on October 1, 2019.
_____________________(1) Presented in goodwill and other intangible assets on the consolidated balance sheets.
(3) Presented in other liabilities on the consolidated balance sheets.
From the BlueMountain Acquisition Date through December 31, 2019, there were revenues of $32 million and a net loss of $10 million related to BlueMountain included in the consolidated statement of operations. For 2019, the Company recognized transaction expenses related to the BlueMountain Acquisition of $9 million, primarily related to legal and financial advisor fees.
The following table presents details of the identified intangible assets acquired:
Finite-LivedIntangible Assets Acquired
Unaudited Pro Forma Results of Operations2. Segment Information
The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and BlueMountain as if the acquisition had been completed on January 1, 2018, as required under GAAP. The pro forma accounts include the estimated historical results of both companies, all net of tax at the applicable statutory rate.
The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2018, nor is it indicative of the results of operations in future periods.
Unaudited Pro Forma Results of Operations(1)
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MBIA UK Insurance Limited
AGC completed its acquisition of MBIA UK Insurance Limited (MBIA UK) (the MBIA UK Acquisition), the U.K. operating subsidiary of MBIA Insurance Corporation (MBIA) on January 10, 2017 (the MBIA UK Acquisition Date). As consideration for the outstanding shares of MBIA UK plus $23 million in cash, AGC exchanged all its holdings of notes issued in the Zohar II 2005-1 transaction (Zohar II Notes), which were insured by MBIA. AGC’s Zohar II Notes had total outstanding principal of approximately $347 million and fair value of $334 million as of the MBIA UK Acquisition Date. The MBIA UK Acquisition added approximately $12 billion of net par insured on January 10, 2017.
MBIA UK was renamed Assured Guaranty (London) Ltd. and on June 1, 2017, was re-registered as a public limited company (plc). The Company combined the operations of its European subsidiaries, AGE UK, Assured Guaranty (UK) plc (AGUK), Assured Guaranty (London) plc (AGLN) and CIFG Europe S.A. (CIFGE) on November 7, 2018. Under the combination, AGUK, AGLN and CIFGE transferred their insurance portfolios to and merged with and into AGE UK (the Combination).
The following table shows the net effect of the MBIA UK Acquisition on January 10, 2017, including the effects of the settlement of pre-existing relationships.
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The Company believes the bargain purchase gain resulted from MBIA's strategy to address its insurance obligations with regards to the Zohar II Notes, the issuers of which MBIA did not expect would have sufficient funds to repay such notes in full on the scheduled maturity date of such notes in January 2017.
Revenue and net income (excluding the effects of subsequent tax reform) related to MBIA UK from the MBIA UK Acquisition Date through December 31, 2017 included in the consolidated statement of operations were approximately $192 million and $139 million, respectively, including the bargain purchase gain, settlement of pre-existing relationships, activity during the year and realized gain on the disposition of AGC's Zohar II Notes. For 2017, the Company recognized transaction expenses related to the MBIA UK Acquisition of $7 million, primarily related to legal and financial advisors fees.
Reinsurance of Syncora Guarantee Inc.’s Insured Portfolio
On June 1, 2018, the Company closed a reinsurance transaction with Syncora Guarantee Inc. (SGI) under which AGC assumed, generally on a 100% quota share basis, substantially all of SGI’s insured portfolio and AGM reassumed a book of business previously ceded to SGI by AGM (SGI Transaction). As of June 1, 2018, the net par value of exposures reinsured and commuted totaled approximately $12 billion (including credit derivative net par of approximately $1.5 billion). The reinsured portfolio consists predominantly of public finance and infrastructure obligations that meet AGC’s underwriting criteria and generated $330 million of gross written premiums. On June 1, 2018, as consideration, SGI paid $363 million and assigned to Assured Guaranty financial guaranty future insurance installment premiums of $45 million, and future credit derivative installments of approximately $17 million. The assumed portfolio from SGI included BIG contracts which had, as of June 1, 2018, expected losses to be paid of $131 million (present value basis using risk free rates), which will be expensed over the expected terms of those contracts as unearned premium reserve amortizes. In connection with the SGI Transaction, the Company incurred and expensed $4 million in fees to professional advisors.
The effect of the SGI Transaction on the insurance and credit derivative balances as of June 1, 2018 is summarized below:
Additionally, beginning on June 1, 2018, on behalf of SGI, AGC began providing certain administrative services on the assumed portfolio, including surveillance, risk management, and claims processing.
3. RatingsThe financial strength ratings (or similar ratings) for AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency, 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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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, see Note 7, Contracts Accounted for as Insurance, and Note 8, Reinsurance.
4. Segment Information
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:assets.
Segment Information (1)
Revenue
The following table reconciles the Company's total GAAP revenues to segment revenues:
Reconciliation of Total GAAP Revenues to Segment Revenues
_____________________
The following table reconciles the Company's total GAAP expenses to segment expenses:
Reconciliation of Total GAAP Expenses to Segment Expenses
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5.3. Outstanding Insurance Exposure
The Company also writes specialty insurance that is consistent with its risk profile and benefits from its underwriting experience.
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 December 31, 2019 and 2018 was $6.6 billion and $6.7 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction that are BIG was $105 million and $111 million as of December 31, 2019 and December 31, 2018, respectively.
Unless otherwise noted, ratings disclosed hereinImpact of COVID-19 Pandemic
Financial Guaranty Portfolio by Internal RatingAs of December 31, 2019
Financial Guaranty Portfolio by Internal RatingAs of December 31, 2018
The following tables present gross and net par outstanding for the financial guaranty portfolio.
Financial Guaranty PortfolioGross Par Outstanding
Financial Guaranty PortfolioNet Par Outstandingby Sector
_____________________(1) Prior period has been presented on a basis consistent with current period sector classifications.
Expected AmortizationComponents of
Financial Guaranty PortfolioComponents of BIG Net Par OutstandingAs of December 31, 2018
and Number of RisksAs of December 31, 2019
Financial Guaranty PortfolioBIG Net Par Outstanding
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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.”
The fiscal and political issues in Puerto Rico have been exacerbated by natural disasters. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and widespread destruction. More recently, beginning on December 28, 2019, and progressing into early 2020, Puerto Rico has been struck by a swarm of earthquakes, including at least 11 that were of magnitude 5 or greater based on the the Richter magnitude scale. While not nearly as deadly or destructive as Hurricane Maria, the earthquakes have damaged buildings and infrastructure, including the power grid.
The Company also participates in mediation and negotiations relating to its2022 Puerto Rico exposure.
The final form and timingResolutions or any future resolutions of responses to Puerto Rico’s financial distress and the devastation of Hurricane Maria 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 obligationsCompany’s PREPA insured by the Company, are uncertain.exposures. The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company'sCompany’s results of operations in that particular quarter or year.and shareholders’ equity.
The Company groups its Puerto Rico exposure into three categories:
Constitutionally Guaranteed
General Obligation. As of December 31, 2019, 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 9, 2019, the Oversight Board certified a revised fiscal plan for the Commonwealth. The revised certified Commonwealth fiscal plan indicates an expected primary budget surplus, if fiscal plan reforms are enacted, of $13.7 billion that would be available for debt service over the six-year forecast period ending 2024. The Company believes the available surplus set forth in the Oversight Board's revised certified fiscal plan (which assumes certain fiscal reforms are implemented by the Commonwealth) should be sufficient to cover contractual debt service of Commonwealth general obligation issuances and of authorities and public corporations directly implicated by the Commonwealth’s general fund during the forecast period. However, the revised certified Commonwealth fiscal plan indicates a net cumulative primary budget deficit through 2049, and there can be no assurance that the fiscal reforms will be enacted or, if they are, that the forecasted primary budget surplus will occur or, if it does, that such funds will be used to cover contractual debt service.
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.
On September 27, 2019,Puerto Rico Par and Debt Service Schedules
PBA.
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.
As noted above, on September 27, 2019, the Oversight Board filed with the Title III court a 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 POA is expected to be amended to incorporate the terms related to the PBA bonds proposed under the GO PSA. The Company believes the 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.
On June 5, 2019, 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 six-year forecast period.
PRCCDA. As of December 31, 2019, 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 December 31, 2019, 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 December 31, 2019, the Company had $822$720 million insured net par outstanding of PREPA obligations. The 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 June 27, 2019, the Oversight Board certified a revised fiscal plan for PREPA.
purpose corporation and secured by a segregated transition charge assessed on electricity bills. The revised fiscal plan of PREPA certified by the Oversight Boardmediation would terminate on June 27, 2019 reflects1, 2022. Judge Swain has since extended the relevant termsterm of such mediation several times, most recently on January 26, 2023 extending the PREPA RSA.
The closing ofterm to April 28, 2023. On September 29, 2022, Judge Swain ordered the restructuring transaction is subjectFOMB 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 forfile a plan of adjustment and disclosure statement by December 1, 2022 and set a schedule for litigating bondholders’ lien status. After receiving an extension from Judge Swain, the FOMB initially filed a plan of adjustment and disclosure statement for PREPA with the Federal District Court of Puerto Rico on December 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan). The FOMB PREPA Plan would split bondholders into two groups: one that includes this proposed treatmentwould settle litigation and agree that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. Dueling summary judgment motions were made in respect of PREPA revenue bonds and confirmation of such planthe bondholders’ lien status by the Title III court,FOMB and execution of acceptable documentation and legal opinions. Underby the PREPA RSA,bondholders on October 24, 2022. As of February 28, 2023, the Company hasFederal District Court of Puerto Rico had not issued any decisions on the optionmotions for summary judgment on the bondholders’ lien status. The Federal District Court of Puerto Rico approved the FOMB disclosure statement on February 28, 2023, which allows bondholder solicitation on the FOMB PREPA Plan to guarantee its allocated share ofbegin.
PRASA.
MFA. As of December 31, 2019, the Company had $248 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 December 31, 2019, 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 $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.
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 Districtgeneral obligation bonds of Puerto Rico (Federal District Court for and various obligations of its related authorities and public corporations.
the validity, secured status and priority regarding bonds issued by the Commonwealth and certain of its entities; (b) the validity and impactAdjustment of the Clawback Orders and other diversion of collateral securing certain bonds; (c) classification of claims; (d) constitutional issues; and (e) identification of essential services. A number of the legal actions in which the Company is involved are covered by the stay and mandatory mediation order.
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 governorCommonwealth of Puerto Rico, directing that the SecretaryEmployees Retirement System of the TreasuryGovernment of the Commonwealth of Puerto Rico, and the Puerto Rico Tourism Company claw back certain taxes and revenues pledgedPublic Buildings Authority.
On June 3, 2017, AGC and AGM filed an adversary complaint in the Federal District Court forof Puerto Rico seeking (i)acting under Title VI of PROMESA.
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.
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 incorporated into the same schedule and mediation 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 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 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 further extended the stay until March 11, 2020.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.plus accrued interest. As of December 31, 2019, $3692022, the net insured par outstanding under the legacy GO and PBA insurance policies was $29 million, and constituted all of the Company’s remaining net par exposure to the GO and PBA bonds it had insured.
Creditors filed a claim objection to certain Commonwealth general obligation bonds issued•$251 million in 2011, approximately $215cash,
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 claimholdersprincipal payment dates to the extent they hold allowed claims. The complaint also asserts that even if Commonwealth law granted statutory liens,distributions of HTA Plan Consideration are insufficient to pay or prepay such liens are avoidable under Section 545amounts.
On May 20, 2019,Company had no insured net par outstanding of PRCCDA or PRIFA obligations remaining. Under the Oversight BoardPRCCDA Modification and the Official CommitteePRIFA Modification, on March 15, 2022, the Company received an aggregate of Unsecured Creditors filed an adversary complaint$47 million in the Federal District Court forcash and $98 million in notional amount of CVIs.
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. A hearing on a motion to dismiss is scheduled for June 2020.
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, 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. A hearing on the defendants’ motion to dismiss is scheduled for June 2020.
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.
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 to PRHTA Revenues.
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.
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.
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.
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.
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.
Notes to Consolidated Financial Statements, Continued
____________________
Exposure to the U.S. Virgin Islands
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. The USVI is benefiting from the federal response Currently, there are numerous legal actions relating to the 2017 hurricanesdefault by the Commonwealth and has madecertain of its instrumentalities on debt service payments, and related matters, and the Company is a party to date.a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to Puerto Rico obligations which the Company insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.
A number of legal actions involving the Company and relating to PRCCDA and PRIFA, as well as claims related to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022 in connection with the consummation of the 2022 Puerto Rico Resolutions. All other proceedings remain stayed pending the Court’s determination on plans of adjustment or other proceedings related to PRHTA and PREPA.
Specialty Insurance and ReinsuranceExposure
____________________
Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio. The Company monitors and assigns ratings and calculates expected losses in the same manner for all its exposures regardless of form or differing accounting models. This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio.Accounting Policy
Net Expected Loss to be PaidRoll Forward
Net Expected Loss to be PaidRoll Forward by Sector
____________________
The tables above include (1) LAE paid of $35 million and $28 million for the years ended December 31, 2019 and 2018, respectively, and (2) expected LAE to be paid of $33 million as of December 31, 2019 and $31 million as of December 31, 2018.
By Accounting Model
Selected U.S. Public Finance TransactionsNet Expected Loss to be Paid (Recovered)
____________________
As of December 31, 2018, the Company had approximately $18 million of net par exposure to bonds issued by Parkway East Public Improvement District (District), which is located in Madison County, Mississippi (the County). The bonds were rated BIG. As part of a settlement with the County, during the third quarter of 2019 the bonds were paid off, reducing the Company's net par exposure to zero,2022, 2021 and the Company received new bonds issued by the District, which the Company holds in its investment portfolio.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the Bankruptcy Code became effective. As of December 31, 2019, 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 payments2020, respectively; and certain variable payments contingent on the City's revenue growth.
The Company projects its total(b) net expected loss across its troubled U.S. public finance exposures as of December 31, 2019, including those mentioned above,LAE to be $531 million, compared with a net expected losspaid of $832$11 million as of December 31, 2018. 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 December 31, 2019, that credit was $819 million, compared with $586 million at December 31, 2018. 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 and/or shift probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance2022 and loss mitigation activities. 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 $224 million in 2019, which 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 and weightings it uses in its scenarios based on the public information summarized under "Exposure to Puerto Rico" in Note 5, 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 $23$26 million as of December 31, 2019, compared with $32 million as of December 31, 2018, primarily consisting of: (i) 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, (ii) 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, 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.2021.The economic benefit for non-U.S. public finance transactions, including those mentioned above, was approximately $9 million during 2019, which was mainly attributable to the improved internal outlook of certain Spanish sovereigns and sub-sovereigns.
As of December 31, 2019, the Company had a net R&W payable of $53 million to R&W counterparties, compared with a net R&W receivable of $5 million as of December 31, 2018. 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 continue improving. 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 stageearly-stage delinquencies, late stagelate-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.
U.S. First Lien U.S. RMBS Loss Projections: Alt-A, First Lien,Prime, Option ARM Subprime and PrimeSubprime
transactions had reached historically high levels,will improve after loans with accumulated delinquencies and theforeclosure cost are liquidated. The Company is assuming in the base casescenario that the still elevatedrecent 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 month18-month period, declining to 40% in the base casescenario over 2.5 years.
Total expected loss to be paid on all first lien U.S. RMBS was $166 million and $243 million as of December 31, 2019 and December 31, 2018, respectively. The $77 million economicCertain transactions benefit in 2019 for first lien U.S. RMBS was primarily attributable to higherfrom excess spread on certain transactionswhen they are supported by large portions of fixed ratefixed-rate assets (either originally fixed or modified to be fixed) and withbut have insured floating rate debt linked to LIBOR. An increase in projected LIBOR which decreaseddecreases excess spread, while lower LIBOR results in 2019. higher excess spread. ICE Benchmark Administration (IBA) and the Financial Conduct Authority have announced that LIBOR will be discontinued after June 30, 2023. The Company believes that the reference to LIBOR in such floating rate RMBS debt will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on the Secured Overnight Finance Rate (SOFR).
U.S. Second Lien U.S. RMBS Loss Projections 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 monthsseveral years by first calculating current representativeexpected liquidation rates. rates for delinquent loans, and applying liquidation rates to currently delinquent loans in order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults).
For the base case scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period hashad ended, the CDR iswas assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR iswas calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.)underwriting, subject to a floor). In the base case scenario, the time over which the CDR trendstrended down to its final CDR iswas 28 months. Therefore, the total stress period for second lien transactions iswas 34 months, representingmonths.
The HELOC loans underlying the Company'sCompany’s insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans werehad been modified to extend the original interest-only period for another fiveto 15 years. As a result,Approximately 80% of the modified loans had reset to fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years.
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 recovery on all second lien U.S. RMBS was $20 million as of December 31, 2019 and the expected loss to be paid was $50 million as of December 31, 2018. The $157 million economic benefit in 2019 for second lien U.S. RMBS was primarily attributable to higher projected recoveries for previously charged-off loans, improved performance, and loss mitigation efforts.
___________________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.(1) Loss severities on future defaults.
Other Structured Finance Excluding U.S. RMBS
The economic loss development during 2019 was $18 million, which was primarily attributable to higher LAE related to certain exposures.
Public Finance TransactionsCompany’s financial statements.
RMBS Transactions
On November 26, 2012, CIFG Assurance North America, Inc. (CIFGNA) filed a complaint in the Supreme Court of the State of New York against JP Morgan Securities LLC for material misrepresentation in the inducement of insurance and common law fraud, alleging that JP Morgan Securities LLC fraudulently induced CIFGNA to insure $400 million of securities issued by ACA ABS CDO 2006-2 Ltd. and $325 million of securities issued by Libertas Preferred Funding II, Ltd. On June 26, 2015, the court dismissed with prejudice CIFGNA’s material misrepresentation in the inducement of insurance claim and dismissed without prejudice CIFGNA’s common law fraud claim. On September 24, 2015, the court denied CIFGNA’s motion to amend but allowed CIFGNA to re-plead a cause of action for common law fraud. On November 20, 2015, CIFGNA filed a motion for leave to amend its complaint to re-plead common law fraud. On April 29, 2016, CIFGNA filed an appeal to reverse the court’s decision dismissing CIFGNA’s material misrepresentation in the inducement of insurance claim. On November 29, 2016, the Appellate Division of the Supreme Court of the State of New York ruled that the court’s decision dismissing with prejudice CIFGNA’s material misrepresentation in the inducement of insurance claim should be modified to grant CIFGNA leave to re-plead such claim. On February 27, 2017, AGC (as successor to CIFGNA) filed an amended complaint which included a claim for material misrepresentation in the inducement of insurance. On July 31, 2019, the parties entered into a confidential settlement and, on August 12, 2019, agreed to dismiss, with prejudice, the action and all claims.
Premiums
Accounting for financialFinancial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition areis consistent whether contracts are written on a direct basis, assumed from another financial guarantor, under a reinsurance treaty, ceded to another insurer, under a reinsurance treaty, or acquired in a business combination.
For premiums received in a reinsurance transaction, the cash received is allocated to individual policies in the assumed portfolio and recorded as unearned premium reserve.
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Expected Collections of
(Undiscounted)(2) Net of reinsurance.
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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
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Financial Guaranty InsurancePolicy Acquisition Costs
RollforwardPolicy Acquisition Costs
Financial Guaranty Insurance Losses
Insurance Contracts'
Net Reserve (Salvage)
Components of Net Reserves (Salvage)
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(2) Recordeddecreases over time as a componentresult of other liabilitiesscheduled principal payments, partial and whole principal prepayments, and defaults.
Reconciliation
____________________Financial Guaranty Insurance Contracts
____________________Notes to Consolidated Financial Statements, Continued
Net Expected Loss Any expected losses to be Expensedpaid (recovered) on credit derivatives are reflected in the fair value of credit derivatives.Financial Guaranty Insurance Contracts
The following table presentsUnder financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company’s stand‑ready obligation. At contract inception, the entire stand-ready obligation is represented entirely by unearned premium reserve. Unearned premium reserve is deferred premium revenue, less claim payments (net of recoveries received) that have not yet been recognized in the statement of operations (contra-paid). A loss and LAE reserve for a financial guaranty insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (total losses) exceed the deferred premium revenue, on a contract-by-contract basis. As a result, the Company has expected loss to be paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes into income.
Loss and LAEReported on theConsolidated Statements of Operations
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The following tables provide information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty InsuranceBIG Transaction Loss SummaryAs of December 31, 2019
Financial Guaranty InsuranceBIG Transaction Loss SummaryAs of December 31, 2018
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Ratings Impact on Financial Guaranty BusinessA 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.For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. AGM insures periodic payments owed by the municipal obligors to the bank counterparties. In certain cases, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were downgraded below "A" by S&P Global Ratings, a division of
Standard & Poor’s Financial Services LLC (S&P) or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an amount not exceeding approximately $377 million in respect of such termination payments.As another example, with respect to variable rate demand obligations (VRDOs) for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2019, AGM and AGC had insured approximately $3.1 billion net par of VRDOs, of which approximately $43 million of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.
In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM in respect to AGMH's former guaranteed investment contracts (GIC) business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody's. AGMH's former subsidiary FSA Asset Management LLC is expected to have sufficient eligible and liquid assets to satisfy any expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.
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.
Accounting Policy
For business assumed and ceded, the accounting model of the underlying direct financial guaranty contract dictates the accounting model used for the reinsurance contract (except for those eliminated as FG VIEs). For any assumed or ceded financial guaranty insurance premiums and losses, the accounting models described in Note 7, Contracts Accounted for as Insurance, are followed. For any assumed or ceded credit derivative contracts, the accounting model in Note 11, Contracts Accounted for as Credit Derivatives, is followed.
Financial Guaranty BusinessThe 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
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 December 31, 2019, 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 $40 million and $287 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.
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Ceded Reinsurance (1)
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In accordance with U.S. statutory accounting requirementsGAAP) are primarily CDS and U.S.also include interest rate swaps.
CommutationsCommutations of Ceded Reinsurance Contracts
Excess of Loss Reinsurance FacilityEffective January 1, 2018, AGC, AGM and MAC entered into a $400fulfill state licensing requirements, or otherwise pledged or restricted totaled $222 million aggregate excess of loss reinsurance facility of which $180 million was placed with an unaffiliated reinsurer. This facility covered losses occurring from January 1, 2018 through December 31, 2025, and terminated on January 1, 2020, after AGC, AGM and MAC chose not to extend it. The facility covered certain U.S. public finance exposures insured or reinsured by AGC, AGM and MAC as of September 30, 2017, excluding exposures that were rated below investment grade as of December 31, 20172022 and $243 million as of December 31, 2021. The investment
There was a transfer of a fixed-maturity security from Level 2 into Level 3 during 2019. There were no other transfers intofrom or frominto Level 3 during the periods presented.
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.
With respectNotes to CDS transactions for which there is an expected claim payment within the next twelve months, the allocationConsolidated Financial Statements, Continued
that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.
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.include:
Fair Value Option on FG VIEs’ Assets and Liabilities
Due toThe consolidated CLOs are CFEs, and therefore the fact that BlueMountain managesdebt issued by, and the Insurance segment has an investment in certain Assured Investment Management funds, the Company consolidated 1 Assured Investment Management managed CLO and 3 Assured Investment Management funds (collectively,loans held by, the consolidated investment vehicles). The consolidated Assured Investment Management funds are: AHP Capital Solutions, LP (AHP), AIM Asset Backed Income Fund (US) L.P. (ABIF) and a BlueMountain CLO Warehouse Fund (US) L.P. (CLO Warehouse Fund). CLO Warehouse Fund invested in BlueMountain CLO XXVI Ltd. (CLO XXVI). All four consolidated investment vehiclesCLOs are accounted for at fair value. See Note 14, Variable Interest Entities.
AHP and ABIF are investment companies, subject tomeasured under the guidance in Accounting Standards Codification (ASC) 946, Financial Services — Investment Companies.
CLO XXVI is a collateralized financing entity (CFE) under ASC 810, Consolidation, and has elected to measure assets and liabilitiesFVO using the fair value of its assets,CFE practical expedient. Loans in CLOs are priced using a loan pricing service which are more observable.aggregates quotes from loan market participants. The financial assets of CLO XXVIloans are all Level 2 assets, and thereforewhich are more observable than the fair value of the financial liabilities of CLO XXVI, which are all Level 3 liabilities.debt issued by the consolidated CLOs. As a result, the financial assetsless observable CLO debt is measured on the basis of the more observable CLO XXVIloans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the financial liabilitiesdebt of CLO XXVIconsolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily,temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) 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 underlying financial liabilities to the beneficial interests retained by the Company).
Assets in consolidated Assured Investment Management funds that are carried at fair value primarily consist of corporate loans and other investments. Assets supporting CLO XXVI are Level 2 assets in the CIVs include assets of the consolidated CLOs and all othercertain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated investment vehicles arefunds. Level 3. Liabilities2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the FVO), securities sold short and derivative liabilities. Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and classified as Level 3 in the fair value hierarchy.securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.
RollforwardRoll Forward of Level 3 AssetsAt (Liabilities) at Fair Value on a Recurring Basis
RollforwardRoll Forward of Level 3 LiabilitiesAtAssets (Liabilities) at Fair Value on a Recurring Basis
RollforwardRoll Forward of Level 3 Assets and LiabilitiesAt(Liabilities) at Fair Value on a Recurring Basis
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____________________Notes to Consolidated Financial Statements, Continued
At As of December 31, 20192022
AtAs of December 31, 20182021
(3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
The amounts(1) Includes due from brokers and descriptions in the note relate to the Company's investmentscounterparties and cash other than thoseequivalents. Carrying value approximates fair value.
Accounting Policy
The vast majority of the Company's investment portfolio consists of fixed-maturityPuerto Rico salvage and short-term investments, classified as available-for-sale at the time of purchase (approximately 98.8% based on fairsubrogation recoverable, management fees receivables and receivables for securities sold, for which carrying value as of December 31, 2019), and therefore carried atapproximates fair value. Changes in fair value for other-than-temporarily-impaired securities are bifurcated between credit
Realized gains and losses on sales of investments are determined using the specific identification method. Realized loss includes amounts recorded for other-than-temporary impairments (OTTI) on debt securities and the declines in fair value of securitiespurchased, for which the Company has the intent to sell the security or inability to hold until recovery of amortized cost.
For mortgage‑backed securities, other than loss mitigation securities, and any other holdings for which there is prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any necessary adjustments due to changes in effective yields and maturities are recognized in net investment income using the retrospective method.
Loss mitigation securities are generally purchased at a discount and are accounted for based on their underlying investment type, excluding the effects of the Company’s insurance. Interest income on loss mitigation securities is recognized on a level yield basis over the remaining life of the security.
Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried atcarrying value approximates fair value and include amounts deposited in money market funds.
Other invested assets primarily consist of equity method investments. The Company's equity method investments primarily consist of an investment in a renewable energy company, as well as investments in private equity funds and managed account investment advisors. Changes in the value of equity method investments are recorded in the consolidated statements of operations in "equity in earnings of investees." Other invested assets also includes other equity investments carried at fair value. Up until December 31, 2017, the change in fair value of preferred stock investments and certain other equity investments was recorded in OCI. Effective January 1, 2018, in accordance with ASU 2016-01, the change in fair value of these investments is recorded in other income in the consolidated statements of operations. In addition, in accordance with ASU 2016-01, the Company elected the new measurement alternative for equity securities that were accounted for under the cost method as of December 31, 2017 because they did not have a readily determinable fair value. Effective January 1, 2018, these equity securities are accounted at cost less any impairment, plus or minus the change resulting from observable price changes in orderly transactions for identical or a similar investment of the same issuer in the consolidated statements of operations.
Cash consists of cash on hand and demand deposits. As a result of the lag in reporting FG VIEs, cash and short-term investments do not reflect cash outflow to the holders of the debt issued by the FG VIEs for claim payments made by the Company's insurance subsidiaries to the consolidated FG VIEs until the subsequent reporting period.
Assessment for Other-Than Temporary Impairments
The Company has a formal review process to determine OTTI for securities in its investment portfolio where there is no intent to sell and it is not more-likely-than-not that it will be required to sell the security before recovery. Factors considered when assessing impairment include:
a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;
a decline in the market value of a security for a continuous period of 12 months;
recent credit downgrades of the applicable security or the issuer by rating agencies;
the financial condition of the applicable issuer;
whether loss of investment principal is anticipated;
the impact of foreign exchange rates; and
whether scheduled interest payments are past due.
The Company assesses the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the security is in an unrealized loss position and its net present value is less than the amortized cost of the investment, an OTTI is recorded. The net present value is calculated by discounting the Company's estimate of projected future cash flows at the effective interest rate implicit in the debt security at the time of purchase. The Company's estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other relevant data. For mortgage‑backed and asset backed securities, cash flow estimates also include prepayment and other assumptions regarding the underlying collateral such as default rates, recoveries and changes in value. The assumptions used in these projections require the use of significant management judgment. If management's assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.
In addition to the factors noted above, the Company also seeks advice from its outside investment managers.
Net Investment Income and Equity Method Investment Earnings
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, other than investments accounted for under the equity method, which are recorded in equity in earnings of investees. 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. Accrued investment income, which is recorded in other assets, was $79 million and $91 million as of December 31, 2019 and December 31, 2018, respectively. Net Investment Income
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Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
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The proceeds from sales of fixed-maturity securities classified as available-for-sale were $1,805 million, $1,180 million and $1,701 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company recorded a gain on change in fair value of equity securities in other income of $27 million for the year ended December 31, 2018, which includes a gain of $31 million related to the Company's minority interest in the parent company of TMC Bonds LLC, which it sold in 2018. The loss on change in fair value of equity securities for the year ended December 31, 2019 was de minimis.
The following table presents the roll-forward of the credit losses on fixed-maturity securities for which the Company has recognized an OTTI and for which unrealized loss was recognized in OCI.Roll Forward of Credit Lossesin the Investment Portfolio
Investment Portfolio
As of December 31, 2019, the majority of the investment portfolio is managed by 6 outside managers (including Wasmer, Schroeder & Company LLC, in which the Company has a minority interest). The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The managed portfolio must maintain a minimum average rating of A+ by S&P or A1 by 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 securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) other alternative investments that the Company believes present an attractive investment opportunity.
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).
Alternative investments include investing in both equity and debt securities. The Company has made minority investments in investment managers as part of its strategy of participating in that market and has also made other unrelated investments that it believes present attractive investment opportunities. In February 2017, the Company 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 $86 million of the commitment was not funded as of December 31, 2019. In December 2019, the Company invested in a limited liability company that owns fuel cells.
The insurance subsidiaries currently intend to invest $500 million in Assured Investment10. Asset Management funds plus additional amounts in other accounts managed by Assured Investment Management. As of December 31, 2019, the Insurance segment had committed capital to the 3 consolidated Assured Investment Management funds, of which $79 million has been drawn and invested by the respective Assured Investment Management funds and $114 million on the commitment remained outstanding. See Note 14. Variable Interest Entities. As of December 31, 2019, the uninvested portion is reflected in short-term investments in the table below.Fees
Investment PortfolioCarrying Value
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Fixed-Maturity Securities and Short-Term Investmentsby Security TypeAs of December 31, 2019
Fixed-Maturity Securities and Short-Term Investmentsby Security TypeAs of December 31, 2018
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The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories.
The following tables present the fair value of the Company’s available-for-sale portfolio of obligations of state and political subdivisions as of December 31, 2019 and December 31, 2018 by state.Fair Value of Available-for-Sale Portfolio ofObligations of State and Political SubdivisionsAs of December 31, 2019 (1)
Fair Value of Available-for-Sale Portfolio ofObligations of State and Political SubdivisionsAs of December 31, 2018 (1)
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The revenue bond portfolio primarily consists of essential service revenue bonds issued by transportation authorities and other utilities, water and sewer authorities and universities.Revenue BondsSources of Funds
The following tables summarize, for all fixed-maturity securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.Fixed-Maturity SecuritiesGross Unrealized Loss by Length of TimeAs of December 31, 2019
Fixed-Maturity SecuritiesGross Unrealized Loss by Length of TimeAs of December 31, 2018
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Of the securities in an unrealized loss position for 12 months or more as of December 31, 2019 and December 31, 2018, 19 and 38 securities, respectively, had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 2019 and $43 million as of December 31, 2018. 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 and December 31, 2018 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 December 31, 2019 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 Securitiesby Contractual MaturityAs of December 31, 2019
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 $280 million and $266 million, as of December 31, 2019 and December 31, 2018, 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 $1,502 million and $1,855 million, based on fair value as of December 31, 2019 and December 31, 2018, respectively.
No material investments of the Company were non-income producing for years ended December 31, 2019 and 2018, respectively.
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 rightsmanagement or servicing of the AssuredIM CLOs, the Company generally receives a performance fee of 20% per annum of the remaining interest proceeds and principal proceeds after a performance hurdle is exceeded. The portion of these fees that pertains to the investment by AssuredIM wind-down funds is typically rebated to such AssuredIM Funds.
Credit derivatives are recorded at fair value. Changes in fair value are recorded in “net change in fair value of credit derivatives” on the consolidated statement of operations. The fair value of credit derivatives is reflected as either net assets or net liabilities determined on a contract by contract basis in the Company's consolidated balance sheets. See Note 9, Fair Value Measurement, for a discussion on the fair value methodology for credit derivatives.
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 11.5 years and 11.6 years as of at December 31, 2019 and December 31, 2018, respectively.
Credit Derivatives (1)
____________________(1) Expected recoveries were $4 million as of December 31, 2019 and $2 million as of December 31, 2018.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
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Fair Value of Credit DerivativesNet Change in Fair Value of Credit Derivative Gains (Losses)
Realized losses and other settlements for 2019 were primarily due to payments related to various U.S. structured finance transactions, including those for a final maturity paydown and for which there was an offsetting unrealized gain. Realized losses and other settlements for 2018 and 2017 were primarily due to a paydown of a U.S. structured finance transaction, for which there was an offsetting unrealized gain.
During 2019, non-credit impairment fair value gains were generated primarily as a result of price improvements on the underlying collateral of the Company's CDS. These unrealized fair value gains were partially offset by unrealized fair value losses resulting from wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name 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 would expect to receive on these transactions increased.
During 2018, non-credit impairment fair value gains were primarily generated by CDS terminations, run-off of CDS par and price improvements on the underlying collateral of the Company’s CDS. In addition, unrealized fair value gains were generated by the increase in credit given to the primary insurer on one of the Company's second-to-pay CDS policies during the period. The unrealized fair value gains were partially offset by unrealized fair value losses resulting from wider implied net spreads driven by the decreased cost to buy protection in AGC’s name, as the market cost of AGC’s credit protection decreased during the period.
During 2017, non-credit impairment fair value gains were primarily generated by CDS terminations, run-off of net par outstanding, and price improvements on the underlying collateral of the Company’s CDS. The majority of the CDS transactions that were terminated were as a result of settlement agreements with several CDS counterparties. During 2017, the cost to buy protection in AGC’s name, specifically the five-year CDS spread, did not change materially during the period, and therefore did not have a material impact on the Company’s unrealized fair value gains and losses on CDS.
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)
Fair Value of Credit Derivative Assets (Liabilities)and Effect of AGCCredit Spread
The fair value of CDS contracts at December 31, 2019, 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 ContractsThe transaction documentation with 1 counterparty for $180 million in CDS net par insured by the Company requires the Company to post collateral, subject to a $180 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 December 31, 2019, AGC did not have to post collateral to satisfy these requirements.
Accounting Policy
In connection with the BlueMountain Acquisition, the FASB's new revenue recognition guidance, Topic 606 Revenue from Contracts with Customers (ASC 606), is applicable to the Company. Management, CLO and performance fees earned by Assured Investment ManagementAssuredIM are accounted for as contracts with customers. Under the guidance for contracts with customers, anAn entity is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e)may recognize revenue when (or as) the entity satisfies acontractual performance obligation. In determining the transaction price, an entity may include variable considerationcriteria have been met and only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.
Management and CLO fees are derived from providing professional services to manage investment funds and CLOs. Investment management services are satisfied over time as the services are provided and are typically based on a percentage of the value of the client’s assets under management. Performance fee revenue will fluctuate from period to period and may not correlate with general market changes, since most of these fees are driven by absolute performance. Performance fee revenues are generated on certain management contracts when performance hurdles are achieved. Such fee revenues are recorded when the contractual performance criteria have been met and when it is probable that a significant reversal of revenue recognized will not occur in future reporting periods. Given the uniqueness of each fee arrangement, performance fee contractscontractual provisions are evaluated on an individual basis to determine the timing of revenue recognition.
Management and CLO Fees
The Company receives a management fee in exchange for providing investment advisory and management services. These annual management fees are generally as follows.
Fees range from 0.70% to 2.00% per annum calculated on either the beginning of the month or quarter, or month-end NAV of the respective funds.
For the Company's management or servicing of the Assured Investment Management CLOs the Company receives, generally 0.35% to 0.50% (combined senior investment management fee and subordinated investment management fee) per annum based on NAV, and 20% per annum of the remaining interest proceeds and principal proceeds after the incentive management fee threshold has been satisfied. The portion of these fees that pertains to the investment by Assured Investment Management funds is typically rebated to the Assured Investment Management funds.
The Company may waive some or the entire management fee with respect to any investor. Certain current and former employees of the Company who have investments in the Assured Investment Management funds are not charged any management fees.
Performance Fees
In accordance with the investment management agreements, and by serving as the general partner, managing member or managing general partner, the Company also receives performance fees. Annual performance fee rates are generally as follows:
Range from 10% to 20% of the net profits in excess of the high-water mark for the respective fund, or
Range from 18% to 30% of the total cash received by investors in excess of certain benchmarks, or
30% of the net profits in excess of the high-water mark and a credit for management fees
Performance fees related to certain Assured Investment Management funds may be subject to future clawback and repayment. Determining the amount of performance fees to record is subject to qualitative and quantitative factors including where the fund is in its life-cycle, whether the Company has received or is entitled to receive performance fees and potential sales of fund investments. To the extent that performance fees have been received, but not earned, the company will recognize a liability for unearned revenue in the consolidated balance sheets. The general partner has the right, in its sole discretion, to
require certain Assured Investment Management funds to distribute to the general partner an amount equal to its presumed tax liability attributable to the allocated taxable income relating to performance fees with respect to such fiscal year and are contractually not subject to clawback. There were no tax distributions recorded during 2019.
The Company may waive some or all of the performance fees with respect to any investor. Certain current and former employees of the Company who have investments in the Assured Investment Management funds are not charged any performance fees.
Asset Management FeesOther Consolidated VIEs
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Accounting Policy
Goodwill is attributable to the BlueMountain Acquisition in the Asset Management segment and represents the excess cost over identifiable net assetsdifference between the present value of an acquired business. The Company tests goodwill annually for impairment or more frequently if circumstances indicate an impairment may have occurred. The goodwill impairment analysis is performed atremaining expected put option premium payments under AGC’s CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the reporting unit level which is equal to the Company's operating segment level. If, after assessing qualitative factors,estimated present value that the Company believes that it is more likely than not that thewould hypothetically have to pay currently for a comparable security (see Note 12, Long-Term Debt and Credit Facilities). The change in fair value of the reporting unit is less than its carrying amount, the Company will evaluate impairment quantitatively to determineAGC CCS and record the amount of goodwill impairment as the excess of the carrying amount of the reporting unit over its fair value. InherentAGM CPS are reported in such fair“fair value determinations are certain judgments and estimates relating to future cash flows, including the Company’s interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.
The Company's finite-lived intangible assets consist primarily of contractual rights to earn future asset management fees from the acquired management and CLO contracts as well as a CLO distribution network. Such finite-lived intangible assets are recorded at fair valuegains (losses) on the date of acquisition and amortized over their estimated useful lives.
The Company tests finite‑lived intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable. The Company evaluates impairment by comparing the estimated fair value attributable to the intangible asset being evaluated with its carrying amount. If an impairment is determined to exist by management, the Company accelerates amortization expense so that the carrying amount represents fair value.
The Company's indefinite-lived intangible assets consist of the value of insurance licenses acquired in prior business combinations. The Company assesses indefinite-lived intangible assets for impairment annually or more frequently if
circumstances indicate an impairment may have occurred. If a qualitative assessment reveals that it is more-likely-than-not that the asset is impaired, the Company calculates an updated fair value.
The following table summarizes the carrying value for the Company's goodwill and other intangible assets:
Goodwill and Other Intangible Assets
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Goodwill and substantially all finite-lived intangible assets relate to the Company’s acquisition of BlueMountain on October 1, 2019. To date, there have been 0 impairments of goodwill or intangible assets. Amortization expense, which is recorded in other operating expensescommitted capital securities” in the consolidated statements of operations, associatedoperations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and
Estimated Future Amortization Expensefor Finite-Lived Intangible Assets
Accounting Policy
The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and continuously reconsiders the conclusion at each reporting date. In determining whether it is the primary beneficiary, the Company evaluates its direct and indirect interests in the VIE. The primary beneficiary of a VIE is the enterprise that has both 1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance; and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
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 regardcontain terms and conditions similar 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 claims paid by Assured Guaranty underthose observed in the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for market.
As partFG VIEs include Puerto Rico Trusts, structured finance and other FG VIEs. Assets in the Puerto Rico Trusts, which consist of New Recovery Bonds and CVIs, are classified as Level 2. The Company elected the FVO for the Puerto Rico Trusts’ liabilities and they are classified as Level 3. See “ - Fixed Maturity Securities” above for a description of the termsfair value methodology for the New Recovery Bonds and CVIs in the Puerto Rico Trusts, which represent the majority of its financial guaranty contracts,the assets in the Puerto Rico Trusts. For structured finance and other FG VIEs’ assets and liabilities the Company under its insurance contract, obtains certain protective rightselected the FVO and they are classified as Level 3. The prices are generally determined with respect to the VIE that give the Company additional controls over a VIE. These protective rights are triggered by the occurrenceassistance 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 controlan independent third 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 FG VIEs’ liabilities that are insured by the Company are considered to be with recourse, because the Company guarantees the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. FG VIEs’
liabilities that are not insured by the Company are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets.
The Company has limited contractual rights to obtain the financial records of its consolidated FG VIEs. The FG VIEs do not prepare separate GAAP financial statements; therefore, the Company compiles GAAP financial information for them based on trustee reports prepared by and received from third parties. Such trustee reports are not available to the Company until approximately 30 days after the end of any given period. The time required to perform adequate reconciliations and analyses of the information in these trustee reports results in a one quarter lag in reporting the FG VIEs’ activities.discounted cash flow approach. The Company records the fair value of structured finance and other FG VIEs’ assets and liabilities based on modeled prices. The Company updates the model assumptions each reporting period for the most recent available information, which incorporates the impact of material events that may have occurred since the quarter lag date. The net change inrecords the fair value of consolidatedPuerto Rico Trusts’ liabilities based on quoted prices.Number of FG VIEs Consolidated
The change inimplied collateral losses within the ISCR of the FG VIEs’ assets held as of December 31, 2019 that was recorded in the consolidated statements of operations for 2019 was a gain of $39 million. The change in the ISCR of the FG VIEs’ assets was a gain of $7 million for 2018 and a gain of $35 million for 2017. To calculate ISCR, the change intransaction. In general, the fair value of the FG VIEs’ assets is allocated betweenmost sensitive to 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.
____________________(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2019 to 2038.The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the consolidated financial statements, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities with recourse.
Consolidated FG VIEsBy Type of Collateral
Consolidated Investment Vehicles
Throughprojected collateral losses, where an increase in collateral losses typically could lead to a jointly owned subsidiary, AGM, AGC and MAC, the U.S. insurance subsidiaries, initially intend to invest $500 million in Assured Investment Management funds. In the fourth quarter of 2019, $79 million was invested in three separate Assured Investment Management funds; AHP, ABIF and CLO Warehouse Fund. As of December 31, 2019, the fair value of such investments was $77 million. CLO Warehouse Fund investeddecrease in the subordinated notes of CLO XXVI.
AHP, ABIF, CLO Warehouse Fund and CLO XXVI (collectively, 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 asset management subsidiaries) and its level of economic interest in the entities (through its U.S. insurance subsidiaries).
AHP and ABIF are investment companies under ASC 946, and therefore account for their underlying investments at fair value. CLO XXVI is a CFE under ASC 810. Under the ASC 810 practical expedient for CFEs, the Company elected to measure CLO XXVI's assets and liabilities using the fair value of its assets, which are more observable. Changes in the fair value of assets and liabilities of consolidated investment vehicles are recorded in "other income" in the consolidated statement of operations.As a result of consolidating AHP, ABIF and CLO Warehouse Fund, the Company records noncontrolling interest (NCI) for the portion of each fund owned by employees and any third party investors. As of December 31, 2019, redeemable employee-owned NCI, held in ABIF and CLO Warehouse Fund, is classified outside of stockholder’s equity, within temporary equity. For AHP, nonredeemable NCI is presented within shareholders' equity in the consolidated balance sheets.
The assets and liabilities of the Company's consolidated investment vehicles (which include consolidated funds: AHP, ABIF and CLO Warehouse Fund as well as CLO XXVI) 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 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 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. 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 consolidated funds in the Company's 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 Liabilitiesof Consolidated Investment Vehicles
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As of December 31, 2019, the consolidated investment vehicles had a commitment to invest $13 million.
Redeemable Noncontrolling Interests in Consolidated Investment Vehicles
Interest income and interest expense are included in "other income." 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 VIEs
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 balance sheets of consolidating Assured Investment Management investment vehicles includes (i) changes in fair value of consolidated investment vehicles, (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 CLO against the assets of the consolidated CLO Warehouse Fund, and (4) the recording of NCI for the proportion of each consolidated Assured Investment Management fund that is not owned by any other subsidiary of the Company.
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 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 consolidated statement of cash flows. Financing activities and capital cash flows to and from investors are presented as financing activities consistent with investment company guidelines.
Effect of Consolidating VIEson the Consolidated Balance SheetsIncrease (Decrease)
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Effect of Consolidating VIEson the Consolidated Statements of OperationsIncrease (Decrease)
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Effect of Consolidating VIEson Consolidated Statements of Cash FlowsInflows (Outflows)
For 2019, the fair value gains on FG VIEs were attributable to higher recoveries on second lien U.S. RMBS FG VIEs' assets. For 2018 and 2017, the primary driver of the gain in 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.
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15.
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Long TermCCS are carried at fair value with changes in fair value reported in the consolidated statement of operations. See Note 9, Fair Value Measurement, – Other Assets – Committed Capital Securities, for a discussion of the fair value measurement of the CCS.
Intercompany Loans Payable
On October 1, 2019, AGM, AGCPrincipal and MAC made 10 year, 3.5% interest rate intercompany loans to AGUS totaling $250 million to fund the BlueMountain AcquisitionCarrying Amounts of Debt
See 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. During 2019, 2018 and 2017, AGUS repaid $10 million, $10 million and $10 million, respectively, in outstanding principal as well as accrued and unpaid interest. As of December 31, 2019, $40 million remained outstanding.
7%7% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7%7% Senior Notes due 2034 (7%(7% Senior Notes) 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 executed by the Company in March 2004. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price.
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 to the date of redemption.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 to 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 to the date of redemption.
Loss on Extinguishment of Debt
Principal and Carrying Amounts of Debt
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The following table presents the principal amounts of AGMH's outstanding Junior Subordinated Debentures that AGUS purchased and the loss on extinguishment of debt recognized by the Company. The Company may choose to make additional purchases of this or other Company debt in the future.
AGUS's Purchaseof AGMH's Junior Subordinated Debentures
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Principal payments due under the long-term debt are as follows:
ExpectedDebt Maturity Schedule of Debt(1)
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Interest Expense
Intercompany Credit Facility
On October 25, 2013, AGL, as borrower,The Company’s interest expense was $81 million, $87 million 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$85 million in the aggregate. In September 2018, AGL and AGUS amended the revolving credit facility to extend the commitment until October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Section 1274(d) of the Code, and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning onyears ended December 31, 2013,2022, 2021 and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan commitment termination date. NaN amounts are currently outstanding under the credit facility.2020, respectively.
See Note 9, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a discussion of the fair value measurement of the CCS.
Accounting Policy
Share-based compensation expense is based on the grant date fair value using the grant date closing price, the lattice, Monte Carlo or Black-Scholes-Merton (Black-Scholes) pricing models. The Company amortizes the fair value of share-based awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the exception of retirement‑eligible employees. For retirement-eligible employees, certain awards contain retirement provisions and therefore are amortized over the period through the date the employee first becomes eligible to retire and is no longer required to provide service to earn part or all of the award.
The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan is estimated
The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with the exception of retirement eligible employees. For retirement eligible employees, the expense is recognized immediately.
Time Vested Stock Options
Stock options are generally granted once a year with exercise prices equaltotal unrecognized compensation cost related to the closing price on the date of grant. To date,outstanding non-vested restricted stock units was $21 million, which the Company has only issued non-qualified stock options. All stock options, except for performance stock options, grantedexpects to employees vest in equal annual installmentsrecognize over a three-yearthe weighted-average remaining service period and expire seven years or ten years from the date of grant. Stock options granted to directors vest over one year and expire in seven years or ten years from grant date. None of the Company's options, except for performance stock options, have a performance or market condition.
Time Vested Stock Options
As of December 31, 2019, the aggregate intrinsic value and weighted average remaining contractual term of stock options outstanding were $2.6 million and 0.7 years, respectively. As of December 31, 2019, the aggregate intrinsic value and weighted average remaining contractual term of exercisable stock options were $2.6 million and 0.7 years, respectively.
NaN options were granted in 2019, 2018 and 2017. As of December 31, 2019, there were 0 unexpensed outstanding non-vested options.
Performance Stock Options
Performance Stock Options
NaN options were granted in 2019, 2018 and 2017.
The total intrinsicweighted-average grant-date fair value of performancerestricted stock options exercisedunits granted during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $0.7$56.46, $44.08, and $41.31, respectively.
Restricted Stock Units
Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. Restricted stock units awarded to employees have vesting terms similar to those of the restricted stock awards and are delivered on the vesting date. The Company has granted restricted stock units to directors of the Company.
Restricted Stock Unit Activity
As of December 31, 2019, the total unrecognized compensation cost related to outstanding nonvested restricted stock units was $25 million, which the Company expects to recognize over the weighted‑average remaining service period of 2.5 years. The totalweighted-average grant-date fair value of restricted stock units vestedshares granted during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $11 million, $8 million$59.47, $51.34 and $7 million,$28.12, respectively.
Performance Restricted Stock Units
The Company has granted performance restricted stock units under the Incentive Plan. These awards vest if AGL's common share price, total shareholder return (TSR) relative to the performance of a peer group and growth in core adjusted book value during the relevant three-year performance period reaches certain hurdles, with a minimum vesting percentage of 0, a target vesting percentage of 100% and a maximum vesting percentage of 200%, 250% and 200%, respectively. If the performance is between the specified levels, the vesting level will be interpolated accordingly. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends paid on common stock during the performance cycle for the number of shares earned.
Performance Restricted Stock Unit Activity
____________________
As of December 31, 2019, the total unrecognized compensation cost related to outstanding nonvested performance share units was $10 million, which the Company expects to recognize over the weighted‑average remaining service period of 1.8 years. The total value of performance restricted stock units vested during the years ended December 31, 2019, 2018 and 2017 was based on grant date fair value and was $6 million, $6 million and $8 million, respectively.
The Company used a Monte Carlo model to value its performance restricted stock units granted in 2018 and 2017 that contain a performance hurdle based on AGL's common share price.
Monte Carlo PricingWeighted Average Assumptions
The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The expected volatility is estimated at the date of grant based on an average of the 3-year historical share price volatility and implied volatilities of certain at-the-money actively traded call options in the Company. The risk-free interest rate is the implied 3-year yield currently available on U.S. Treasury zero-coupon issues at the date of grant. The expected life is based on the 18-month term of the performance period.
For the 2019 awards, the grant-date fair value of the performance restricted stock units tied to relative TSR was calculated using a Monte Carlo simulation in order to determine the total return of the Company’s shares relative to the total return of approximately 200 financial companies in the Russell 2000 Index. The inputs to the simulation include the beginning prices of shares, historical volatilities, and dividend yields of all relevant companies as well as all possible pairwise correlation coefficients among the relevant companies. In addition, the risk-free return and discount for illiquidity are also included. The grant date fair value of these awards was $46.66 per share.
For the 2019 awards, the grant-date fair value of the core adjusted book value performance restricted stock units was based on the grant date closing price.
Share‑BasedShare-Based Compensation Expense
Share‑BasedShare-Based Compensation Expense Summary
OverviewAGLDeferred and its Bermuda subsidiaries, AG Re, AGRO,current tax assets and Cedar Personnel Ltd. (Bermuda Subsidiaries),liabilities are not subject to any income, withholdingreported in “other assets” 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 it's administrative and head office functions continue to be carried on in Bermuda. As a U.K. tax resident company, AGL is required to file a corporation tax return with Her Majesty’s Revenue & Customs. AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The corporation tax rate was 19% for 2019. Assured Guaranty expects that the dividends AGL receives from its direct subsidiaries will be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be taxed under the U.K. "controlled foreign companies" regime and has obtained a clearance from Her Majesty’s Revenue & Customs confirming this”other liabilities” on the basis of current facts.consolidated balance sheets.
AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. AGE UK, the Company’s U.K. subsidiary, had previously elected under U.S. Internal Revenue Code Section 953(d) to be taxed as a U.S. company. In January 2017, AGE UK filed a request with the IRS to revoke the election, which was approved in May 2017. As a result of the revocation of the Section 953(d) election, AGE UK is no longer liable to pay future U.S. taxes beginning in 2017.
On January 10, 2017, AGC purchased MBIA UK, a U.K. based insurance company. After the purchase, MBIA UK changed its name to AGLN and files its tax returns in the U.K. as a separate entity for the period prior to its merger with AGE UK. For additional information on the MBIA UK Acquisition, see Note 2, Business Combinations and Assumption of Insured Portfolio.
Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO and AG Intermediary Inc. file their own consolidated federal income tax return.
As a result of the BlueMountain Acquisition referred to in Note 2, the entities acquired will be included in the AGUS consolidated federal income tax return.
____________________Notes to Consolidated Financial Statements, Continued
As of December 31, 2019, the Company had alternative minimum tax credits of $12 million which, pursuant to the 2017 Tax Cuts and Jobs Act (Tax Act), are available as a credit to offset regular tax liability over the next two years with any excess refundable by 2021.
The During 2022, the Company has $13recorded a return to provision adjustment, which included the utilization of $19 million ofin foreign tax credits, thereby reducing the Company's foreign tax credits (FTC) carryovers from previous acquisitions$24 million as of December 31, 2021 to $5 million as of December 31, 2022. FTCs were established under the 2017 Tax Cuts and $23 million of FTC due to the TaxJobs Act (TCJA) for use against regular tax in future years. FTCs will begin to expire in 2020years, and will fully expire byin 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 remaining FTC of $36$5 million will not be utilized, and therefore recordedmaintained a valuation allowance with respect to this tax attribute.attribute, resulting in a decrease in the valuation allowance from $24 million as of December 31, 2021 to $5 million as of December 31, 2022.
Notes to Consolidated Financial Statements, Continued
PretaxPre-tax Income (Loss) by Tax Jurisdiction
PretaxPre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.
Effect of the 2017 Tax Cuts and Jobs ActAudits
On December 22, 2017, the Tax Act was signed into law. The Tax Act changed many items of U.S. corporate income taxation, including a reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of non-U.S. subsidiaries. At December 31, 2017, the Company had not completed accounting for the tax effects of the Tax Act; however, the Company made a reasonable estimate of the effects on the existing deferred tax balances and the one-time transition tax. The Company recognized a provisional income tax expense of $61 million, which was included as a component of income tax expense from continuing operations in 2017. During 2018, the Company recorded an adjustment to the provisional amount with a $4 million tax benefit as a component of income tax expense from continuing operations. As of December 31, 2022, AGUS had open tax years with the U.S. IRS for 2018 the accountingforward and is currently under audit for the income2018 and 2019 tax effectsyears. As of December 31, 2022, Assured Guaranty Overseas US Holdings Inc. had open tax years with the Tax Act have beenU.S. IRS for 2019 forward and is not currently under audit with the IRS. In September 2022, His Majesty’s Revenue & Customs completed a business risk review of Assured Guaranty that commenced in July 2022 and the total net impact resulting from the Tax Act is an expense of $57 million.
The Tax Act includes provisionsassigned a low-risk rating for GILTI whereincorporate taxes are imposed on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Tax Act also includes a Base Erosion Anti-abuse Tax provision, which taxes certain payments from a U.S. corporation to its foreign subsidiaries.
Deferred Tax Assets and Liabilities
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, whichU.K. The Company’s French subsidiary is generally 21%. The provisional amount recorded related to the remeasurementnot currently under examination and has open tax years of the deferred tax balance was an income tax expense of $37 million. As a result of adjustments identified from filing the 2017 tax return, the total remeasurement of the deferred tax balance resulting from the Tax Act is an income tax expense of $34 million.2019 forward.
Foreign Tax Effects
The one-time transition tax is based on total post-1986 earnings and profits for which the Company had previously deferred U.S. income taxes. The Company recorded a provisional amount for its one-time transition tax liability on non-U.S. subsidiaries less realizable FTCs and a write off of deferred tax liabilities on unremitted earnings, resulting in an increase in income tax expense of $24 million. As a result of adjustments identified from filing the 2017 tax return, the total impact to the transition tax resulting from the Tax Act is an income tax expense of $23 million.
The table below summarizes the impact of the Tax Act on the consolidated statements of operations.
Summary of the Tax Act Effect(Benefit) Provision
The following table provides a reconciliation of the beginning and ending balances of the total liability for unrecognized tax positions.
Audits
Aszero as of December 31, 2019, AGUS had open tax years with the U.S. IRS for 2016 to present2022, 2021 and is currently under audit for the 2016 tax year. It is expected that the audit will close in2020. In 2020, and, depending on the final outcome, reserves for uncertainunrecognized tax positions may be released. In December 2016, the IRS issued a Revenue Agent Report for the 2009 - 2012 audit period, which did not identify any material adjustments that were not already accounted for in prior periods. In April 2017, the Company received a final letter from the IRSdecreased by $15 million to close the audit with no additional findings or changes, andzero as a result of settlement of positions taken during the Company released previously recorded uncertain tax position reserves and accrued interest of approximately $37 million in the second quarter of 2017. The 2013 and 2014 tax years closed in 2018. The 2015 tax year closed in 2019. 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. CIFGNA, which was acquired by AGC during 2016, is not currently under examination and has open tax years of 2016 to the date of acquisition.prior period.
15. Insurance Company Regulatory Requirements
Admitted
AGE UKAGUK prepares its Solvency and Financial Condition Report and other required regulatory financial reportreports based on Prudential Regulation Authority and Solvency II Regulations (Solvency II). AGE UK adopted the full framework required by Solvency II on January 1, 2016, which is the date they became effective. As of December 31, 2019 and December 31, 2018, AGE UK's2022 AGUK’s Own Funds were £684an estimated £592 million (or $716 million). As of December 31, 2021 AGUK’s Own Funds were £591 million (or $800 million).
In March 2019, MAC received approval from the New York State Department of Financial Services to dividend to MAC Holdings, which is owned by AGM and AGC, $100 million in 2019, an amount that exceeded the dividend capacity that was available for distribution without regulatory approval. MAC distributed a $100 million dividend to MAC Holdings in the second quarter of 2019. The maximum amount available during 2020 for MAC to distribute to MAC Holdings as dividends without regulatory approval is estimated to be approximately $21 million, NaN of which is available for distribution in the first quarter of 2020.
France
NaN of the Company's investment portfolio managers, Wellington Management Company, LLP (Wellington)(together with its affiliates, Wellington) and BlackRock Financial Management Inc. (BlackRock), each own(together with its affiliates, BlackRock) directly or indirectly owned more than 5% of the Company'sCompany’s common shares. In addition,Wellington is one of the Company’s investment managers, and BlackRock was also one of the Company’s investment managers until September 2020. BlackRock also provides investment reporting software to the Company.
The Charles Schwab Corporation announced on February 24, 2020 that it had entered into an agreement to acquire Wasmer, Schroeder & Company, LLC, and that, subject to customary closing conditions, it expects to close the transaction in mid-2020.
Effective January 1, 2019, The Company determines if an arrangement is a lease at inception. For operating leases with an original term of more than 12 months, where the Company adopted Topic 842, which requiredis the establishment oflessee, it recognizes a right-of-use (ROU) asset in “other assets” and a lease liability in “other liabilities” on the consolidated balance sheet for operating and finance leases.sheets. An ROU asset represents the Company'sCompany’s right to use an underlying asset for the lease term, and a lease liability represents the Company'sCompany’s obligation to make lease payments arising from the lease. Upon adoption, all of the Company’s leases were classified as operating leases; however, the Company made an accounting policy election not to apply the recognition requirements of Topic 842 to short-term leases with an initial term of 12 months or less. At the inception of a lease, the total fixed payments under a lease agreement wereare discounted utilizing an incremental borrowing rate that represents the Company’s collateralized borrowing rate. Upon adoption, the incremental borrowingThe rate for each lease wasis determined based on the remaining lease term as of January 1, 2019. The Company does notthe lease commencement date. Some of the Company’s leases include renewal options, which are not included in calculating the lease liability.terms unless the Company is reasonably certain it will exercise the option.
Upon adoption, the Company recognized lease liabilities of approximately $95 million (recorded in other liabilities), ROU assets of approximately $69 million (recorded in other assets), and derecognized existing deferred rent and lease incentive liabilities of approximately $26 million, which resulted in no cumulative-effect adjustment to retained earnings.
____________________
Components of Lease Expense and Other Information
Rent expense(2) Includes variable, short-term and finance lease costs.
____________________
"Exposure “Exposure to Puerto Rico"Rico” section of Note 5,3, Outstanding Insurance Exposure, for a description of such actions. See "Recovery Litigation"also “Recovery Litigation” section of Note 6,4, Expected Loss to be Paid (Recovered), for a description of recovery litigation
Notes to Consolidated Financial Statements, Continued
Accounting Policy
The Company records share repurchases as a reduction to On February 23, 2022 and August 3, 2022, the Board authorized the repurchase of an additional $350 million and $250 million, respectively, of its common stock and additional paid-in capital. Once additional paid-in capital has been exhausted, share repurchases are recorded as a reduction to common stock and retained earnings.
Share Repurchases
____________________
A summary of selected quarterly information follows:
____________________
CONDENSED CONSOLIDATING BALANCE SHEETAssured Guaranty Ltd.AS OF DECEMBER 31, 2019
____________________
CONDENSED CONSOLIDATING BALANCE SHEET(1) Mainly consists of due from and due to affiliates.AS OF DECEMBER 31, 2018
____________________
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSAND COMPREHENSIVE INCOMEFOR THE YEAR ENDED DECEMBER 31, 2019Condensed Statements of Cash Flows
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSAND COMPREHENSIVE INCOMEFOR THE YEAR ENDED DECEMBER 31, 2018(in millions)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSAND COMPREHENSIVE INCOMEFOR THE YEAR ENDED DECEMBER 31, 2017(in millions)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2019(in millions)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2018(in millions)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2017(in millions)
Guaranties of Obligations of Affiliates
Other than integrating BlueMountain, and consolidating certain newly established BlueMountain funds and a CLO in which certain of the Company's insurance subsidiaries invest, there There has been no change in the Company'sCompany’s internal controlscontrol over financial reporting during the Company'sCompany’s quarter ended December 31, 2019,2022, that has materially affected, or is reasonably likely to materially affect, the Company'sCompany’s internal controlscontrol over financial reporting.
Management'sManagement’s Annual Report on Internal Control over Financial Reporting
On October 1, 2019, the Company acquired BlueMountain Capital Management, LLC (BlueMountain) and its associated entities. See Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Business Combinations and Assumption of Insured Portfolio, for additional information. The Company is currently in the process of assessing the internal control over financial reporting associated with this acquired business. At December 31, 2019, the BlueMountain acquisition accounted for approximately 2% of consolidated assets and approximately 3% of consolidated revenues. As a result of the timing of this acquisition, the Company has excluded this business from the Company's annual assessment of internal control over financial reporting for the year ended December 31, 2019.
On February 26, 2020, Laura Bieling, age 53, was appointed as an executive officer and principal accounting officer of AGL. She has been the Chief Accounting Officer and Controller of AGL since May 2019 and was the chief accounting officer and controller of the U.S. subsidiaries of AGL since March 2019 and the Controller of AGM and AGC since 2011. Ms. Bieling has been with AGM since 2000, and was the Chief Accounting Officer and Controller of AGMH from 2004 until July of 2009. Prior to joining AGM, Ms. Bieling was a Senior Manager at PricewaterhouseCoopers, LLP. Robert Bailenson had been the principal accounting officer of AGL for SEC reporting purposes prior to Ms. Bieling’s appointment.ITEM 9B. OTHER INFORMATION
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Forward Looking Statements
This Form 10-K 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:
•significant changes in inflation, interest rates, the world’s credit markets or segments thereof, interest rates, credit spreads, foreign exchange rates or general economic conditions;conditions, including the possibility of a recession;
•geopolitical risk, including war in Ukraine and the resulting economic sanctions, fragmentation of global supply chains, volatility in energy prices, potential for increased cyberattacks, and risk of intentional or accidental escalation;
•the possibility of a United States (U.S.) government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings;
•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 in this section;
•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'sGuaranty’s insurance;
•the loss of investors in Assured Guaranty'sGuaranty’s asset management strategies or the failure to attract new investors to Assured Guaranty'sGuaranty’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, including losses with respect to related legal proceedings, 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;exposures, including as a result of the final resolution of Assured Guaranty’s remaining Puerto Rico exposures or the amounts recovered on securities received in connection with the resolution of Puerto Rico exposures already resolved;
•increased competition, including from new entrants into the financial guaranty industry;
•poor performance of Assured Guaranty'sGuaranty’s asset management strategies compared to the performance of the asset management strategies of Assured Guaranty'sGuaranty’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 financial guaranty contracts written in credit default swap (CDS) form, and certain consolidated 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 possibility that acquisitionsstrategic transactions made by Assured Guaranty, including its acquisition of BlueMountain Capital Management LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities (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;
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•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.)U.S. Securities and Exchange Commission (the SEC)(SEC);
•other risks and uncertainties that have not been identified at this time; and
•management’s response to these factors.
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-K. 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-K 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).
Unless otherwise noted, ratings on Assured Guaranty'sGuaranty’s insured portfolio and on bonds or notes purchased pursuant to loss mitigation strategies or other risk management strategies (loss mitigation securities) are Assured Guaranty’s internal ratings. The Company purchases attractively priced obligations that it has insured and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). Ratings on Loss Mitigation Securities are also Assured Guaranty's internal ratings. Internal credit ratings are expressed on a rating scale similar to that used by the rating agencies and generally reflect an approach similar to that employed by the rating agencies, except that Assured Guaranty'sGuaranty’s internal credit ratings focus on future performance, rather than lifetime performance.
Also, unless otherwise noted, the Company includes as part of its asset management business the management of collateralized loan obligations (CLOs) managed by BlueMountain Fuji Management, LLC (BM Fuji), which was sold to a result of loss mitigation strategies, including loss mitigation securities heldthird party in the second quarter of 2021. Assured Investment Management LLC (AssuredIM LLC) and its investment portfolio. The Company managesmanagement affiliates (together with AssuredIM LLC, AssuredIM) is not the loss mitigation securities as investmentsinvestment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and not insurance exposure.continues to provide personnel and other services to BM Fuji associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and a personnel and services agreement, consistent with past practices.
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ASSURED GUARANTY LTD.
FORM 10-K
TABLE OF CONTENTS
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AGL and its U.S Holding Companies | ||||||||
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PART I
Overview
Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-based holding company incorporated in 2003 that provides, through its operating subsidiaries, credit protection products and asset management services. The Company provides credit protection products to the U.S.United States (U.S.) and internationalnon-U.S. public finance (including infrastructure) and structured finance markets, and manages assets across collateralized loan obligations (CLOs) and long-durationas well as opportunity funds that build on its corporate credit, asset-backedasset-based finance and healthcare structured capital experience.
In the Insurance segment, the Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer, through its several insurance subsidiaries, 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 (debt(collectively, debt service), 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.Europe.
In the Asset Management segment, the Company completed on October 1, 2019 its acquisition (the BlueMountain Acquisition) of all of the outstanding equity interests in BlueMountain Capitalprovides asset management services through Assured Investment Management LLC (BlueMountain)(AssuredIM LLC) and its associated entities. As of that date, BlueMountain managed or serviced $18.3 billion in assets acrossinvestment management affiliates (together with AssuredIM LLC, AssuredIM). AssuredIM provides investment advisory services to CLOs, and opportunity funds, that build on its corporate credit, asset-backed finance and healthcare structured capital experience, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. AssuredIM has managed structured and public finance, credit and special situation investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. The Company established AssuredIM with the completion, on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain AcquisitionCapital Management, LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities (the BlueMountain Acquisition). The Asset Management segment diversifies the risk profile and revenue opportunities of the Company into the asset management industry, with the goal of further developing a fee-based platform, which will be operating within the Assured Investment Management platform. Additionally, the Company believes thatCompany.
Since the establishment of Assured Investment Management providesAssuredIM, the Company an opportunity to deploy excess capital at attractive returns, improving the risk-adjusted return on a portion of its investment portfolio. The Company intends to leverage the Assured Investment Management infrastructure and platform to grow its Asset Management segment both organically and inorganically through strategic combinations.
The Company continually evaluates its key business strategies, which fall into three areas: (1) insurance; (2) asset management and alternative investments; and (3) capital management. The Company seeks to grow the insurance business through new business production, acquisitions of legacy monolines or reinsurance of their portfolios, and to continue to mitigate losses in its current insured portfolio. The Company intends to grow its Asset Management business through strategic combinations. The Company is also using the investment knowledge and experience in AssuredIM to expand the categories and types of investments it makes. AssuredIM’s investing capabilities provide the Insurance segment with an opportunity to deploy excess capital at attractive returns, and to improve the risk-adjusted return on a portion of its investment portfolio. Finally, the Company pursues strategies to manage capital within the Assured Guaranty group more efficiently.
Insurance
Insurance Companies
The Company'sCompany’s largest line of business is Insurance. The Company primarily conducts financial guaranty business on a direct basis from the following companies: Assured Guaranty Municipal Corp. (AGM), Municipal Assurance Corp. (MAC), Assured Guaranty Corp. (AGC), Assured Guaranty UK Limited (AGUK, formerly known as Assured Guaranty (Europe) plc (AGE UK)plc) and, most recently, Assured Guaranty (Europe) SA (AGE SA)(AGE). It also conducts insurance business through its Bermuda-based reinsurers Assured Guaranty Re Ltd. (AG Re) and Assured Guaranty Re Overseas Ltd. (AGRO). The following is a description of AGL'sthe Company’s principal insurance operating subsidiaries:
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•Assured Guaranty Municipal Corp. AGM is located and domiciled in New York, and was organized in 1984 as “Financial Security Assurance Inc.” It provides financial guaranty insurance and reinsurance on debt obligations issued in the U.S. and non-U.S. public finance and infrastructure markets, including bonds issued by U.S. state or governmental authorities or notes issued to finance infrastructure projects. •Assured Guaranty •Assured Guaranty UK Limitedand Assured Guaranty (Europe) SA. AGUK and AGE (the European Insurance Subsidiaries) offer financial guaranties in the non-U.S. public finance, infrastructure and structured finance markets. AGUK is a U.K. incorporated private limited company licensed as a U.K. insurance company and located in England that writes new business in the U.K. and certain other countries that are not part of the European Economic Area (EEA). AGUK was organized in 1990 and issued its first financial guaranty in 1994. AGE is a French incorporated company located in France and established in mid-2019 that has been authorized by the French insurance and banking supervisory authority, the Autorité de Contrôle Prudentiel et de Résolution (ACPR), to conduct financial guaranty business. AGE writes new business in the EEA. •Assured Guaranty Re Ltd. and Assured Guaranty Re Overseas Ltd.AG Re and AGRO underwrite financial guaranty reinsurance, and AGRO also underwrites other specialty insurance and reinsurance that are in line with the Company’s risk profile and benefits from its financial guaranty underwriting experience. AG Re and AGRO write business as reinsurers of third-party primary insurers and of certain affiliated companies. AG Re is incorporated under the laws of Bermuda and is licensed as a Class 3B insurer under the Insurance Act 1978 and related regulations of Bermuda. AG Re indirectly owns AGRO, which is a Bermuda Class 3A and Class C insurer. Support of the European Insurance Subsidiaries AGM and AGC (the U.S. Insurance Subsidiaries) provide support to the European Insurance Subsidiaries through reinsurance and other agreements. Support of AGUK AGM and AGUK implemented in 2011 a co-guarantee structure pursuant to which: (i) AGUK directly guarantees a specified portion of the public finance obligations issued in a particular transaction rather than guaranteeing 100% of the issued obligations; (ii) AGM directly guarantees the balance of the guaranteed public finance obligations; and (iii) AGM also provides a second-to-pay guarantee for AGUK’s portion of the guaranteed public finance obligations (Public Finance Co-Guarantee Structure). The co-guarantee split for public finance business, which has been in effect since October 2018, is 15% AGUK and 85% AGM. Effective July 1, 2021, AGC and AGUK implemented a co-guarantee structure for non-public finance business that, other than the covered business, is identical to the AGM/AGUK Public Finance Co-Guarantee Structure (Non-Public Finance Co-Guarantee Structure). The co-guarantee split for non-public finance business is 15% AGUK and 85% AGC. Separate and apart from the Public Finance Co-Guarantee Structure and the Non-Public Finance Co-Guarantee Structure, AGM provides support to AGUK through a quota share and excess of loss reinsurance agreement (Reinsurance Agreement) and a net worth maintenance agreement (Net Worth Agreement). Under the quota share cover of the Reinsurance Agreement, AGM reinsures approximately 95-99% of AGUK’s retention (after cessions to other reinsurers) of most of the outstanding financial guaranties that AGUK wrote prior to the implementation of the Public Finance Co-Guarantee Structure in 2011. The quota share cover of the Reinsurance Agreement also obligates AGM to reinsure 85% of municipal, utility, project finance or infrastructure risks or similar business that AGUK writes from and after October 2018 without utilizing the co-guarantee structure. Currently, there is no such outstanding business at AGUK. AGM secures its quota share reinsurance obligations to AGUK under the Reinsurance Agreement by posting collateral in trust equal to 102% of the sum of AGM’s assumed share of the following in respect of the reinsured AGUK 7 policies: (i) AGUK’s unearned premium reserve (net of AGUK’s reinsurance premium payable to AGM); (ii) AGUK’s provisions for unpaid losses and allocated loss adjustment expenses (LAE) (net of any salvage recoverable); and (iii) any unexpired risk provisions of AGUK, in each case (i) - (iii) as calculated by AGUK in accordance with generally accepted accounting practice in the U.K. (UK GAAP). Under the excess of loss cover of the Reinsurance Agreement, AGM is obligated to pay AGUK quarterly the amount (if any) by which (i) the sum of: (a) AGUK’s incurred losses, calculated in accordance with UK GAAP as reported by AGUK in its financial returns filed with the Prudential Regulation Authority (PRA); and (b) AGUK’s paid losses and LAE, in both cases net of all other performing reinsurance (including the reinsurance provided by AGM under the quota share cover of the Reinsurance Agreement), exceeds (ii) an amount equal to: (a) AGUK’s capital resources under U.K. law; minus (b) 110% of the greatest of the amounts as may be required by the PRA as a condition for maintaining AGUK’s authorization to carry on a financial guarantee business in the U.K. The purpose of this excess of loss cover is to ensure that AGUK maintains capital resources equal to at least 110% of the most stringent amount of capital that it may be required to maintain as a condition to carrying on a financial guarantee business in the U.K. AGUK may terminate the Reinsurance Agreement (i.e., both its quota share and excess of loss covers) upon the occurrence of any of the following events: (i) AGM’s rating by Moody’s Investors Service, Inc. (Moody’s) falls below “Aa3” or its rating by S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (S&P), falls below “AA-” (and AGM fails to restore such rating(s) within a prescribed period of time); (ii) AGM’s insolvency, failure to maintain the minimum capital required under the laws of AGM’s domiciliary jurisdiction, filing a petition in bankruptcy, going into liquidation or rehabilitation, or having a receiver appointed; or (iii) AGM’s failure to maintain its required collateral described above. Under the Net Worth Agreement, AGM is obligated to make capital contributions to AGUK in amounts sufficient to ensure that AGUK maintains capital resources equal to 110% of the greatest of the amounts as may be required by the PRA as a condition of AGUK maintaining its authorization to carry on a financial guarantee business in the U.K., provided that such contributions: (i) do not exceed 35% of AGM’s policyholders’ surplus as determined by the laws of the State of New York; and (ii) are in compliance with a provision of the New York Insurance Law requiring notice to, or approval by, the New York State Department of Financial Services (the NYDFS) for transactions between affiliates that exceed certain thresholds. The Net Worth Agreement obligates AGM to provide AGUK with support similar to that which AGM also provides AGUK under the excess of loss cover of the Reinsurance Agreement, except the latter is meant to protect against erosion of AGUK’s capital resources due to insurance and/or reinsurance losses in AGUK’s insured portfolio, while the former is meant to protect against an erosion of AGUK’s capital resources for other reasons (e.g., poor investment performance or origination expenses exceeding premium). Given this purpose, the Net Worth Agreement clarifies that any amounts due thereunder must take into account all amounts paid, or reasonably expected to be paid, under the Reinsurance Agreement. The Net Worth Agreement also includes termination provisions substantially similar to those in the Reinsurance Agreement. AGM has never been required to make any contributions to AGUK’s capital under the current Net Worth Agreement. Support of AGE AGE has in place similar reinsurance and capital support agreements as are in place with AGUK. AGM’s agreements with AGE generally apply to all AGE policies that insure public finance business in EEA jurisdictions. The agreements consist of: (i) a quota share reinsurance agreement between AGE and AGM pursuant to which AGM provides the same reinsurance to AGE in respect of business that was transferred to AGE by AGUK pursuant to Part VII of the Financial Services and Markets Act 2000 (FSMA) (Part VII Transfer) effective October 1, 2020 as AGM provided to AGUK prior to such transfer (AGE also has similar agreements in effect with its affiliates, AGC and AG Re); (ii) a second quota share reinsurance agreement whereby AGM provides AGE with 90% proportional reinsurance for: a. certain business transferred to AGE pursuant to the Part VII Transfer that was not reinsured by AGM when such business was part of AGUK's insured portfolio; b. certain business originally written by AGUK pursuant to the co-insurance arrangement described above, but which was novated to, and 100% guaranteed by, AGE in connection with the Part VII Transfer; and c. any new public finance business written by AGE; and 8 (iii) an excess of loss reinsurance agreement, similar to the excess of loss cover of AGM’s Reinsurance Agreement with AGUK, pursuant to which AGM is obligated, effectively, to ensure that AGE maintains capital resources equal to at least 110% of the most stringent amount of capital that AGE may be required to maintain as a condition of it maintaining its authorization to carry on a financial guarantee business in France. Effective July 1, 2021, AGC and AGE entered into a Non-Public Finance Business Reinsurance Agreement pursuant to which AGC provides AGE with 90% proportional reinsurance for any non-public finance business written by AGE. AGM and AGC secure their quota share reinsurance obligations to AGE under the agreements described above by depositing collateral in accounts maintained by an EEA financial institution and pledging such accounts to AGE under French law. The measure of AGM’s and AGC’s required collateral for AGE is generally the same as the measure of AGM’s required collateral for AGUK, except that the former is determined in accordance with French (versus U.K.) GAAP. AGM also has in place with AGE a net worth maintenance agreement that is similar to AGM’s Net Worth Agreement with AGUK - i.e., the former obligates AGM to ensure that AGE maintains capital resources at least equal to 110% of its most stringent capital requirement for maintaining its authorization to carry on a financial guarantee business in France. Other Group Support of the European Insurance Subsidiaries for Certain Legacy Business AGC and AG Re also provide reinsurance support to the European Insurance Subsidiaries for certain legacy business that was insured prior to 2009 by AGUK. Some of this business continues to reside at AGUK, while some of it was transferred to AGE in October 2020 pursuant to the Part VII Transfer. AG Re does not currently provide direct reinsurance support for new business being written by AGUK or AGE. AGC and AG Re secure their reinsurance of this legacy business in essentially the same manner as AGM secures its reinsurance of the European Insurance Subsidiaries - i.e., AGC and AG Re pledge collateral equal to their assumed UK GAAP liabilities for AGUK and equal to their assumed French GAAP liabilities for AGE. Insurance Acquisitions |
The Company combined the operations of its then European subsidiaries, AGE UK, Assured Guaranty (UK) plc (AGUK), Assured Guaranty (London) plc (AGLN) and CIFG Europe S.A. (CIFGE), in a transaction that was completed on November 7, 2018. Under the combination, AGUK, AGLN and CIFGE transferred their insurance portfolios to and merged with and into AGE UK (the Combination).
Insurance Portfolio - Financial Guaranty
Financial guaranty insurance generally provides an unconditional and irrevocable guaranty that protects the holder of a debt instrument or other monetary obligation against non-payment of scheduled principal and interest payments when due. Upon an obligor'sobligor’s default on scheduled debt service payments due on the debt obligation, whether due to its insolvency or otherwise, the Company is generally required under the financial guaranty contract to pay the investor the principal and interest shortfalls thenwhen due.
Financial guaranty insurance may be issued to all of the investors of the guaranteed series or tranche of a municipal bond or structured finance security at the time of issuance of those obligations or it may be issued in the secondary market to only specific individual holders of such obligations who purchase the Company'sCompany’s credit protection.protection either in the secondary market or on a bilateral basis in the primary market when an obligation is not normally traded.
Both issuers of and investors in financial instruments may benefit from financial guaranty insurance. Issuers benefit when they purchase financial guaranty insurance for their new issue debt transaction because the insurance may have the effect of lowering an issuer'sissuer’s interest cost over the life of the debt transaction to the extent that the insurance premium charged by the Company is less than the net present value of the difference between the yield on the obligation insured by Assured Guaranty (which carries the credit rating of the specific subsidiary that guarantees the debt obligation) and the yield on the debt obligation
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if sold on the basis of its uninsured credit rating. The principal benefit to investors is that the Company's guaranty provides increased certainty that scheduled payments will be received when due. TheA financial guaranty may also improve the marketability and liquidity of obligations, issued by infrequent or unknown issuers, as well asespecially obligations with complex structures or backed by asset classes new to the market. In general, and especially in such instances, investors may be able to sell bonds insured by highly rated financial guarantorsbonds more quickly than uninsured debt obligations and depending on the difference between the financial strength rating of the insurer and the rating of the issuer, at a higher secondary marketbetter price than forthe comparable uninsured debt obligations.debt.
As an alternative to traditional financial guaranty insurance, in the past the Company also providedmay provide credit protection relating to a particular security or obligor through a credit derivative contract, such as a credit default swap (CDS). Under the terms of a CDS, the seller of credit protection agrees to make a specified payment to the buyer of credit protection if one or more specified credit events occurs with respect to a reference obligation or entity. In general, the Company, as the seller of credit protection, specified as credit events in its CDS failure to pay interest and principal on the reference obligation, but the Company'sCompany’s rights and remedies under a CDS may be different and more limited than under a financial guaranty insurance of an entire issuance. Due to changes in the regulatory environment, the Company has not provided credit protection in the U.S. through a CDS since March 2009, other than in connection with loss mitigation and other remediation efforts relating to its existing book of business. The Company, however, has acquired or reinsured portfolios both before and after 2009 that include financial guaranty contracts in credit derivative form.
The Company also offers credit protection through reinsurance, and in the past has provided reinsurance to other financial guaranty insurers with respect to their guarantyfinancial guaranties of public finance, infrastructure and structured finance obligations. The Company believes that the opportunities currently available to it in the reinsurance market primarily consist of potentially assuming portfolios of transactions from inactive primary insurers, such as it did in the SGI Transaction, and recapturing portfolios that it has previously ceded to third party reinsurers, but such opportunities are expected to be limited given the small number of unaffiliated reinsurers currently reinsuring the Company.Transaction.
U.S. Public Finance Obligations The Company insures and reinsures a number of different types of U.S. public finance obligations. The types of U.S. public finance obligations includingthe Company insures include the following:
General Obligation Bonds are full faith and credit bondsobligations that are issued by states, their political subdivisions and other municipal issuers, and are supported by the general obligation of the issuer to pay from available funds and by a pledge of the issuer to levy ad valoremproperty taxes in an amount sufficient to provide for the full payment of the bonds.
Tax-Backed Bonds are obligations that are supported by the issuer from specific and discrete sources of taxation. They includetaxation and tax-backed revenue bonds, general fund obligations and lease revenue bonds. Tax-backed obligations may be secured by a lien on specific pledged tax revenues, such as a gasoline or excise tax, or an income tax, or incrementally from growth in property tax revenue associated with growth in property values. These obligations also include obligations secured by special assessments levied against property owners and often benefit from issuer covenants to enforce collections of such assessments and to foreclose on delinquent properties. Lease revenue bonds typically are general fund obligations of a municipality or other governmental authority that are subject to annual appropriation or abatement; projects financed and subject to such lease payments ordinarily include real estate or equipment serving an essential public purpose. Bonds in this category also include moral obligations of municipalities or governmental authorities.
Municipal Utility Bonds are obligations of all forms of municipal utilities, including electric, water and sewer utilities and resource recovery revenue bonds. These utilities may be organized in various forms, including municipal enterprise systems, authorities or joint action agencies.
Transportation Bonds include a wide variety of revenue-supported bonds,obligations, such as bonds for airports, ports, tunnels, municipal parking facilities, toll roads and toll bridges.
Healthcare Bonds are obligations of healthcare facilities, including community based hospitals and systems, as well as of health maintenance organizations and long-term care facilities.
Higher Education Bondsare obligations secured by revenue collected by either public or private secondary schools, colleges and universities. Such revenue can encompass all of an institution'sinstitution’s revenue, including tuition and fees, or in other cases, can be specifically restricted to certain auxiliary sources of revenue.revenue or revenue relating to student accommodation.
Infrastructure Bonds include obligations issued by a variety of entities engaged in the financing of infrastructure projects, such as roads, airports, ports, social infrastructure and other physical assets delivering essential services supported by long-term concession arrangements with a public sector entity.
Housing Revenue Bonds are obligations relating to both single and multi-family housing, issued by states and localities, supported by cash flow and, in some cases, insurance from entities such as the Federal Housing Administration.
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Investor-Owned Utility Bonds are obligations primarily backedissued by investor-owned utilities, and include first mortgage bond obligations of for-profit electric or water utilities providing retail, industrial and commercial service, and also includeas well as sale-leaseback obligation bonds supported by such entities.
Renewable Energy Bonds are obligations backed by revenue from renewable energy sources, such as solar, wind farm, hydroelectric, geothermal and fuel cell.sources.
Other Public Finance Bonds include other debt issued, guaranteed or otherwise supported by U.S. national or local governmental authorities, as well as student loans, revenue bonds, and obligations of some not-for-profit organizations.
A portion of the Company'sCompany’s exposure to tax-backed bonds, municipal utility bonds and transportation bonds constitutes "special revenue"“special revenue” bonds under the United States Bankruptcy Code (Bankruptcy Code). Special revenue bonds benefit from a lien on the special revenues, after deducting necessary operating expenses, of the project or system from which the revenues are derived.
Non-U.S. Public Finance Obligations The Company insures and reinsures a number of different types of non-U.S. public finance obligations, which consist of both infrastructure projects and other projects essential for municipal function such as regulated utilities. Credit support for the exposures written by the Company may come from a variety of sources, including some combination of subordinated tranches, over-collateralization or cash reserves. Additional support also may be provided by transaction provisions intended to benefit noteholders or credit enhancers. The types of non-U.S. public finance securities the Company insures and reinsures include the following:
Regulated Utility Obligations are obligations issued by government-regulated providers of essential services and commodities, including electric, water and gas utilities.utilities, supported by the rates and charges paid by the utilities’ customers. The majority of the Company's internationalCompany’s non-U.S. regulated utility business is conducted in the U.K.
Infrastructure Finance Obligations are obligations issued by a variety of entities engaged in the financing of internationalnon-U.S. infrastructure projects, such as roads, airports, ports, social infrastructure, student accommodations, stadiums, and other physical assets delivering essential services supported either by long-term concession arrangements with a public sector entity or a regulatory regime. The majority of the Company's internationalCompany’s non-U.S. infrastructure business is conducted in the U.K.
Pooled Infrastructure Obligations are synthetic asset-backed obligations that take the form of CDS obligations or credit-linked notes that reference either infrastructure finance obligations or a pool of such obligations, with a defined deductible to cover credit risks associated with the referenced obligations. The Company has not entered into a pooled infrastructure transaction since 2006.
Sovereign and Sub-Sovereign Obligations primarily includes obligations of local, municipal, regional or national governmental authorities or agencies outside of the U.S.
Renewable Energy Bonds are obligations secured by revenues relating to renewable energy sources, typically solar or wind farms. These transactions often benefit from regulatory support in the form of regulated minimum prices for the electricity produced. The majority of the Company’s non-U.S. renewable energy business is conducted in Spain.
Other Public Finance Obligations includeare obligations of, or backed by, local, municipal, regional or national governmental authorities or agencies not generally described in any of the other categories above.described categories.
U.S. and Non-U.S. Structured Finance Obligations The Company insures and reinsures a number of different types of U.S. and non-U.S. structured finance obligations. Credit support for the exposures written by the Company may come from a variety of sources, including some combination of subordinated tranches, excess spread, over-collateralization or cash reserves. Additional support also may be provided by transaction provisions intended to benefit noteholders or credit enhancers. The types of U.S. and non-U.S. structured finance obligations the Company insures and reinsures include the following:
Residential Mortgage-Backed Securities (RMBS) are obligations backed by closed-end and open-end first and second lien mortgage loans on one-to-four family residential properties, including condominiums and cooperative apartments. The Company has not insured a RMBS transaction since January 2008, although it has acquired RMBS insurance exposures since that time in connection with its acquisition or reinsurance of legacy financial guaranty portfolios. First lien mortgage loan products in these transactions include fixed rate, adjustable rate and option adjustable-rate mortgages.properties. The credit quality of borrowers covers a broad range, including "prime," "subprime"“prime,” “subprime” and "Alt-A."“Alt-A.” A prime borrower is generally defined as one with strong risk characteristics as measured by factors such as payment history, credit score, and debt-to-income ratio. A subprime borrower is a borrower with higher risk characteristics, usually as determined by credit score and/or credit history.characteristics. An Alt-A borrower is generally defined as a prime quality borrower that lacks certain ancillary characteristics, such as fully documented income. RMBS include home equity lines of credit (HELOCs), which refers to a type of residential mortgage-backed transaction backed by second-lien loan collateral. The Company has not provided insurance for RMBS in the primary market since 2008.
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Life Insurance Securitization ObligationsTransactions are obligations secured by the future earnings from pools of various types of insurance and insurance/reinsurance policies and income produced by invested assets.
Pooled Corporate Obligations are securities primarily backed by various types of corporate debt obligations, such as secured or unsecured bonds, bank loans or loan participations and trust preferred securities. These securities are often issued in "tranches,"“tranches,” with subordinated tranches providing credit support to the more senior tranches. The Company'sCompany’s financial guaranty exposures generally are to the more senior tranches of these issues.
Consumer Receivables Securities are obligations backed by non-mortgage consumer receivables, such as student loans, automobile loans and leases, manufactured home loans and other consumer receivables.
Financial Products Business is the guaranteed investment contracts (GICs) portion of a line of business previously conducted by Assured Guaranty Municipal Holdings Inc. (AGMH) that the Company did not acquire when it purchased AGMH in 2009 from Dexia SA and that is being run off. That line of business consisted of AGMH's guaranteed investment contractsAGMH’s GIC business, its medium term notes business and the equity payment agreements associated with AGMH'sAGMH’s leveraged lease business. Although Dexia SA and certain of its affiliates (Dexia) assumed the liabilities related to such businesses when the Company purchased AGMH, AGM policies related to such businesses remained outstanding. Assured Guaranty is indemnified by Dexia SA and certain of its affiliates against loss from the former Financial Products Business.financial products business.
Until November 2008, AGMH’s former financial products segment had been in the business of borrowing funds through the issuance of GICs insured by AGM and reinvesting the proceeds in investments that met AGMH’s investment criteria. In June 2009, in connection with the Company'sCompany’s acquisition of AGMH from Dexia Holdings Inc., Dexia SA, the ultimate parent of Dexia Holdings Inc., and certain of its affiliates, entered into a number of agreements intended to mitigate the credit, interest rate and liquidity risks associated with the GIC business and the related AGM insurance policies. Some of those agreements have since terminated or expired, or been modified. As of December 31, 2019,2022, the aggregate accreted GIC balance was approximately $1.0$0.5 billion, compared with approximately $10.2 billion as of December 31, 2009. As of December 31, 2019,2022, the aggregate fair market value of the assets supporting the GIC business plus cash and positive derivative value exceeded by nearly $0.9$0.7 billion the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business.
The financial products business also included the equity payment undertaking agreement portion of the leveraged lease business, described in Liquidity and Capital Resources, Liquidity Requirements and Sources, Insurance Subsidiaries.
Other Structured Finance Obligations are obligations backed by assets not generally described in any of the other described categories.
Insurance Portfolio - Specialty Insurance and ReinsuranceBusiness
The Company also provides specialty insurance, reinsurance and reinsuranceguarantees in transactions with similar risk profiles to its structured finance exposures written in financial guaranty form. The Company provides such specialty insurance and reinsurance, for example, for life insurance transactions and aircraft residual value insurance (RVI) transactions.
Exposure Limits, Underwriting Procedures, and Credit Policy
Exposure Limits
The Company establishes exposure limits and underwriting criteria for obligors, sectors and countries, and for individual insurance transactions. Risk exposure limits for single obligors are based on the Company'sCompany’s capital resources and its assessment of potential frequency and severity of loss as well as other factors, such as historical and stressed collateral performance. Moreover, these limits are further constrained by both regulatory limits and rating agency requirements. Sector limits are based on the Company’s view of stress losses for the sector and on its assessment of correlation. Country limits are based on the size and stability of the relevant economy, and the Company’s view of the political environment and legal system. All of the foregoing limits are established in relation to the Company'sCompany’s capital base.
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Underwriting Procedures
Each insurance transaction underwritten by the Company involves persons with different skills and backgrounds across various departments within the Company. The Company'sCompany’s insurance transaction underwriting teams include both underwriters and lawyers, who analyze the structure of a potential transaction and the credit and legal issues pertinent to the particular line of business or asset class, and accounting and finance personnel, who review the more complex transactions to determine the appropriate accounting treatment.
Upon completion of the underwriting analysis, the underwriter prepares a formal credit report that is submitted to a credit committee for review. An oral presentation is usually made to the committee, followed by questions from committee members and discussion among the committee members and the underwriters. In some cases, additional information may be presented at the meeting or required to be submitted prior to approval. Each credit committee decision is documented and any further requirements, such as specific terms or evidence of due diligence, are noted. The Company'sCompany’s credit committees assess each insurance transaction underwritten by the Company and are composed of senior officers of the Company generally excluding those senior officers responsible for business origination. The committees are organized by asset class, such as for public finance or structured finance, and along regulatory lines.by company. For certain small transactions, the credit decision may be delegated by the credit committee to a sub-committee composed of members of the credit committee.
Upon approval by the credit committee, the underwriter, working with the responsible attorney, is responsible for closing the transaction and issuing the policy. At policy issuance, the underwriter and the responsible attorney certify that the transaction closed meets the terms and conditions agreed to by the credit committee.
Credit Policy
The Company maintains underwriting manuals that articulate the application of the principles in its risk appetite statement to its financial guaranty business. For new financial guaranty business, generally a risk must be viewed by the Company as investment grade at the time of underwriting to be eligible for insurance. The underwriting manuals also articulate the Company’s exposure limits and credit policies applicable to specific products.
U.S. Public FinanceFinance.
For U.S. public finance transactions, the Company'sCompany’s underwriters generally analyze the issuer'sissuer’s historical financial statements and, where warranted, develop stress case projections to test the issuer'sissuer’s ability to make timely debt service payments under stressful economic conditions.
The Company focuses principally on the credit quality of the obligor based on population size and trends, wealth factors, and strength of the economy. The Company evaluates the obligor’s liquidity position; its fiscal management policies and track record; its ability to raise revenues and control expenses; and its exposure to derivative contracts and to debt subject to acceleration. The Company assesses the obligor’s pension and other post-employment benefits obligations and funding policies and evaluates the obligor’s ability to adequately fund such obligations in the future. The Company analyzes other critical risk factors including the type of issue; the repayment source; pledged security, if any; the presence of restrictive covenants and the tenor of the risk. The Company also considers the ability of obligors to file for bankruptcy or receivership under applicable statutes (and on related statutes that provide for state oversight or fiscal control over financially troubled obligors). The Company also considersevaluates the impact of environmental impact and climate change risks, associated withincluding weather-related events, on the ability of the obligor to meet its financial obligations over the life of the insured transaction. Such risks include rising sea levels, hurricanes, wildfires and earthquakes. The Company weighs the risk of a rating agency downgrade of an obligation's underlying uninsured rating.
In cases of not-for-profit institutions, such as healthcare issuers and private higher education issuers, the Company focuses on the financial stability of the institution, its competitive position and its management experience.experience as well as restrictive covenants imposed on the obligor for the benefit of debt holders.
The Company’s credit policy for U.S. infrastructure transactions is substantially similar to that of non-U.S. infrastructure transactions described below.
Non-U.S. Transactions
Public Finance Transactions. For non-U.S. transactions, the Company undertakes an analysis of the country or countries in which the risk resides, which includes political risk as well as economic and demographic characteristics. For each transaction, the Company also performs an assessment of the legal framework governing the transaction and the laws affecting the underlying assets supporting the obligations to be insured. In general, non-U.S. transactions consist of transactions with regulated utilities or infrastructure transactions.
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The underwriting of regulated utilities is generallyoutside of the same as for U.S. transactions, but with additional consideration given to factors specificprimarily focuses on financial strength of the utility, financial covenants made by the utility, and regulations relevant to the relevantspecific jurisdiction. The Company also assesses each transaction for material environmental and climate change risks, and incorporates its assessment into its underwriting decisions.
For non-U.S. infrastructure transactions, the Company reviews the type of project (e.g., utility, hospital, road, social housing, transportation or student accommodation) and the source of repayment of the debt. For certain transactions, debt service and operational expenses are covered by availability payments made by either a governmental entity or a not-for-profit entity. The availability payments are due if the project is available for use, regardless of whether the project actually is in use. The principal risks for such transactions are construction risk and operational risk.
For other transactions, notably transactions secured by toll-roads, and student accommodation and stadiums, revenues derived from the project must be sufficient to make debt service payments as well as cover operating expenses during the concession period.
For infrastructure transactions, underwriters generally use financial models in order to evaluate the ability of the transaction to generate adequate cash flow to service the debt under a variety of scenarios. The models include economically stressed scenarios that the underwriters use for their assessment of the potential credit risk inherent in a particular transaction. Stress models developed internally by the Company'sCompany’s underwriters reflect both empirical research and information gathered from third parties, such as rating agencies or investment banks. The Company may also engage advisorsadvisers such as consultants and external counsel to assist in analyzing a transaction'stransaction’s financial or legal risks.
The Company’s due diligence for infrastructure projects also includes: a financial review of the entity seeking the development of the project (usually a governmental entity or university); a financial and operational review of the developer, the construction companies, and the project operator; and a financial review of the various providers of operational financial protection for the bondholders (and therefore the insurer), including construction surety providers, letter-of-credit providers, liquidity banks or account banks. The Company uses outside consultants to review the construction program and to assess whether the project can be completed on time and on budget. The Company projects the cost of replacing the construction company, including delays in construction, in the event that a construction company is unable to complete the construction for any reason. Construction security packages are sized appropriately to cover these risks and the Company requires such coverage from credit-worthy institutions.
U.S. Structured Finance
Finance. Structured finance obligations generally present three distinct forms of risk: asset risk, pertaining to the amount and quality of assets underlying an issue; structural risk, pertaining to the extent to which an issuer's legal structure provides protection from loss; and execution risk, which is the risk that poor performance by a servicer or collateral manager contributes to a decline in the cash flow available to the transaction. Each of these risks is addressed through the Company'sCompany’s underwriting process. The underwriter is also required to assess the presence of any environmental or climate change risk and, to the extent there are notable environmental or climate change risks, work to assess the risks and present them to the credit committee.
For structured finance transactions, underwriters generally use financial models to evaluate the ability of the transaction to generate adequate cash flow to service the debt under a variety of hypothetical scenarios. The models include economically stressed scenarios that the underwriters use for their assessment of the potential credit risk inherent in a particular transaction. Stress models developed internally by the Company'sCompany’s underwriters reflect both empirical research and information gathered from third parties, such as rating agencies or investment banks. Generally, the amount and quality of asset coverage
required with respect to a structured finance exposure is dependent upon both the historic performance of the asset class, as well as the Company’s view of the future performance of the subject assets.
The Company may also engage advisorsadvisers such as consultants and external counsel to assist in analyzing a transaction's financial or legal risks. The Company may also conduct a due diligence review that includes, among other things, a site visit to the project or facility, meetings with issuer management, review of underwriting and operational procedures, file reviews, and review of financial procedures and computer systems.
In addition, structured securities usually are designed to protect investors (and therefore the insurer or reinsurer) from the bankruptcy or insolvency of the entity that originated the underlying assets, as well as the bankruptcy or insolvency of the servicer or manager of those assets.
The Company conducts due diligence on the collateral that supports its insured transactions. The principal focus of the due diligence is to confirm the underlying collateral was originated in accordance with the stated underwriting criteria of the asset originator. The Company also conducts audits of servicing or other management procedures, reviewing critical aspects of
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these procedures such as cash management and collections. The Company may, for certain transactions, obtain background checks on key managers of the originator, servicer or manager of the obligations underlying that transaction.
Non-U.S. Structured Finance.The underwriting process for Non-U.S. Structured Finance transactions is substantially similar to the procedures described above for U.S. Structured Finance transactions, with additional consideration for the risks relating to the relevant jurisdiction for each transaction.
Importance of Financial Strength Ratings
An insurer’s financial strength rating itself is not specific to any particular policy or contract. Itcontract; a rating agency must assign a rating to the insured obligation. A financial strength rating does not refer to an insurer's ability to meet non-insurance obligations and is not a recommendation to purchase any policy or contract issued by an insurer or to buy, hold, or sell any security insured by an insurer. The insurance financial strength ratings assigned by the rating agencies are based upon factors that the rating agencies believe are relevant to policyholders and are not directed toward the protection of investors in AGL'sAGL’s common shares. Ratings reflect only the views of the respective rating agencies assigning them and are subject to continuous review and revision or withdrawal at any time.
A major component in arriving at a financial guaranty insurer’s rating has been the rating processagency’s assessment of the insurer’s capital adequacy, with each rating agency employing its own proprietary model. These capital adequacy approaches include “stress case” loss assumptions for various risks or risk categories. The rating agencies have at various times materially increased stress case loss assumptions for various risks or risk categories, in some cases later reducing such stress case losses. This approach has been challengingmade predicting the amount of capital required to maintain or attain a certain rating more difficult. In addition, both S&P and Moody’s have applied other factors, some of which are subjective, such as the insurer's business strategy and franchise value or the anticipated future demand for its product, to justify ratings for the Company due to a number of factors, including:
Despite the difficultunpredictable application of subjective factors that are in addition to a rating agency process following the financial crisis,agency’s assessment of insurers’ capital adequacy, the Company has been able to maintain strong financial strength ratings. However, if a substantial downgrade of the financial strength ratings of the Company'sCompany’s insurance subsidiaries were to occur in the future, such downgrade would adversely affect its business and prospects and, consequently, its results of operations and financial condition. The Company believes that if the financial strength ratings of any of its insurance subsidiaries were downgraded from their current levels, such downgrade could result in downward pressure on the premium that such insurance subsidiary would be able to charge for its insurance. The Company believes that so long as its insurance subsidiaries continue to have financial strength ratings in the double-A category from at least one of S&P or Moody’s, they are likely to be able to continue writing financial guaranty business with a credit quality similar to that historically written. However, if neither S&P nor Moody’s maintained financial strength ratings of an insurance subsidiary in the double-A category, or if either S&P or Moody’s were to downgrade an insurance subsidiary below the single-A level, it could be difficult for such insurance subsidiary to originate the current volume of new financial guaranty business with comparable credit characteristics.
The Company periodically assesses the value of each rating assigned to each of its companies, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its companies. For example, Kroll Bond Rating Agency (KBRA) ratings were first assigned to MAC in 2013, to AGM in 2014, to AGC in 2016 and to AGE UK in 2018; an A.M. Best Company, Inc. (Best)a Moody’s rating was first assigned to AGRO in 2015; while a Moody's rating was never requested for MAC,
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was dropped from AG Re and AGRO in 2015, and was the subject of a rating withdrawal request in the case ofby AGC (such request was declined)declined by Moody’s).
See Item 1A. Risk Factors, Strategic Risks captioned “A downgrade of the financial strength or financial enhancement ratings of any of the Company'sCompany’s insurance and reinsurance subsidiaries wouldmay adversely affect its business and prospects and, consequently, its results of operations and financial condition”prospects” and Part II, Item 8,7, Management’s Discussion and Analysis of Financial StatementsCondition and Supplementary Data, Note 3,Results of Operations, Results of Operations — Insurance Segment — Financial Strength Ratings, for more information about the Company'sCompany’s ratings.
Competition
Assured Guaranty is the market leader in the financial guaranty industry. The Company'sCompany’s position in the market benefits from its ability to maintain strong financial strength ratings, its strong claims-paying resources, its proven willingness and ability to make claim payments to policyholders after obligors have defaulted, and its ability to achieve recoveries in respect of the claims that it has paid on insured residential mortgage-backed and other securities and to resolve its troubled municipal exposures.
Assured Guaranty'sGuaranty’s principal competition is in the form of obligations that issuers decide to issue on an uninsured basis. In the U.S. public finance market, when the difference in yield (or the credit spread) between a bond insured by Assured Guaranty and an uninsured bond is narrow, as is often the case in a low interest rates are low,rate environment, investors may prefer greater yield over insurance protection, and issuers may find the cost savings from insurance less compelling. Over the last several years, interest rates generally have been lower than historical norms. In 2019, municipal interest rates reached new lows andcontrast, when credit spreads tightened further. The 30-year AAA Municipal Market Data (MMD) rate started the year off at 3.02% and ended the year at 2.09%. As a result, the difference in yield (or the credit spread) between a bond insured by Assured Guaranty and an uninsured bond has providedare wider, there is comparatively littlemore room for issuer savings and insurance premium. InHowever, credit spreads may be narrower in a higher interest rate environment, as occurred in late 2022, and credit spreads may widen in a low interest rate environment, as occurred after the U.S. public finance market, market penetration of municipal bond insurance remained approximately 5.9%onset of the par amountCOVID-19 pandemic as a result of new issues sold for both 2019market concerns about the impact of the COVID-19 pandemic on some municipal credits. See Part II, Item 7, Management’s Discussion and 2018. The Company believes the relatively low market penetration rates in 2019Analysis of Financial Condition and 2018 were in part due to the extremely low interest rates prevailing during mostResults of that period.Operations — Overview — Economic Environment.
In the U.S. public finance market, Assured Guaranty is the only financial guaranty company active before the global financial crisis ofthat began in 2008 that has maintained sufficient financial strength to write new business continuously since the crisis began. Assured Guaranty has only one direct competitor for public finance financial guaranty business, Build America Mutual Assurance Company (BAM), a mutual insurance company that commenced business in 2012 and is active only in the public finance market.2012.
The Company estimates that, of the new U.S. public finance bonds sold with insurance in 2019,2022, the Company insured approximately 60%59% of the par, while BAM insured approximately 40%41%. BAM is effective in competing with the Company for small to medium sized U.S. public finance transactions in certain sectors. BAM sometimes prices its guaranteesguaranties for such transactions at levels the Company does not believe produces an adequate rate of return and so does not match, but BAM's pricing and underwriting strategies may have a negative impact on the amount of premium the Company is able to charge for its insurance for such transactions. However, the Company believes it has competitive advantages over BAM due to: AGM's and MAC'sAGM’s larger capital base; AGM'sAGM’s ability to insure larger transactions and issuances in more diverse U.S. bond sectors;
In the globalnon-U.S. structured finance and infrastructure markets, Assured Guaranty is the only financial guaranty insurance company currently writing new guarantees.guaranties. Management considers the Company’s greater diversification to be a competitive advantage in the long run because it means the Company is not wholly dependent on conditions in any one market. In the internationalnon-U.S. infrastructure finance market, the uninsured execution serving as the Company’s principal competition occurs primarily in privately funded transactions where no bonds are sold in the public markets. In the structured finance market, the majority of our business is represented by bilateral transactions with counterparties (typically insurance companies or banks) where the motivation to buy our product relates to capital savings, and/or single risk or sectoral risk management. In this sector the Company’s principal competition is from nonpayment insurance and other forms of capital saving or risk syndication available to banks and insurers. In the securitization markets, uninsured execution occurs in both public and primaryprivate transactions primarily where bonds are sold with sufficient credit or structural enhancement embedded in transactions, such as through overcollateralization, first loss insurance, excess spread or other terms, to make the bonds attractive to investors without bond insurance.
In the future, additional new entrants into the financial guaranty industry could reduce the Company'sCompany’s new business prospects, including by furthering price competition or offering financial guaranty insurance on transactions with structural and
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security features that are more favorable to the issuers than those required by Assured Guaranty. However, the Company believes that the presence of multiple guarantors might also increase the overall visibility and acceptance of the product by a broadening group of investors, and the fact that investors are willing to commit fresh capital to the industry may promote market confidence in the product.
In addition to monoline insurance companies, Assured Guaranty competes with other forms of credit enhancement, such as nonpayment insurance, letters of credit or credit derivatives provided by banks and other financial institutions, some of which are governmental enterprises, or direct guaranties of municipal, structured finance or other debt by federal or state governments or government sponsored or affiliated agencies. Alternative credit enhancement structures, and in particular federal government credit enhancement or other programs, can interfere with the Company'sCompany’s new business prospects, particularly if they provide direct governmental-level guaranties, restrict the use of third-party financial guaranties or reduce the amount of transactions that might qualify for financial guaranties.
The Company believes that issuers and investors in securities will continue to purchase financial guaranty insurance, especially if interest rates rise and credit spreads widen. U.S. municipalities have budgetary requirements that are best met through financings in the fixed income capital markets. Historically, smaller municipal issuers have frequently used financial guaranties in order to access the capital markets with new debt offerings at a lower all-in interest rate than on an unguaranteed basis. In addition, the Company expects long-term debt financings for infrastructure projects will grow throughout the world, as will the financing needs associated with privatization initiatives or refinancing of infrastructure projects in developed countries.
The Company evaluates the amount of capital it requires based on an internal capital model as well as rating agency models and insurance regulations. The Company believes it has excess capital based on these measures,its internal capital model and rating agency models, and, to the extent permitted by insurance regulation or other regulatory authority, has been returning some of its excess capital to shareholders by repurchasing its common shares and paying dividends, and has been deploying some of its excess capital to acquire financial guaranty portfolios, asset management companies and alternative investments.
Asset Management
The Company completedsignificantly increased its participation in the BlueMountain Acquisitionasset management business with the completion, on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain and its associated entities, for a purchase price of $157 million. The Company contributed $60 million of cashused BlueMountain to BlueMountain at closing,establish AssuredIM and contributed an additional $30 million in cash in February 2020, for certain restructuring costs and future strategic investments. As of the date of acquisition, BlueMountain managed or serviced $18.3 billion in assets across CLOs and opportunity funds that build on its corporate credit, asset-backed finance and healthcare structured capital experience, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. BlueMountain has managed structured finance, credit and special situation investments, with a track record dating back to 2003. As of December 31, 2019, BlueMountain, which now operates under the name “Assured Investment Management”, was a top-twenty CLO manager by assets under management (as reported by CreditFlux) and is led by an experienced CLO and loan research team, with a broad distribution channel. Assured Investment Management underwrites assets and structures investments while leveraging a technology-enabled risk platform.
The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will result in any transaction. Please see Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in the benefits anticipated.”
Investment Managers
The following is a description of the Company’s principal investment management subsidiaries:
•AssuredIM LLC. AssuredIM LLC is a Delaware limited liability company established in 2003 and located in New York and is an investment adviser registered with the Securities and Exchange Commission (SEC). AssuredIM LLC serves as an investment adviser to pooled investment vehicles, special purpose vehicles for CLOs, and institutional accounts that are primarily U.S. and non-U.S. limited partnerships, U.S. limited liability companies, trusts and other non-U.S. companies. AssuredIM LLC generally provides investment management and supervisory services to its advisory clients on a discretionary basis. AssuredIM LLC was formerly known as BlueMountain Capital Management, LLC.
•Assured Investment Management (London) LLP. Assured Investment Management (London) LLP (AssuredIM London) is an affiliate of AssuredIM and serves as subadviser to AssuredIM, primarily with respect to issuers based in Europe, and is compensated by AssuredIM for its services. AssuredIM London was formerly known as Blue Mountain Capital Partners (London) LLP. AssuredIM London is registered with the Financial Conduct Authority (FCA) and is a relying adviser in AssuredIM LLC’s SEC registration.
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•Assured Healthcare Partners LLC. Assured Healthcare Partners LLC (AHP) is a Delaware limited liability company formed in September 2020 as a continuation of the private healthcare strategy established at AssuredIM in 2013 to provide investment advisory services primarily focused on private investments in the healthcare sector. AHP serves as an investment adviser to certain funds, pooled investment vehicles or accounts, which are its advisory clients. AHP is a relying adviser in AssuredIM LLC’s SEC registration.
Management of a Portion of Insurance Company Capital
The Company believes that Assured Investment ManagementAssuredIM provides the Company an opportunity to deploy excess capital at attractive returns, improving the
risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company intendsU.S. Insurance Subsidiaries, through their jointly-owned investment subsidiary, AG Asset Strategies LLC (AGAS), are authorized to initially invest $500up to $750 million of capital in funds managed by Assured Investment Management (Assured Investment Management funds) plus additional amountsAssuredIM (AssuredIM Funds). Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in other accounts managed by Assured Investment Management. 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.AssuredIM Funds through AGAS. As of December 31, 2019,2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, and healthcare structured capital. As of December 31, 2022 and December 31, 2021, the fair value of AGAS’ interest in AssuredIM Funds was $569 million and $543 million, respectively. In addition, the U.S. Insurance Subsidiaries invested $550 million in third-party separately managed accounts under an Investment Management Agreement (IMA) with AssuredIM. As of December 31, 2022, total capital managed by AssuredIM on behalf of the Company was $1.2 billion. These investments provide the Company with an opportunity to enhance its returns on a meaningful portion of its portfolio. They also have had invested approximately $79 millionthe effect of facilitating the growth of AssuredIM’s CLO business and the launch on the AssuredIM platform of new products or funds in the asset-based and healthcare sectors. All of the $500 million it intends to initially investAssuredIM Funds that were established since the BlueMountain Acquisition and in Assured Investment Management funds.which the Company directly invested are consolidated as of December 31, 2022. Consolidated AssuredIM Funds are not included in the investment portfolio on the balance sheet, but instead as assets and liabilities of consolidated investment vehicles (CIVs). CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses.
Asset Management ProductsStrategies
CLOs
The Company’s CLO management business was established in 2005 and is the largest business by assets under management (AUM) in the Asset Management segment. As of December 31, 2022, CLOs consisted of $15.2 billion in AUM. The Company is among the top 25 global managers of CLOs when measured by AUM, according to Creditflux Ltd., issuing CLOs in both the U.S. and Europe. The CLOs managed by the Company are backed predominantly by non-investment grade first-lien senior secured loans. The CLOs typically issued on a quarterly basis when market conditions permit and generally have reinvestment periods ranging from three to five years with a stated maturity of 12-13 years with a potential reinvestment period. Once the reinvestment period expires, the CLO’s noteholders will receive distributions through the maturity12 to 13 years. The Company employs an active portfolio management strategy focused on seeking relative value and maximizing absolute return of the loan portfolio.
The Company also manages a fund that invests in the equity of U.S. and European CLOs as well as the first loss equity of CLO (unless Assured Investment Managementwarehouses managed by AssuredIM. (A CLO warehouse is a special purpose vehicle that invests in a diverse portfolio of loans until such time as sufficient loans have been acquired and the noteholders agreemarket conditions are opportune to resetsecuritize and issue a new CLO.) The CLO fund has the periodability to, and may at times, invest in the mezzanine securities of a CLO managed by AssuredIM. The Company has committed capital to, and invests in, the CLOsCLO fund through AGAS. The Company has committed $380 million to the CLO Fund, and as of December 31, 2022, $276 million has been funded.
In addition to CLO management, the Company offers CLO investing capabilities, deploying managed capital across the entire CLO capital structure. The Company’s CLO investment management team manages funds for the Company’s Insurance segment under an extended reinvestment period).IMA in a separately managed account. This account invests in investment grade CLO tranches managed by unaffiliated managers.
Opportunity Funds
Opportunity funds invest in a mix of strategies that may have higher concentrations in illiquid strategies.less liquid investments. Typically, opportunity funds have limited redemption rights and instead offer contractual cashflowcash flow distributions based on the legal agreement of each respective opportunity fund. The Company manages opportunity funds that focus on healthcare investments, and asset-based investments.
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Healthcare Investing. AssuredIM established its private healthcare strategy in 2013. Through its healthcare opportunity funds, the Company offers to the healthcare services industry flexible capital solutions supporting mergers and acquisitions, acceleration of organic growth, consolidation, repositioning, shareholder liquidity, and restructuring opportunities. The Company focuses investments in post-acute and long-term care, behavioral and mental health, physician practice management, regional health systems, and payer and provider services (non-clinical).
The Company typically earns management fees on the total committed capital of a healthcare opportunity fund during the investment period, and on remaining invested capital during the harvest period (the period post reinvestment period where capital is returned to investors upon the disposition of investments). A portion of fees are paid without regard to performance and a portion is performance-based. The Company receives performance-based fees if and to the extent one or more contractual thresholds, such as certain rate of return or a multiple on invested capital (each a “hurdle”), is exceeded. Performance-based fees are typically not recognized until near the end of the fund life. Generally, the Company’s healthcare funds have expected fund lives of between 5 and 10 years at close.
The Company manages two healthcare opportunity funds. The Company has committed capital to this strategy through AGAS.
Asset-Based Investing. The Company’s asset-based investment management business was founded in 2008. It seeks to generate returns by investing in specialty finance companies that originate and service a broad array of consumer and commercial assets, as well as by investing in discrete pools of such assets through either privately negotiated transactions or publicly issued securitizations. The asset classes of focus include auto loans, student loans, unsecured consumer loans, equipment loans, leases and dealer floor plan loans.
The Company manages a fund that is invested in a consumer finance company focused on auto loans and also manages legacy hedge andan asset-based fund. The Company has committed capital to this strategy through AGAS.
Legacy Opportunity Funds. The Company manages two opportunity funds now subjectthat are multi-strategy funds and were established prior to the BlueMountain Acquisition. These funds are in the harvest periods and returning capital to investors. The Company does not have any capital commitments to these funds.
Liquid Strategies
The municipal investment management team currently invests in investment grade municipal securities as an orderly wind-down.income generation strategy for the Company’s Insurance segment in a separately managed account under an IMA. This strategy seeks to maximize after-tax income and total return across a broad portfolio of both taxable and tax-exempt municipal bonds. It also seeks to generate returns through a combination of investment yield and price return due to credit spread changes and duration impact.
The Company manages several funds that were established prior to the BlueMountain Acquisition and are currently returning capital to investors. These funds are structured as co-mingled hedge funds and single investor funds not otherwise described above. The Company does not have any capital commitments to these funds.
Asset Management Revenues
Fees in respect of investment advisory services are the largest components of revenues for the Asset Management segment. The Company is compensated for its investment advisory services generally through management fees charged to its advisory clients (Management Fees).that are typically based on a percentage of value of a client’s net AUM. The Company typically receives monthly Management Feesbelieves that AUM was impacted by a range of 1/12 of a per annum fee of typically 1%-2%factors in 2022, including the condition of the net assetsglobal economy and financial markets, the widening of CLO spreads following Russia’s invasion of Ukraine, the runoff of legacy funds, and certain strategic limitations during the year. AUM may also be impacted by the relative attractiveness of the hedgeinvestment strategies of AssuredIM, and opportunity funds. regulatory or other governmental policies or actions.
With respect to the CLOs, the Company typically receivesearns management fees on the total adjusted par outstanding of a Management Fee made upCLO. A portion of two components (i.e.,fees are paid senior (senior investment management fees) in the structure and a “Senior Investment Management Fee”portion is paid after all notes have received current interest (subordinated investment management fees). Existing CLOs have total fees of 0.15%-0.20%,between 25 basis points (bps) and 50 bps per annum that are paid on a quarterly basis. In the typical structure, downgrades of underlying loans and defaults of underlying loans may cause the CLO to fail one or more performance tests. If such test failure occurs, subordinated
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investment management fees are not paid in that quarter and are deferred until the CLO resumes passing these tests. In addition, the subordinated notes or more commonly referred to as well as a “Subordinated Investment Management Fee” of 0.20%-0.35%, in each case, of the net assetsCLO equity (CLO Equity) of the CLO per annum).do not receive distributions when such tests are failing. Funds that would have been used to pay the CLO Equity are required to be used to buy new loans or pay down the senior notes of the CLO. Over time, the CLO may come back into compliance with these performance tests by reinvesting excess spread in new loans, improvements in the underlying loans and through active trading. If and when the CLO comes back into compliance, the deferred subordinated investment management fees are paid and the CLO Equity resumes its quarterly distributions.
With respect to CLOs andopportunity funds, the Company typically receives monthly or quarterly management fees. In certain hedge and opportunity funds the Company receives management fees expressed as a percentage of the committed amount and funded amount while in other opportunity, liquid strategy and wind-down funds, fees are expressed as a percentage of their net assets values.
In addition, the Company may receive performance-based compensation (Performance Allocations/Fees)fees (performance fees, incentive allocations, and carried interest are collectively referred to as performance fees) with respect to each calendar year ora performance period, typically 10%-30%expressed as a percentage of net profitsprofits. For certain opportunity funds, and wind-down funds, performance-based fees are typically allocated to each investor in such vehicle on an annual basis, payable at the end of each year or performance period, as the case may be. With respect to CLOs and certain opportunityperiod. For these funds, the Company receives performance-based compensation on an internal rate of return calculation, if and to the extent a certain minimum rate of return (a “hurdle”) is exceeded. For certain hedge and opportunity funds, performance based-compensation isfees are typically reduced by the amount of management fees paid over a specified period and/or subject to a “high-water mark” or loss“loss carryforward provision.provision”. (A "high-water mark"“high-water mark” provision typically requires that, once a performance fee is paid based on net asset value (NAV) or other measure during a period, any subsequent performance fee be measured from that value, or high-water mark.mark; and a “loss carryforward” provision similarly ensures that losses must be recouped before the fund manager receives any incentive compensation. With respect to certain opportunity funds, the Company receives performance-based fees if and to the extent one or more contractual thresholds, such as a certain rate of return or a multiple on invested capital (each a “hurdle”), is exceeded.
Depending on the characteristics of the CLOs, hedge and/or opportunity funds,a fund, fees may be higher or lower. The Company reserves the right to credit, reduce or waive some or all fees for certain investors, including investors affiliated with the Company. Further, to the extent that the Company’s hedgewind-down and/or opportunity funds are invested in the Company'sCompany’s managed/serviced CLOs, the Company may rebate any Management Feesmanagement fees and/or Performance Allocations/Feesperformance-based fees earned from the CLOs to the extent that such fees are attributable to the hedge and opportunity funds’ holdings of CLOs also managed or serviced by the Company.
The asset management industry is a highly competitive market. Assured Investment ManagementAssuredIM competes with many other firms in every aspect of the asset management industry,business, including raising funds, seeking investments, and hiring and retaining talented professionals. Some of Assured Investment Management’sAssuredIM’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by Assured Investment Management.AssuredIM. Some of these competitors also may have a lower cost of capital and access to funding sources that are not available to Assured Investment ManagementAssuredIM and/or the Company, which may create further competitive disadvantageschallenges with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships.relationships than those available to AssuredIM and/or the Company. On the other hand, the Company believes being part of a financial services company the size of the Company gives AssuredIM a number of key advantages as compared with many of its competitors, especially those that are smaller. For example, the Company is able to provide AssuredIM with access to capital to help initiate its strategies and to share its institutional experience in a number of asset classes. In addition, the Company believes that AssuredIM has built a platform that is scalable for future strategies.
Investment Portfolio
The Company'sCompany’s investment portfolio primarily consists of fixed maturityfixed-maturity securities supporting its Insurance segment. The Asset Management segment and Corporate division primarily includeincludes short-term investments used to support business operations and corporate initiatives.
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Investment income from the Company'sCompany’s investment portfolio is one of the primary sources of cash flow supporting its insurance operations and insurance claim payments. The Company's total investment portfolio generated net investment income of $378 million, $395 million and $417 million in 2019, 2018 and 2017, respectively and equity in net earnings of investees of $4 million and $1 million in 2019 and 2018, respectively.
The Company'sCompany’s principal objectives in managing its investment portfolio are to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio; to maximize after tax book income; to manage investment risk within the context of the underlying portfolio of insurance risk; and to preserve the highest possible ratings for each Assured Guaranty insurance operating company.subsidiaries. If the Company'sCompany’s calculations with respect to its policyinsurance subsidiaries liabilities are incorrect or other unanticipated payment obligations arise, or if the Company improperly structures its investments to meet these and other corporate liabilities, it could have unexpected losses, including losses resulting from forced liquidation of investments before their maturity.investments. The investment policies of the Company'sCompany’s insurance subsidiaries are subject to insurance law requirements, and may change depending upon regulatory, economic, rating agency and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the businesses. The performance of invested assets is subject to the ability of the Company and its internal and external investment managers to select and manage appropriate investments.
Assets Managed by six investment managers: BlackRock Financial Management, Inc.,External Investment Managers: The Company’s three external asset managers are Goldman Sachs Asset Management, L.P., New England Asset Management, Inc., Wellington Management Company, LLP, and MacKay Shields LLC, and Wasmer, Schroeder & Company, LLC. The Company's external investment managers haveeach of which has discretionary authority over the portion of the investment portfolio they manageit manages, within the limits of the investment guidelines approved by the Company'sCompany’s Board of Directors. Each manager is compensated based upon a fixed percentage of the market value of the portion of the portfolio being managed by such manager. BlackRock Financial Management, Inc. and Wellington Management Company LLP bothowns or manages funds that own more than 5% of the Company'sCompany’s common shares,shares. As of December 31, 2022, 67% of the investment portfolio, with a fair value of $5.6 billion, compared with 72% or $7.0 billion as of December 31, 2021, is externally managed.
Puerto Rico New Recovery Bonds and Contingent Value Instruments (CVIs): After over five years of negotiations, in 2022 a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico):
• On January 18, 2022, the Federal District Court of Puerto Rico, acting under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority (GO/PBA Plan).
• On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of the Puerto Rico Convention Center District Authority (PRCCDA).
• On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered another order under Title VI of PROMESA (PRIFA Modification) modifying certain debt of the Puerto Rico Infrastructure Financing Authority (PRIFA).
• On October 12, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the Modified Fifth Amended Title III Plan of Adjustment (HTA Plan) of the Puerto Rico Highways and Transportation Authority (PRHTA).
As a result of the consummation on March 15, 2022 of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company has a minority interest in Wasmer, Schroeder &under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company LLC. The Charles Schwab Corporation announced on February 24, 2020 that it had entered into an agreement to acquire Wasmer, Schroeder & Company, LLC,received substantial amounts of cash and that, subject to customary closing conditions, it expects to closeCVIs, as well as new general obligation bonds (under the transaction in mid-2020. DuringGO/PBA Plan) (New GO Bonds) and new bonds backed by toll revenues (under the years endedHTA Plan) (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds). See Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. As of December 31, 2019, 2018 and 2017,2022, 7.9% of the Company recorded investment management fees and related expenses to external managers of $9 million, $9 million, and $9 million, respectively.
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Puerto Rico Trusts). The Company has continued to sell New Recovery Bonds received as salvage, and had $486 million fair value of New Recover Bonds and CVIs remaining as of February 24, 2023.
Loss Mitigation Securities: As of December 31, 2022, Loss Mitigation Securities represent 6.1% of the financial guaranties. The Company held approximately $868investment portfolio or $508 million and $1,190 million of securities, based on theirat fair value excluding(excluding the benefit of any insurance provided by the Company). As of December 31, 2021, the Company had $581 million of such securities, at fair value, representing 6.1% of its reported investment portfolio.
Fixed-Maturity Securities Managed by AssuredIM: The Company also has a portfolio of investment grade municipal bonds and investment grade tranches of CLOs, which represents approximately 6% of the investment portfolio with a fair value $537 million, and $541 million as of December 31, 20192022 and December 31, 2018, respectively. The2021, respectively, that are managed by AssuredIM under an IMA.
In addition to its fixed-maturity and short-term investments portfolio, the Company also invests in non-AssuredIM alternative investments. As of December 31, 2022 and December 31, 2021, the Company had $123 million and $169 million, respectively, in other non-AssuredIM alternative investments.
In addition to assets reported in the total investment line item on the consolidated financial statements, the Company has made minority investments in investment managersother invested capital that is reported on the consolidated balance sheets as part of its strategy of participating in that marketfinancial guaranty variable interest entities (FG VIEs) assets or as CIVs with other investors’ ownership interest reported as noncontrolling interests. See Part II, Item 8, Financial Statements and also makes other unrelated investments that it believes present attractive investment opportunities.Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
AssuredIM Funds and CLOs: The Company intends to useconsiders leveraging the investment knowledge and experience in Assured Investment Managementof AssuredIM to expand the categoriesmanage its assets to be a value-added opportunity, and types of investments included in its investment portfolio by both (a) initially investing $500has authorized up to $750 million of Insurance segment assets to be invested in Assured Investment Management funds plus additional amounts in other accounts managed by
AssuredIM Funds. The portion of the Insurance segment’s portfolioassets that is invested in Assured Investment Management funds may beAssuredIM Funds is excluded from the amounts reported in the investment portfolio and instead reported in assets of consolidated investment vehicles in the Company’s consolidated statement of financial positioninvestments if, under accounting principles generally accepted in the U.S. (GAAP), the Companyentity is deemed to be the primary beneficiary. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14, Variable Interest Entities for information on when and how such funds and CLOs require consolidation.
consolidated. In instances where consolidation of these entities is required, the assets and liabilities of consolidated Assured Investment Management fundsAssuredIM Funds and CLOs are reported in the line items captioned “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles,” resulting in a gross-up of the Company’s consolidated assets and liabilities. Redeemable and nonredeemable noncontrolling interests are also recorded for the portion of such consolidated funds’ capital attributable to affiliated or third party investors. Changes in fair value are recorded in other income.
Puerto Rico Trust Assets: In addition to New Recovery Bonds and CVIs described above, for bondholders that elected to receive custody receipts that represent an interest in the investment portfolio, but instead, is presented as followslegacy insurance policy plus any cash, New Recovery Bonds and CVIs under the 2022 Puerto Rico Resolutions, such assets reside in consolidated trusts. As of December 31, 2022, the Company reported $212 million in Puerto Rico Trusts’ assets in FG VIEs assets on the consolidated balance sheet: assetssheets. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated investment vehicles of $572 million, liabilities of consolidated investment vehicles of $482 million, and redeemable and nonredeemable noncontrolling interests of $13 million.the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts.
Risk Management Procedures
Organizational Structure
The Company's policies and procedures relating to risk assessment and risk management are overseen by itsCompany’s Board of Directors (the Board or AGL'sAGL’s Board). oversees the risk management process. The Board takesemploys an enterprise-wide approach to risk management that is designed to supportsupports the Company'sCompany’s business plans atwithin a reasonable level of risk. A fundamental part of riskRisk assessment and risk management isare not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company.that company. The Board annually approves the Company'sCompany’s business plan, factoring risk management into account. It also approves the Company'sCompany’s risk appetite statement, which articulates the Company'sCompany’s tolerance for risk and describes the general types of risk that the Company accepts or attempts to avoid. The involvement of the Board in setting the Company'sCompany’s business strategy is a key part of its assessment of management'smanagement’s risk tolerance and also a determinationdeterminant of what constitutes an appropriate level of risk for the Company.
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While the Board has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk assessment and risk management. The Risk Oversight Committee of the Board oversees the standards, controls, limits, underwriting guidelines and policies that the Company establishes and implements in respect of credit underwriting and risk management. It focuses on management's assessment and management of both (i) credit risks and (ii)as well as other risks, including, but not limited to, market, financial, legal, and operational risks (including cybersecurity and data privacy risks), and risks relating to the Company's reputation and ethical standards. In addition, the Audit Committee of the Board is responsible for, among other matters, reviewing policies and processes related to risk assessment and risk management, including the Company'sCompany’s major financial risk exposures and the steps management has taken to monitor and control such exposures. It also oversees cybersecurity and data privacy and reviews compliance with related legal and regulatory requirements (including cybersecurity requirements).requirements. The Compensation Committee of the Board reviews compensation-related risks to the Company. The Finance Committee of the Board oversees the investment of the Company'sCompany’s investment portfolio (including alternative investments) and the Company'sCompany’s capital structure, liquidity, financing arrangements, rating agency matters, and any corporate development activities in support of the Company'sCompany’s financial plan. The Nominating and Governance Committee of the Board oversees risk at the Company by developing appropriate corporate governance guidelines and identifying qualified individuals to become board members. The Environmental and Social Responsibility Committee oversees the Company’s risk and opportunities related to environmental issues, such as climate change, as well as aspects of human capital management, including diversity and inclusion.
The board of directors of each of the Company’s insurance subsidiaries has overall responsibility for the system of governance, oversight of the business and affairs and establishment of the key strategic direction and key financial objectives, including risk management, of its respective company. The AGUK Board and the AGE Board have each delegated, pursuant to written terms of reference, responsibility for risk matters to their respective Risk Oversight Committees. The AGUK Board and the AGE Board have delegated the day-to-day management of their companies to their Chief Executive Officer and Managing Director respectively, who is in each case supported by a number of management committees.
The Company has established a number ofseveral management committees to develop enterprise level risk management guidelines, policies and procedures for the Company'sCompany’s insurance, reinsurance and asset management subsidiaries that are tailored to their respective businesses, providing multiple levels of review, analysis and control.
The Company's management committees responsible for enterprise risk management include:
•Portfolio Risk Management Committee—The Company'sPortfolio Risk Management Committee is responsible for enterprise risk management for the Company’s Insurance segment and focuses on measuring and managing credit, market and liquidity risk for the Company’s Insurance segment. This committee establishes company-wide credit policy for the Company’s direct and assumed insured business. It implements specific underwriting procedures and limits for the Company and allocates underwriting capacity among the Company’s subsidiaries. All transactions in new asset classes or new jurisdictions, or otherwise outside the Company’s Board-approved risk appetite statement, must be approved by this committee.
•Risk Management Committees—The U.S., AG Re and AGRO risk management committees and the European Insurance Subsidiaries Surveillance Committees conduct an in-depth review of the insured portfolios of the relevant subsidiaries, focusing on varying portions of the portfolio at each meeting. They review and may revise internal ratings assigned to the insured transactions and review sector reports, monthly product line surveillance reports and compliance reports. The European Insurance Subsidiaries Executive Risk Committees are responsible for assisting the risk oversight committees of their respective board of directors in the management of risk and oversight of their respective company’s risk management framework and processes. This includes monitoring their respective company’s compliance with risk strategy, risk appetite, risk limits, as well as overseeing and challenging their respective company’s risk management and compliance functions. In carrying out its responsibilities, each of the risk management committees considers numerous factors that could impact their insured portfolios, including macroeconomic factors, long term trends and climate change.
•U.S. Workout Committee—This committee receives reports from surveillance and workout personnel on insurance transactions at AGM and/or AGC that might benefit from active loss mitigation or risk reduction and approves loss mitigation or risk reduction strategies for such transactions.
•Reserve Committees—Oversight of reserving risk is vested in the U.S. Reserve Committee, the European Insurance Subsidiaries Executive Risk Committees, the AG Re Reserve Committee and the AGRO Reserve Committee. The committees review the reserve methodology and assumptions for each major asset class or significant below-investment-grade (BIG) transaction, as well as the loss projection scenarios used and the
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probability weights assigned to those scenarios. The reserve committees establish reserves for the relevant subsidiaries, taking into consideration supporting information provided by surveillance personnel, and are responsible for changes to assumptions that that have a significant impact on expected losses.
The Company’s committees responsible for risk management in its Asset Management segment include:
•AssuredIM Investment Committees—These committees focus on application of investment evaluation criteria for the Asset Management segment’s investing activity within each investment strategy. Each Asset Management segment investment committee consists of the Chief Investment Officer and two or more senior investment professionals with deep expertise in the markets relevant to each investment.
•AssuredIM Risk Committee—This committee focuses on avoiding inappropriate risk of loss, legal or reputational damage to AssuredIM’s investors arising from the Asset Management segment’s investment and business processes. Moreover, the committee reviews risk matters that need to be addressed by the broader group rather than the regular oversight and escalation designees, which would include, but is not limited to, fund limit breaches, investment mandate compliance, allocations, trade execution, counterparty agreements, legal and regulatory compliance and business continuity. Within such responsibilities, the committee reviews principal transactions and cross transactions among clients within the Asset Management segment. Compliance and other operational sub-committees report to this committee on the full range of compliance and other operational risk matters applicable to the Asset Management segment including policies, risks and controls, audits, personal trading activity, compliance testing results, operational diligence and regulatory filings.
•AssuredIM and AssuredIM Healthcare Partners Valuation Committees—These committees focus on oversight of the Asset Management segment’s valuation policies and procedures. The respective committees meet to review the period-end valuations prior to the release of net asset valuations to fund investors (either monthly or quarterly depending on the investor reporting cycle). The period-end package includes details of estimated versus final NAV differences, securitized products price verification, valuation model reviews, price back testing, derivative valuation verification, administrator valuation reconciliation and latent price analysis. In addition, these committees convene to review and decide on material changes to fund valuation methodology, material valuation changes on an Accounting Standards Codification (ASC) 820 Level 3 asset, pricing or valuation exceptions, valuation approach to new products, new model approval, guidelines and policies for classification of assets and changes to policies and procedures.
Enterprise Risk Management
The business units and functional areas are responsible for identifying, assessing, monitoring, reporting and managing their own risks. The Chief Risk Officer and other risk management personnel are separate from the business units and are responsible for developing the risk management framework, ensuring applicable risk management policies and procedures are followed consistently across business units, and for providing objective oversight and aggregated risk analysis. Internal Audit
The internal audit function (Internal Audit) provides independent assurance around effective risk management design and control execution. On a quarterly basis, or more frequently when required, Internal Audit reports its findings directly to the Audit Committee of the Board of Directors and informs the Chief Executive Officer of any material issues.
Quarterly risk reporting keeps management and the Board and its Risk Oversight Committee, senior management, the business units and functional areas informed about material risk-related developments. At least once each year, risk management personnel prepare an Own Risk and Solvency Assessment for the GroupCompany as a whole and each of the operating companies (Commercial Insurer Solvency Self-Assessment for AG Re)Re and AGRO) which reports the results of capital modeling, the status of key risk indicators and any emerging risks. In addition, the Company performs in-depth reviews annually of risk topics of interest to management and the Board. To the extent potentially significant business activities or
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operational initiatives are considered, the Chief Risk Officer analyzes the possible impact on the Company’s risk profile and capital adequacy.
Surveillance of Insured Transactions
The Company'sCompany’s surveillance personnel are responsible for monitoring and reporting on the performance of each risk in its insured portfolio, including exposures in both the financial guaranty direct and assumed businesses, and trackstracking aggregation of risk. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, change or affirm ratings during reviews, and recommend remedial actions to management. AllThe Company assigns internal credit ratings at closing to all transactions in the insured portfolio, are assigned internal credit ratings, and surveillance personnel recommend rating affirmations or adjustments to those ratings via the Risk Management Committees to reflect changes in transaction credit quality. The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual review cycles based on the Company’s view of the exposure’s 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.
The review cycle and scope vary based upon transaction type and credit quality. In general, the review process includes the collection and analysis of information from various sources, including trustee and servicer reports, performance reports from Intex (a commercially available structured finance reporting system), financial statements, general industry or sector news and analyses, and rating agency reports. For public finance risks, the surveillance process includes monitoring general economic trends, developments with respect to state and municipal finances, regulatory changes, environmental trends, and the financial situation of the issuers. For structured finance transactions, the surveillance process can include monitoring transaction performance data and cash flows, compliance with transaction terms and conditions, and evaluation of servicer or collateral manager performance and their financial condition. Additionally, the Company uses various quantitative tools, scorecards and models to assess transaction performance and identify situations where there may have been a change in credit quality. Surveillance activities may include discussions with or site visits to issuers, servicers, collateral managers or other parties to a transaction. Surveillance may adopt augmented procedures in response to various events, as it has done in response to the COVID-19 pandemic, major hurricanes or floods, and the transition away from the London Interbank Offered Rate (LIBOR) as a reference rate.
For transactions that the Company has assumed, the ceding insurers are responsible for conducting ongoing surveillance of the exposures that have been ceded to the Company, except that the Company provides surveillance for exposures assumed from SGI.SGI in a manner consistent with its own direct portfolio. The Company'sCompany’s surveillance personnel monitor the ceding insurer'sinsurer’s surveillance activities on exposures ceded to the Company through a variety of means, including reviews of surveillance reports provided by the ceding insurers, and meetings and discussions with their analysts. For public finance risks, the Company’s surveillance personnel independently review assumed exposure utilizing the same procedures as applied to the Company’s direct exposures. The Company'sCompany’s surveillance personnel also monitor transaction performance (for structured finance and infrastructure transactions), general news and information, industry trends and rating agency reports to help focus surveillance activities on sectors or exposures of particular concern. For certain exposures, the Company also will undertake an independent analysis and remodeling of the exposure. The Company'sCompany’s surveillance personnel also take steps to ensure that the ceding insurer is managing the risk pursuant to the terms of the applicable reinsurance agreement.
Workouts
The Company'sCompany’s workout and surveillance personnel are responsible for managing workout, loss mitigation and risk reduction situations. They work together with the Company's surveillance personnel to develop and implement strategies on transactions that are experiencing loss or could possibly experience loss. They, along with the Workout Committee, develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies and mitigate potential losses. The Company'sCompany’s workout and surveillance personnel also engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the Company'sCompany’s litigation proceedings. They may also make open market or negotiated purchases of securities that the Company has insured, or negotiate or otherwise implement consensual terminations of insurance coverage prior to contractual maturity. The Company'sCompany’s surveillance personnel work with servicers of RMBS transactions to enhance their performance.
Asset Management
The Company’s Asset Management segment risk personnel are responsible for quantifying, analyzing and reporting the risks of each asset management fund and ensuring adherence to agreed investor mandates, independent from Asset Management segment investment personnel. The Asset Management segment applies investment and risk management
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processes across all managed funds and investments. Investment professionals are responsible for sourcing, evaluating, structuring, executing, managing, and exiting existing investments. After the evaluation and diligence processes, and as appropriate thereafter, investment team members submit recommended actions to the relevant Asset Management segment investment committee in accordance with each strategy’s required investment procedures. The relevant Asset Management segment investment committee carefully considers the alignment of each investment with the unique objectives and constraints of the vehicle(s) to which it is allocated. Asset Management segment risk professionals further independently monitor and ensure alignment of risk taking with the objectives and constraints of each investment mandate at inception and thereafter, using both proprietary and third-party quantitative data, analytic tools, and reports.
Cybersecurity
The Company relies on digitalupon information technology and systems, including technology and systems provided by or interfacing with those third parties, to conduct its businesses and interact with market participants and vendors. With this reliance on technology comes the associated security risks from using today’s communication technology and networks.
To defend the Company'sCompany’s computer systems from cyberattacks, the Company uses tools such as firewalls, anti-malware software, multifactor authentication, e-mail security services, virtual private networks, third-party security experts, and timely applied software patches, among others. In addition, the Company evaluates the adequacy of the cybersecurity controls of applicable third-party service providers, including through a rigorous vendor selection and management process. The Company has also engaged third-party consultants to conduct penetration tests to identify any potential security vulnerabilities. The Company trains personnel on how to identify potential cybersecurity risks and protect Company information and resources. This training is mandatory for all employees globally upon hire and on an annual basis. Although the Company believes its defenses against cyber intrusions are sufficient, it continually monitors its computer networks for new types of threats.
Data Protection
The Company is subject to local, state, and national laws and regulations in the U.S., U.K., the European Union (EU), the other EEA countries that comply with data protection laws in the EU, and other non-U.S. jurisdictions that require financial institutions and other businesses to protect personal and other sensitive information and provide notice of their privacy and security practices relating to the collection, disclosure and other processing of personal information. The Company is also subject to local, state, and national laws and regulations in the U.S., U.K., EEA, and other non-U.S. jurisdictions that require notification to affected individuals and regulators regarding data security breaches. To address these requirements, the Company has established and implemented policies and procedures that are intended to protect the privacy and security of personal information that comes into the Company’s possession or control, and to comply with applicable laws and regulations. Company policies and procedures include, but are not limited to, specific technical, administrative, and physical safeguards for personal information, periodic risk assessments on privacy and security measures, monitoring and testing, an incident response plan that requires Company personnel to promptly report suspected and actual data breach incidents to designated management representatives, an enterprise-wide data governance program, and regularly maintained records that demonstrate the Company’s accountability for compliance with the core privacy principles, relating to the processing of personal information and applicable data protection laws. The Company has imposed similar requirements, as applicable, on third parties with whom it shares personal information including through a rigorous vendor selection and management process. The Company engages its personnel and enhances data privacy and security awareness through training, which is mandatory for all employees globally on an annual basis.
Climate Change Risk
The Company has long considered environmental impacts as part of its underwriting process, in particular with regard to U.S. public finance transactions. Global awareness of climate change has drawn greater attention to the potential financial implications and long-term consequences of increasing frequency or severity of natural disaster events (e.g., storms and wildfires). As a financial guarantor of municipal and structured finance transactions, the Company does not take direct insurance exposure to climate change but does face the risk that its obligors’ ability to pay debt service will be impaired by the impact of climate related events. Beginning February 1, 2019,perils.
The Company continues to enhance its approach to the Company formalized its consideration of environmental risksclimate risk in the origination, underwriting, credit approval, and surveillance of its financial guaranty business by requiring thatinsured exposures and has integrated climate risk into its risk management and control functions. Credit underwriting submissions are required to include a considerationan assessment of environmental and/or transitional risk factors as part of the underwriting analysis. Specifically, the vulnerability of obligors is evaluated with respect to climatic changes (e.g., sea level rise, droughts), extreme weather events (e.g., hurricanes, tornadoes, floods) or geological events (e.g., earthquakes, volcanoes) as well as resilience factors (e.g., mitigation capabilities, adaptation capacity) to determine if such environmental issues could materially impact an obligor’s expected performance.
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The Company’s assessment of how climate change-driven risks may impact a prospective obligor’s ability to pay debt service is informed by its extensive experience in municipal finance coupled with proprietary analytics and third-party data and insights. To improve the Company’s understanding of climate change and to develop the analytical tools needed to measure and manage the related financial risks, the Company has been investing in both talent and technology. The Company’s risk management resources include climate science expertise. In addition, a dedicated internal team is currently working with a geospatial data analytics company specializing in climate change/risk analysis and its effect on cities, counties, and states, to develop analytical capabilities to evaluate climate risk and assess potential negative impacts that climate change could have on the proposed obligor’s ability to pay debt service.
The Company is also exposed indirectly to climate change trends and events that might impair the performance of securities in its investment portfolio. The portfolio consists predominantly of fixed-income assets. Nevertheless, environmental issues, including regulatory changes, changes in supply or demand characteristics of fuels, and extreme weather events, may
impact the value of certain securities. TheIn 2016, the Company determined in 2016 not to make any new investments in thermal coal enterprises. In fourth quarter of 2019, the Company revised its investment guidelines to reflect its commitment to incorporatingincorporate material environmental factors into its investment analysis to enhance the quality of investment decisions. On an annual basis, the Company instructs its primary external portfolio managers to conduct an environmental, social and governance (ESG) analysis of their respective portion of the Company’s investment portfolio, for which ESG data is readily available. The Company conducts the ESG review to analyze if there are any material ESG risks in the portfolio that may adversely impact return expectations or are otherwise not in keeping with the Company’s risk appetite statement.
Regulatory Reporting. As the global community moves to address and mitigate the effects of climate change, regulators across jurisdictions have taken steps to require climate change risk management and related reporting. Several of the Company’s subsidiaries are, or are anticipated to be, subject to regulatory reporting with respect to managing and disclosing the impact of climate change and the related financial risks. In November 2021, the NYDFS, which is the regulator for AGM, issued its “Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change” In the U.K., the PRA, which regulates AGUK, has established certain requirements in relation to understanding the financial impact of climate change, as part of its ongoing supervisory approach. In August 2022, the Bermuda Monetary Authority issued, for consultation, its “Guidance Note on the Management of Climate Change Risks for Commercial Insurers”, detailing its expectations regarding the management of climate risk by commercial insurers. The Company continues to monitor regulatory developments and meet requirements applicable to its subsidiaries. To date, the costs associated with complying with regulatory reporting obligations have not had a material impact on the Company’s business, financial condition, and results of operations.
Managing Greenhouse Gas Emissions. As a financial services firm with approximately 400 employees, the direct impact of Assured Guaranty’s operations on the environment is relatively small. The Company contributes to the global effort to combat climate change by monitoring its greenhouse gas emissions (GHG). In 2019, the Company instituted a program to measure, manage and report its GHG emissions on an enterprise-wide basis and set targets for reducing such emissions. Pursuant to the Greenhouse Gas Protocol, the Company collects and analyzes internal data annually for its Scope 1, Scope 2 and certain key Scope 3 GHG emissions (business travel and data hosting). In 2021, the most recent year for which data is available, the Company’s total GHG emissions (using location-based Scope 2) equaled approximately 2,220 total tonnes of carbon dioxide. The Company’s methodology and results are reviewed by an independent third party, which conducts a reasonable assurance review for Scope 1 and Scope 2 emissions and a limited assurance review for Scope 3 emissions, in accordance with ISO 14064-3 International Standards.
The Company has established a management environmental and social responsibility task forcebelieves that is responsible for coordinating its response tothe physical effects of climate change risk (among other matters)on the Company’s business operations are not likely to be material and the Company does not anticipate capital expenditures for climate related projects.
Governance. In May 2019 the Board established anThe Environmental and Social Responsibility Committee to overseeand the Risk Oversight Committee of AGL’s Board of Directors, each consisting solely of independent directors, provide oversight of the Company's responseapproach to addressing climate change risk in accordance with their respective charters. The Environmental and that committee began meetingSocial Responsibility Committee reviews updates on the consideration of environmental risks in August.the Company’s insurance risk management and its investment portfolio, as well as legislative and regulatory developments of significance to the Company’s environmental initiatives and related oversight. The Risk Oversight Committee reviews the establishment and implementation of enterprise risk management policies and practices.
At the operating company level, the AGM and AGC boards of directors review environmental risk reports at each of their quarterly meetings. The Chief Risk Officer is designated as the AGM and AGC board member and member of senior management responsible for overseeing the management of climate risks. The Company has also formed an environmental risk working group composed of senior members of the Company’s credit, underwriting, surveillance, and risk management departments, to review the impact of environmental risk on the Company, including the development of objective risk
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measures, metrics and methodologies needed to evaluate the financial impact of climate change on obligors in its insured portfolio on both aggregate and individual risk levels.
Regulation
The business ofCompany’s operations are regulated by many different regulatory authorities, including insurance, securities, derivatives and investment advisory. The insurance and reinsurance is regulatedfinancial services industries generally have been subject to heightened regulatory scrutiny and supervision since the financial crisis that began in most countries, although2008.
The Company and its subsidiaries are subject to insurance-related and asset management-related statutes, regulations and supervision by the U.S. states and territories and the non-U.S. jurisdictions in which they do business. The degree and type of regulation varies significantly from one jurisdiction to another. ReinsurersWe expect that the U.S. and non-U.S. regulations applicable to the Company and its regulated entities will continue to evolve for the foreseeable future.
United States Regulation
Insurance and Financial Services Regulation
AGL has two operating insurance subsidiaries domiciled in the U.S., which the Company refers to collectively as the U.S. Insurance Subsidiaries.
•AGM is a New York domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.
•AGC is a Maryland domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia and Puerto Rico.
Insurance Holding Company Regulation
The U.S. Insurance Subsidiaries are subject to the insurance holding company laws of their respective jurisdictions of domicile, as well as other jurisdictions where these insurers are licensed to do insurance business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and annually to furnish financial and other information about the operations of companies within its holding company system. Generally, all transactions among companies in the holding company system to which any of the U.S. Insurance Subsidiaries is a party (including sales, loans, reinsurance agreements and service agreements) must be fair, reasonable and equitable, and, if material or of a specified category, such as reinsurance or service agreements, require prior notice to and approval or non-disapproval by the insurance department where the applicable subsidiary is domiciled.
Change of Control
Before a person can acquire control of a U.S.-domiciled insurance company, prior written approval must be obtained from the insurance commissioner of the state where the insurer is domiciled or deemed commercially domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of such insurer. Because a person acquiring 10% or more of AGL’s common shares would indirectly control the same percentage of the stock of our U.S. Insurance Subsidiaries, the insurance change of control laws of Maryland and New York would likely apply to such acquisition. Accordingly, a person acquiring 10% or more of AGL’s common shares must either file disclaimers of control of our U.S. Insurance Subsidiaries with the insurance commissioners of the States of Maryland and New York or apply to acquire control of such subsidiaries with such insurance commissioners. However, this presumption does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a control determination. Significantly, an acquirer of less than 10% of an insurer’s voting securities may still be deemed to control the insurer based on all the facts and circumstances, including the terms and conditions of the proposed transaction. Moreover, a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer. Prior to approving an application to acquire control of a domestic insurer, each state insurance commissioner will consider factors such as the financial strength of the applicant, the integrity and management of the applicant’s board of directors and executive officers, the applicant's plans for the management of the board of directors and executive officers of the insurer, the applicant’s plans for the future operations of the insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. These laws may
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discourage potential acquisition proposals and may delay, deter or prevent a change of control involving AGL that some or all of AGL’s shareholders might consider to be desirable, including, in particular, unsolicited transactions.
Other State Insurance Regulations
State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including licensing these companies to transact business, “accrediting” reinsurers, determining whether assets are “admitted” and counted in statutory surplus, prohibiting unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends and, in certain instances, approving policy forms and related materials and approving premium rates. State insurance laws and regulations require the U.S. Insurance Subsidiaries to file financial statements with insurance departments in every U.S. state or jurisdiction where they are licensed, authorized or accredited to conduct insurance business, and their operations are subject to examination by those departments at any time. The U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with Statutory Accounting Principles, or SAP, and procedures prescribed or permitted by these departments. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years.
The NYDFS, the regulatory authority of the domiciliary jurisdiction of AGM, and the Maryland Insurance Administration (the MIA), the regulatory authority of the domiciliary jurisdiction of AGC, each conducts a periodic examination of insurance companies domiciled in New York and Maryland, respectively, usually at five-year intervals. In 2018, NYDFS last completed an examination of AGM, and the MIA last completed an examination of AGC. The examinations for AGM and AGC were for the five-year period ending December 31, 2016. The examination reports from the NYDFS and the MIA did not note any significant regulatory issues.
The NYDFS and the MIA formally commenced their current ongoing joint examination of AGM and AGC in the second quarter of 2022 for the five-year period ending December 31, 2021.
State Dividend Limitations
New York. One of the primary sources of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGM. Under the New York Insurance Law, AGM may only pay dividends out of “earned surplus,” which is the portion of an insurer’s surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to the insurer’s shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the NYDFS in an amount that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the NYDFS) or 100% of its adjusted net investment income during that period. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
Maryland. Another primary source of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGC. Under Maryland’s insurance law, AGC may, with prior notice to the MIA, pay an ordinary dividend in an amount that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders’ surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. A dividend or distribution to a shareholder of AGC in excess of this limitation would constitute an “extraordinary dividend,” which must be paid out of AGC’s “earned surplus” and reported to, and approved by, the MIA prior to payment. "Earned surplus" is that portion of AGC's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to its shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized capital gains and appreciation of assets. AGC may not pay any dividend or make any distribution, including ordinary dividends, unless it notifies the MIA Insurance Commissioner (the Maryland Commissioner) of the proposed payment within five business days following declaration and at least ten days before payment. The Maryland Commissioner may declare that such dividend not be paid if it finds that AGC’s policyholders’ surplus would be inadequate after payment of the dividend or the dividend could lead AGC to a hazardous financial condition. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
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Contingency Reserves
Each of AGM, under the New York Insurance Law, and AGC, under Maryland insurance law and regulations, must establish a contingency reserve, as reported on its statutory financial statements, to protect policyholders. The New York Insurance Law and Maryland insurance laws and regulations, as applicable, determine the calculation of the contingency reserve and the period of time over which it must be established and, subsequently, can be released.
In both New York and Maryland, releases from the insurer’s contingency reserve may be permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.
From time to time, the U.S. Insurance Subsidiaries have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer’s outstanding insured obligations. In 2022, the U.S. Insurance Subsidiaries each requested a release of accumulated contingency reserve which were deemed excessive in relation to the Company’s outstanding insured obligations. AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $87.3 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $1.3 million, which represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $87.3 million release. Both AGM’s and AGC’s release were recorded in 2022. In 2021 AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $104 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $246 million, of which approximately $1.5 million represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $104 million release.
Applicable New York and Maryland laws and regulations require regular, quarterly contributions to contingency reserves, but such laws and regulations permit the discontinuation of such quarterly contributions to an insurer's contingency reserves when such insurer’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the insurer’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category. In accordance with such laws and regulations, and with the approval of the NYDFS and the MIA, respectively, AGM ceased making quarterly contributions to its contingency reserves for non-municipal business and AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business, in each case beginning in the fourth quarter of 2014. Such cessations are expected to continue for as long as AGM and AGC satisfy the foregoing condition for their applicable line(s) of business.
Single and Aggregate Risk Limits
The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty insurers applicable to all obligations insured by a financial guaranty insurer that are issued by a single entity and backed by a single revenue source. For example, under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. In addition, the insured unpaid principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and collateral, is limited to 75% of the insurer’s policyholders’ surplus and contingency reserves.
Under the limit applicable to qualifying asset-backed securities, the lesser of:
•the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or
•the insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral,
may not exceed 10% of the sum of the insurer’s policyholders’ surplus and contingency reserves, subject to certain conditions.
Single-risk limits are also specified for other categories of insured obligations, and generally are more restrictive than those described above for municipal and asset-backed obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to a catch-all or “other” limit under which the unpaid principal of the single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. For example, “triple-X” and “future flow” securitizations, as well as unsecured corporate obligations and unsecured investor-owned utility obligations, are generally subject to this catch-all or “other” single-risk limit.
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The New York Insurance Law and the Code of Maryland Regulations also establish an aggregate risk limit on the basis of the aggregate net liability insured by a financial guaranty insurer as compared with its statutory capital. “Aggregate net liability” is defined for this purpose as the outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under this limit, an insurer’s combined policyholders’ surplus and contingency reserves must not be less than the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment-grade obligations. As of December 31, 2022, the aggregate net liability of each of AGM and AGC utilized approximately 26% and 9% of their respective policyholders’ surplus and contingency reserves.
The NYDFS Superintendent (New York Superintendent) and the Maryland Commissioner each have broad discretion to order a financial guaranty insurer to cease new business originations if the insurer fails to comply with single or aggregate risk limits. In the Company’s experience in New York, the New York Superintendent has shown a willingness to work with insurers to address these concerns.
Investments
The U.S. Insurance Subsidiaries are subject to laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain asset categories, such as BIG fixed-maturity securities, real estate, equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. In addition, any investment by a U.S. Insurance Subsidiary must be authorized or approved by that insurance company’s board of directors or a committee thereof that is responsible for supervising or making such investment.
Group Regulation
In connection with AGL’s establishment of tax residence in the U.K., as discussed in greater detail under “Tax Matters” below, the NYDFS has been designated as group-wide supervisor for the Assured Guaranty group. Group-wide supervision by the NYDFS results in additional regulatory oversight over Assured Guaranty, particularly with respect to group-wide enterprise risk, and may subject Assured Guaranty to new regulatory requirements and constraints.
U.S. Credit for Reinsurance Requirements for Non-U.S. Reinsurance Subsidiaries
The Company’s Bermuda reinsurance subsidiaries, AG Re and AGRO, are affected by regulatory requirements in various U.S. states governing the ability of a ceding company domiciled in the state to receive credit on its statutory financial statements for reinsurance provided by a reinsurer. In general, under such requirements, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the ceding company’s state of domicile is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), and loss and LAE reserves ceded to the reinsurer. The substantial majority of states, however, also permit a credit on the statutory financial statements of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer secures its reinsurance obligations to the ceding insurer by providing collateral in the form of a letter of credit, trust fund or other acceptable security arrangement. Certain of those states also permit such non-licensed/non-accredited reinsurers that meet certain specified requirements to apply for “certified reinsurer” status. If granted, such status allows the certified reinsurer to post less than 100% collateral (the exact percentage depends on the certifying state's view of the reinsurer's financial strength) and the applicable ceding company will still qualify, on the basis of such reduced collateral, for full credit for reinsurance on its statutory financial statements with respect to reinsurance contracts renewed or entered into with the certified reinsurer on or after the date the reinsurer becomes certified. Certain states have eliminated the reinsurance collateral requirements for unauthorized reinsurers in certain qualifying jurisdictions that (i) meet specified requirements, such as minimum capital and surplus amounts and minimum solvency or capital ratios, and (ii) provide certain commitments to the ceding insurer’s domiciliary state, such as submission to such state’s jurisdiction and the filing of annual audited financial statements with the state. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.
AG Re and AGRO are not licensed, accredited or approved in any state and have established trusts to secure their reinsurance obligations. In 2017, AGRO obtained certified reinsurer status in Missouri, which allows AGRO to post 10% collateral in respect of any reinsurance assumed from a Missouri-domiciled ceding company on or after the date of AGRO’s certification (although, currently, AGRO does not assume any such reinsurance). See “International Regulation —Bermuda—Bermuda Insurance Regulation” for Bermuda regulations applicable to AG Re and AGRO.
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Regulation of Swap Transactions Under Dodd-Frank
The Company’s U.S. insurance businesses are subject to direct and indirect regulation than primary insurers. The businessunder U.S. federal law. In particular, their derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd- Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Based on the size of its U.S. Insurance Subsidiaries’ remaining legacy derivatives portfolios, AGL does not believe any of its U.S. subsidiaries are required to register with the Commodity Futures Trading Commission (CFTC) as a “major swap participant” or with the SEC as a “major securities-based swap participant.” Certain of the Company's subsidiaries may be subject to Dodd-Frank Act requirements to post margin for, or to clear on a regulated execution facility, future swap transactions or with respect to certain amendments to legacy swap transactions, if they enter into such transactions.
Regulation of U.S. Asset Management Business
AGL has two principal operating asset management subsidiaries domiciled in the U.S.: AssuredIM LLC and AHP. AssuredIM LLC is registered as an investment adviser with the SEC and AHP is a relying adviser of AssuredIM LLC. Registered investment advisers, including their relying advisers, are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). As registered investment advisers, AssuredIM must submit periodic filings with the SEC on Forms ADV, which are publicly available. AssuredIM LLC’s SEC filings include information regarding AHP as a relying advisor. The Advisers Act also imposes additional requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. AssuredIM is also registered with the CFTC as a commodity pool operator and is a member of the National Futures Association (NFA), therefore subject to their respective periodic filing and other requirements. BlueMountain CLO Management, LLC (BMCLO), a third asset management subsidiary, has limited activity with a relatively small AUM and, accordingly, ceased to be registered with the SEC in 2022.
In addition, private funds advised by AssuredIM LLC, AHP and BMCLO rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. These exemptions are complex and may in certain circumstances depend on compliance by third parties which are not controlled by the Company.
International Regulation
General
A portion of the Company’s business is conducted in foreign countries. Generally, the Company’s subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Certain of these jurisdictions require registration and periodic reporting by insurance and reinsurance companies that are licensed or authorized in such jurisdictions and are controlled by other entities. Applicable legislation also typically requires periodic disclosure concerning the entity that controls the insurer and reinsurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including, in some instances, payment of dividends by the insurance and reinsurance subsidiary within the holding company system.
In addition to these licensing, disclosure and asset transfer requirements, the Company’s foreign operations are also regulated in various jurisdictions with respect to, among other matters, policy language and terms, amount and type of reserves, amount and type of capital to be held, amount and type of local investment, local tax requirements, and restrictions on changes in control. AGL, as a Bermuda-domiciled holding company, is also subject to shareholding restrictions. Such shareholding restrictions of AGL and restrictions on changes in control of our foreign operations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and, in particular, unsolicited transactions, that some or all of its shareholders might consider to be desirable. See Item 1A. Risk Factors, Risks Related to GAAP, Applicable Law and Regulations captioned “Applicable insurance laws may make it difficult to effect a change of control of AGL.”
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Bermuda
The Bermuda Monetary Authority (the Authority) regulates the Company’s operating insurance and reinsurance subsidiaries in Bermuda. AG Re and AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations (collectively, the Insurance Act). AG Re is registered and licensed as a Class 3B insurer and is authorized to carry on general insurance business (as understood under the Insurance Act), subject to any conditions attached to its license and to compliance with the requirements imposed by the Insurance Act.
AGRO is registered and licensed as both a Class 3A insurer and a Class C long-term insurer, and therefore carries on both general and long-term business (as understood under the Insurance Act), subject to any conditions attached to its license. In particular, AGRO must keep its accounts in respect of its general business and its long-term business separate in respect of any other business. AGRO is required to maintain both a general business fund and a long-term business fund (as defined in the Insurance Act.)
Bermuda Insurance Regulation
The Insurance Act, as enforced by the Authority, imposes on AG Re and AGRO a variety of requirements and restrictions, including the filing of annual GAAP financial statements and audited statutory financial statements; compliance with minimum enhanced capital requirements; compliance with the Authority’s Insurance Code of Conduct; compliance with the Authority’s Insurance Sector Operational Cyber Risk Management Code of Conduct; compliance with minimum solvency and liquidity standards; restrictions on the declaration and payment of dividends and distributions; preparation and publication of an annual Financial Condition Report providing details on measures governing the business operations, corporate governance framework, solvency and financial performance of the insurer and reinsurer; restrictions on changes in control of regulated insurers and reinsurers; restrictions on the reduction of statutory capital; and the need to have a principal representative and a principal office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Authority the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance and reinsurance companies and in certain circumstances share information with foreign regulators.
Shareholder Controllers
Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or more or 50% or more of the Company’s common shares must notify the Authority in writing within 45 days of becoming such a holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may direct, among other things, that the voting rights attached to their common shares are not exercisable.
Minimum Solvency Margin and Enhanced Capital Requirements
Under the Insurance Act, AG Re and AGRO must each ensure that the value of its general business statutory assets exceeds the amount of its general business statutory liabilities by an amount greater than a prescribed minimum solvency margin and each company’s applicable enhanced capital requirement, which is established by reference to either its Bermuda Solvency Capital Requirement (BSCR) model or an approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an insurer’s capital requirements (statutory economic capital and surplus) by establishing capital requirements for ten categories of risk in the insurer’s business: fixed income investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentration risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk.
Restrictions on Dividends and Distributions
The Insurance Act limits the declaration and payment of dividends by AG Re and AGRO, including by prohibiting each company from declaring or paying any dividends during any financial year if it is in breach of its prescribed minimum solvency margin, minimum liquidity ratio or enhanced capital requirement, or if the declaration or payment of such dividends would cause such a breach. Dividends are paid out of each insurer's statutory surplus and, therefore, dividends cannot exceed such surplus. See “Minimum Solvency Margin and Enhanced Capital Requirements” above and “Minimum Liquidity Ratio” below.
The Companies Act 1981 of Bermuda (Companies Act) also limits the declaration and payment of dividends and other distributions by Bermuda companies such as AGL and its Bermuda subsidiaries, which, in addition to AG Re and AGRO,
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also include Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries). Such companies may only declare and pay a dividend or make a distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing that the company is, and after the payment will be, able to meet and pay its liabilities as they become due and the realizable value of the company’s assets will not be less than its liabilities.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding insurers and any other assets which the Authority accepts on application. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit, corporate guaranties and other instruments.
Certain Other Bermuda Law Considerations
Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.
AGL is not currently subject to taxes computed on profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual government fees, business fees, payroll tax and other taxes and duties. See “— Tax Matters—Taxation of AGL and Subsidiaries—Bermuda.”
United Kingdom Insurance and Financial Services Regulation
Each of AGUK and Assured Guaranty Finance Overseas Ltd. (AGFOL) are subject to the FSMA, which covers financial services industry generally,relating to deposits, insurance, investments and certain other financial products. Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K. each constitutes a “regulated activity” requiring authorization by the appropriate regulator.
The PRA and the FCA are the main regulatory authorities responsible for insurance regulation in the U.K. These two regulatory bodies cover the following areas:
•the PRA, a part of the Bank of England, is responsible for prudential regulation of certain classes of financial services firms, including insurance companies, and
•the FCA is responsible for the prudential regulation of all non-PRA firms and the regulation of market conduct by all firms.
AGUK, as an insurance company, is regulated by both the PRA and the FCA. They impose on AGUK a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; intervention and enforcement; and fees and levies. AGFOL, as an insurance intermediary, is regulated by the FCA. AGFOL’s permissions from the FCA allow it to introduce business to the U.S. Insurance Subsidiaries, so that AGFOL can arrange financial guaranties underwritten by the U.S. Insurance Subsidiaries. AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or places.
AGUK also is the principal of Assured Guaranty Credit Protection Ltd. (AGCPL). Prior to 2009, AGCPL entered into a limited number of derivative contracts, some of which are still outstanding, that provide credit protection on certain referenced obligations. AGUK guarantees AGCPL’s obligations under such derivative contracts. AGCPL is not authorized by the PRA or FCA, but is an appointed representative of AGUK. This means that AGCPL can carry on insurance distribution activities without a license because AGUK has regulatory responsibility for it.
PRA Supervision and Enforcement
The PRA has extensive powers to intervene in the affairs of an authorized firm, including the power in certain circumstances to withdraw the firm’s authorization to carry on a regulated activity. The PRA carries out the prudential
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supervision of insurance companies like AGUK through a variety of methods, including the collection of information from statistical returns, the review of accountants’ reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of insurance companies.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The PRA weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its regulatory objectives. It is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
AGUK calculates its minimum required capital according to the Solvency II criteria and is in compliance.
Other U.K. Regulatory Requirements
In 2010 it was agreed between AGUK’s management and its then regulator, the Financial Services Authority (now the PRA), that new business written by AGUK would be guaranteed using a co-insurance structure pursuant to which AGUK would co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGUK's financial guaranty for each transaction covers a proportionate share (currently fixed from 2018 at 15%) of the total exposure, and AGM or AGC, as the case may be, guarantees the remaining exposure under the transaction. AGM or AGC, as the case may be, will also provide a second-to-pay guaranty to cover AGUK’s financial guaranty.
Solvency II and Solvency Requirements
Solvency II took effect from January 1, 2016, in the U.K. and remains in effect as part of the U.K.’s retained EU law after the withdrawal of the U.K. from the EU (Brexit). The reform of Solvency II as it applies in the U.K. is currently under consideration by the U.K. government. Solvency II provides rules on capital adequacy, governance and risk management and regulatory reporting and public disclosure. Under Solvency II, AGUK is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the PRA may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGUK calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
U.K. company law prohibits each of AGUK and AGFOL from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s capital requirements may in practice act as a restriction on dividends for AGUK.
Change of Control
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an insurance company) they must give the PRA (if regulated by the PRA and FCA) or the FCA (if regulated solely by the FCA) notice in writing before making the acquisition. The PRA and the FCA have up to 60 working days (without including any period of interruption) in which to assess a change of control case. Any person (a company or individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power, of a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and Markets in Financial Instruments Directive (MiFID)
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investment firms, and the 20% threshold to insurance brokers and certain other firms that are Non-Directive firms for the purposes of the Solvency II Directive.
U.K. Withdrawal from the European Union
Through 2019, AGUK wrote business in the U.K. and various countries throughout the EU as well as certain other non-EU countries. In mid-2019, to address the impact of the withdrawal of the U.K. from the EU, AGL established AGE as a French incorporated company. AGE was authorized by the French insurance and banking supervisory authority, the ACPR, to conduct financial guarantee business from January 2, 2020, and from that date AGUK ceased the underwriting of new business within the EEA. In October 2020, in preparation for Brexit, AGUK transferred to AGE certain existing AGUK policies relating to risks in the EEA under the Part VII Transfer.
AGUK will continue to write new business in the U.K. and certain other non-EEA countries.
Regulation of U.K. Asset Management Business
AssuredIM London is domiciled in the U.K. and is authorized by the FCA as an investment manager in the U.K. with certain permissions. The FSMA and rules promulgated thereunder, together with certain additional legislation, govern all aspects of the U.K. investment business, including sales, research and trading practices, the provision of investment advice, and discretionary management services, the use and safekeeping of client funds and securities, regulatory capital, margin practices and procedures, the approval standards for individuals, anti-money laundering, periodic reporting and settlement procedures.
AssuredIM London acts as a subadvisor to AssuredIM LLC, is a relying adviser of AssuredIM LLC for US regulatory purposes and its information is incorporated into AssuredIM LLC’s periodic filings on Forms ADV, which are publicly available. As a result of its FCA registration and being a relying adviser of AssuredIM LLC, AssuredIM London is subject to both U.K. and U.S. requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. In 2022, AssuredIM London ceased to be registered as a commodity trading adviser with the CFTC and is no longer a member of the NFA due to its limited role as a subadvisor to AssuredIM LLC.
In addition, AssuredIM London relies on complex exemptions from the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. Such exemptions may in certain circumstances depend on compliance by third parties not controlled by the Company.
France
As an insurance company licensed in France, AGE is regulated by the ACPR and is subject to the provisions of Solvency II as well as related EU delegated regulations as implemented in France, and by the French Insurance Code and the Monetary and Financial Code, both of which set out the primary rules governing the insurance industry in France. In accordance with French insurance regulation and Solvency II, AGE is permitted to carry on its activities in the countries of the EEA where it is authorized to operate under the freedom to provide services regime.
French regulation of insurance companies imposes on AGE a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; and intervention and enforcement.
ACPR Supervision and Enforcement
The ACPR has extensive regulationpowers to intervene in the affairs of an insurance company, including the power in certain circumstances to withdraw the company’s authorization to carry on a regulated activity. The ACPR carries out the prudential supervision of insurance companies like AGE through a variety of methods, including the collection of information from statistical returns, the review of accountants' reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews.
The ACPR assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The ACPR is forward-looking, assessing its objectives not just against current risks, but also against those that
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could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
Solvency II and Solvency Requirements
Solvency II came into effect in France on January 1, 2016, and is the legal and regulatory basis for the supervision of insurance firms in France. It provides rules on capital adequacy, governance, risk management, and regulatory reporting and public disclosure. Under Solvency II, AGE is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the ACPR may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as well.a separate asset (rather than being netted off the underlying insurance liabilities). AGE calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
French company law prohibits AGE from declaring a dividend to its shareholders unless it has “profits and/or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While French law imposes no statutory restrictions on an insurer's ability to declare a dividend, the ACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE.
Change of Control
The French insurance code has requirements regarding acquisitions, disposals, and increases or decreases in ownership of a French-licensed insurance company.
Any transaction enabling a person (a company or individual), acting alone or in concert with other persons, to acquire, increase, dispose of or reduce its ownership in an insurance company licensed in France requires express or implied approval from the ACPR: (i) where such transaction results directly or indirectly in the proportion of shares or voting rights held by that person or those persons rising above 10%, 20%, one-third or 50% of all shares or voting rights; (ii) where the insurance or reinsurance company becomes a subsidiary of that person or those persons; and (iii) where the transaction allows this person or persons to exercise a significant influence over the management of this company.
As a matter of principle, the ACPR has 60 business days from the date on which it acknowledges receipt of the notification of the transaction to notify the reporting entity and the insurance company whose ownership change is contemplated of its refusal or approval of the transaction. In approving or refusing the transaction, the ACPR takes into account various factors, including the reputation of the acquirer, the effect of the transaction on the business and the management of the company, the impact of the transaction on the financial strength of the company, or the ability of the company to continue to comply with applicable regulation.
Human Capital Management
The Company recognizes that its workforce, as a key driver of long-term performance, is among its most valued assets. Accordingly, the Company’s key human capital management objectives are to attract, retain, develop and support a diverse group of the highest quality employees, including talented and experienced business leaders who drive its corporate strategies and build long-term shareholder value. To promote these objectives, the Company’s human capital management programs are designed to reward and support employees with competitive compensation and benefit packages in each of its locations around the globe, and with professional development opportunities to cultivate talented employees and prepare them for critical roles and future leadership positions.
As of December 31, 2022, the Company employed 411 people worldwide; approximately 89% of employees are based in the U.S. and Bermuda and approximately 11% are based in the U.K. and France. Approximately 36% of the Company’s
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workforce is female and 64% is male. The average tenure is 11.9 years. Other than in France, none of the Company’s employees are subject to collective bargaining agreements. The Company believes its employee relations are satisfactory.
Learning and Development; Mentoring. The Company invests in the professional development of its workforce. To support the advancement of its employees, the Company endeavors to strengthen their knowledge and skills by providing equitable access to training, including in leadership, management and effective communication skills, mentoring opportunities, as well as tuition reimbursement assistance. Employee evaluations and performance reviews are conducted annually, during which managers and employees are encouraged to discuss employee goals and opportunities for development, including, as appropriate, training and coaching.
The Company also provides opportunities for qualified employees to work abroad in another of the Company’s offices as part of its international rotation program.
The Company’s collegial and collaborative culture fosters informal mentoring and learning. The Company also has a formal one-on-one mentoring program to provide an additional learning resource for its employees, facilitate the onboarding of new recruits and reinforce connectedness. The mentoring program is offered to all employees across the Company’s offices. The Company utilizes an outside consultant to provide workshops for both mentors and mentees. In addition, the Company sponsors memberships for its employees in external organizations to provide further opportunities for professional development, mentoring and networking.
Compensation and Benefits. The compensation program is designed to attract, retain and motivate talented individuals and to recognize and reward outstanding achievement. The components of the program consist of base salary and may include incentive compensation in the form of an annual cash incentive and deferred compensation in the form of cash and/or equity (including, in the case of certain AssuredIM professionals, an entitlement to a portion of carried interest allocated to the general partners of certain AssuredIM Funds). The Company believes that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns the interests of employees and investors. To maintain the wellness of its employees, the Company offers a benefits package designed to promote and support physical and mental health as well as financial security. Benefits include life and health (medical, dental and vision) insurance, retirement savings plans, an employee stock purchase plan, paid time off, paid family leave, an employee assistance program, commuter benefits, tuition reimbursement, fertility and family planning resources, emergency backup child, elder and pet care, reimbursement of health club fees, online classes for children, and corporate matches of an employee’s charitable contributions.
Culture. The Company seeks to foster and maintain strong ethical standards and a reputation as a business that conducts itself professionally and with a high degree of integrity. In addition, the Company works to provide and support a respectful and inclusive environment that values the abilities of each employee, leading to enhanced engagement and improved retention. Education and awareness are critical components in promoting the Company’s cultural values across the organization. Upon onboarding and annually, all employees are required to complete training in the Company’s Global Code of Ethics as well as its policies on the prevention of sexual harassment and discrimination. The Company also provides additional targeted training and guidance to specific personnel regarding anti-fraud, anti-bribery and anti-corruption related matters. Transparency towards stakeholders, including shareholders, policyholders, investors and employees, is another hallmark of the Company’s culture. Each quarter after the Company issues its financial results, in addition to meeting with shareholders and policyholders, the AGL Chief Executive Officer and Chief Financial Officer hold a town-hall style meeting for all employees where they provide an update on the Company’s performance and strategy, acknowledge contributions made by employees to the continued success of its business and answer questions.
Employee Engagement. In 2022, the Company launched its inaugural employee engagement survey. While the Company encourages open dialogue, the engagement survey provided a confidential forum for employees to provide more candid feedback. The Company engaged a third-party provider to foster confidentiality; the vendor conducted the survey, collected and aggregated feedback and benchmarked results relative to other similar-size financial services companies. The survey was sent to the total global workforce; 88% of all employees participated in the survey. The overall engagement score exceeded the benchmark.
Diversity and Inclusion. Diversity and inclusion are ingrained within Assured Guaranty’s policies and practices, including its Diversity and Inclusion Policy, and integrated throughout the Company. Assured Guaranty is committed to building and sustaining at all levels of the organization a diverse workforce that is representative of its communities, in a manner consistent with its business needs, scale and resources, and fostering an inclusive culture and workplace that embrace the differences within its staff and effectively utilize the many and varied talents of its employees. Responsibility for implementing the goals of diversity and inclusion is shared by board members, who participate in forums, senior management, who serve as mentors and executive sponsors of employee resource groups (ERGs) (described below) and the global workforce,
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who serve on the Diversity and Inclusion Committee (D&I Committee) (described below). To incentivize and hold senior leadership accountable, the Company incorporates environmental and social responsibility considerations (including with respect to diversity and inclusion) in its executive compensation program.
The Company has taken a number of steps to demonstrate its organizational commitment to diversity and inclusion.
Training. In 2021, the Company provided bias awareness training for all of its employees on how to identify and interrupt unconscious bias and the role each employee can play to promote diversity, equity and inclusion. In 2022, the Company provided workshops on inclusive interviewing for managers and others with hiring responsibilities.
Recruiting. The Company added a number of talent acquisition strategies to its recruiting practices in order to deliberately reach and attract a diverse and qualified applicant pool. To cast a wider net, positions are posted on Assured Guaranty’s websites and other public job and recruiting websites. For positions which require the use of a search firm, the Company has instructed its executive recruiters and search firms to present more diverse and qualified applicant pools. The Company’s internal recruiting team also works with organizations that promote the development and advancement of women and underrepresented minorities to help source more diverse applicant pools. The Company does not use artificial intelligence or other software to screen applicants.
Employee-led Diversity and Inclusion Committee. The Company’s employee-led D&I Committee is a critical ally in the Company’s commitment to promoting diversity, fostering inclusion, and addressing racial inequity. The D&I Committee is composed of dedicated employees with different backgrounds, points of view, levels of seniority and tenure with the Company, who provide input into policies and strategies for achieving a diverse workforce and an inclusive culture. The D&I Committee has played a key role in recommending and working to implement strategies and initiatives to achieve its diversity and inclusion goals, such as the mentoring program, ERGs, hosting firm-wide events designed to provide education and facilitate discussion around topics such as bias, gender and race, and investing in organizations that work to create a pipeline of diverse and qualified candidates.
Employee Resource Groups. Based on employee feedback, the Company launched employee resource groups for African Americans, women and working parents to create community and awareness and encourage employees to engage with and support one another. The ERGs also provide mentorship and career development opportunities to members and assist the Company in its efforts to retain, develop and promote diverse professionals and to foster a more inclusive culture. The ERGs are employee-led with the support of executive sponsors; membership in the ERGs is voluntary and open to all employees. Throughout the year, the ERGs sponsored various events, firm-wide as well as focused for group members, including a panel discussion on women in the workforce, a workshop for parents on helping children cope with the stress resulting from the COVID-19 pandemic, and discussions on the business case for, and importance of, diversity and inclusion.
Conversations Around Gender and Race. In 2022, the ERGs and the D&I Committee sponsored several firm-wide presentations and panel discussions designed to facilitate difficult conversations around race, gender, and bias. The chair of the AGL Board and the chair of the Environmental and Social Responsibility Committee each visited the New York office, on separate occasions, to participate in a question and answer discussion about the business case for diversity and inclusion, balancing the goals of diversity and meritocracy, and the Board’s support for the Company’s diversity and inclusion initiatives. Women directors from AGL’s Board as well as AGUK’s Board participated in a panel discussion where they shared insights and advice about careers and balancing professional and personal goals.
The women’s ERG is currently planning Assured Guaranty’s first international women’s conference. Women employees and allies are invited to gather in New York in March 2023 (coinciding with International Women’s Day) to network in person with women colleagues, hear inspiring speakers, participate in round table educational sessions on key professional issues, and to celebrate collective and individual accomplishments.
COVID-19 Response and Hybrid Work. At the start of the global COVID-19 pandemic in 2020, Assured Guaranty initiated its business continuity protocols and instructed its employees to work from home, placing an emphasis on the well-being of its employees and their families. The Company’s investments in technology and the regular testing of its business continuity plan allowed it to quickly shift to remote work. The success of remote work, both at the Company and across the broader labor market, sparked a collective re-evaluation of the nature of office work. The Company surveyed its employees for their feedback while also observing industry trends and peer practices to craft a viable and sustainable remote work policy. Currently, the Company offers employees the option to work remotely for a portion of their time– both as a convenience to employees and to remain competitive as an employer.
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Governance. The AGL Board’s Environmental and Social Responsibility Committee and Compensation Committee, pursuant to their respective charters, provide oversight of the Company’s human capital management strategies, policies, and initiatives, including the attraction, development and retention of personnel, the promotion of diversity, and the fostering of an inclusive culture. The Environmental and Social Responsibility Committee is periodically updated on workforce demographics and tenure, culture and workplace safety, and initiatives of the employee-led D&I Committee and the Corporate Philanthropy Committee. The Compensation Committee, which is advised by an independent compensation consultant, is responsible for the oversight of management development and evaluation of succession planning for senior management, and a review of the Company’s senior management compensation benchmarked against a comparison group.
Board members also support the Company’s D&I Committee programming by participating in panel discussion and presentations sponsored by the Company’s ERGs and D&I Committee, as described above.
Tax Matters
United States Tax Reform
The 2017 Tax Cuts and Jobs Act of 2017 (the TCJA) lowered the corporate U.S. tax rate to 21%, eliminated the alternative minimum tax, limited the deductibility of interest expense and required a one-time tax on a deemed repatriation of untaxed earnings of non-U.S. subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies such as the Company, the TCJA also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. In addition, the TCJA included certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections and U.S. persons investing in such companies. For example, the TCJA includes a base erosion and anti-abuse tax (BEAT) that could make affiliate reinsurance between U.S. and non-U.S. members of the Company’s group economically unfeasible. In addition, the TCJA introduced a current tax on global intangible low-taxed income that may result in an increase in U.S. corporate income tax imposed on the Company’s U.S. group members with respect to earnings of their non-U.S. subsidiaries. As discussed in more detail below, the TCJA also revised the rules applicable to passive foreign investment companies (PFICs) and controlled foreign corporations (CFCs). Further, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company. Additionally, tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or a PFIC or has related person insurance income (RPII) are subject to change, possibly on a retroactive basis. The Treasury Department recently issued final and proposed regulations intended to clarify the application of the insurance income exception to the classification of a non-U.S. insurer as a PFIC and provide guidance on a range of issues relating to PFICs, and recently issued proposed regulations that would expand the scope of the RPII rules. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation and Note 14, Income Taxes.
Taxation of AGL and Subsidiaries
Bermuda
Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by AGL or its Bermuda Subsidiaries. AGL, AG Re and AGRO have each obtained from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to AGL, AG Re or AGRO or to any of their operations or their shares, debentures or other obligations, until March 31, 2035. This assurance is subject to regulation under applicable insurance-relatedthe provision that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda, or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any land leased to AGL, AG Re or AGRO. AGL, AG Re and asset management-related statutesAGRO each pays annual Bermuda government fees, and AG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the U.S., the U.K., Bermuda and elsewhere.government.
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In both New York and Maryland, releases from the insurer’s contingency reserve may be permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.
From time to time, the U.S. Insurance Subsidiaries have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer’s outstanding insured obligations. In 2022, the U.S. Insurance Subsidiaries each requested a release of accumulated contingency reserve which were deemed excessive in relation to the Company’s outstanding insured obligations. AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $87.3 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $1.3 million, which represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $87.3 million release. Both AGM’s and AGC’s release were recorded in 2022. In 2021 AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $104 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $246 million, of which approximately $1.5 million represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $104 million release.
Applicable New York and Maryland laws and regulations require regular, quarterly contributions to contingency reserves, but such laws and regulations permit the discontinuation of such quarterly contributions to an insurer's contingency reserves when such insurer’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the insurer’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category. In accordance with such laws and regulations, and with the approval of the NYDFS and the MIA, respectively, AGM ceased making quarterly contributions to its contingency reserves for non-municipal business and AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business, in each case beginning in the fourth quarter of 2014. Such cessations are expected to continue for as long as AGM and AGC satisfy the foregoing condition for their applicable line(s) of business.
Single and Aggregate Risk Limits
The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty insurers applicable to all obligations insured by a financial guaranty insurer that are issued by a single entity and backed by a single revenue source. For example, under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. In addition, the insured unpaid principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and collateral, is limited to 75% of the insurer’s policyholders’ surplus and contingency reserves.
Under the limit applicable to qualifying asset-backed securities, the lesser of:
•the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or
•the insured unpaid principal (reduced by the extent to which the Company refersunpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral,
may not exceed 10% of the sum of the insurer’s policyholders’ surplus and contingency reserves, subject to collectivelycertain conditions.
Single-risk limits are also specified for other categories of insured obligations, and generally are more restrictive than those described above for municipal and asset-backed obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to a catch-all or “other” limit under which the unpaid principal of the single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. For example, “triple-X” and “future flow” securitizations, as well as unsecured corporate obligations and unsecured investor-owned utility obligations, are generally subject to this catch-all or “other” single-risk limit.
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The New York Insurance Law and the Code of Maryland Regulations also establish an aggregate risk limit on the basis of the aggregate net liability insured by a financial guaranty insurer as compared with its statutory capital. “Aggregate net liability” is defined for this purpose as the Assured Guaranty U.S. Insurance Subsidiaries.outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under this limit, an insurer’s combined policyholders’ surplus and contingency reserves must not be less than the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment-grade obligations. As of December 31, 2022, the aggregate net liability of each of AGM and AGC utilized approximately 26% and 9% of their respective policyholders’ surplus and contingency reserves.
Group Regulation
In connection with AGL’s establishment of tax residence in the U.K., as discussed in greater detail under “Tax Matters” below, the NYDFS has been designated as group-wide supervisor for the Assured Guaranty group. Group-wide supervision by the NYDFS results in additional regulatory oversight over Assured Guaranty, particularly with respect to group-wide enterprise risk, and may subject Assured Guaranty to new regulatory requirements and constraints.
U.S. Credit for Reinsurance Requirements for Non-U.S. Reinsurance Subsidiaries
The Company’s Bermuda reinsurance subsidiaries, AG Re and AGRO, are affected by regulatory requirements in various U.S. states governing the ability of a ceding company domiciled in the state to receive credit on its statutory financial statements for reinsurance provided by a reinsurer. In general, under such requirements, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the ceding company’s state of domicile is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), and loss and LAE reserves ceded to the reinsurer. The substantial majority of states, however, also permit a credit on the statutory financial statements of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer secures its reinsurance obligations to the ceding insurer by providing collateral in the form of a letter of credit, trust fund or other acceptable security arrangement. Certain of those states also permit such non-licensed/non-accredited reinsurers that meet certain specified requirements to apply for “certified reinsurer” status. If granted, such status allows the certified reinsurer to post less than 100% collateral (the exact percentage depends on the certifying state's view of the reinsurer's financial strength) and the applicable ceding company will still qualify, on the basis of such reduced collateral, for full credit for reinsurance on its statutory financial statements with respect to reinsurance contracts renewed or entered into with the certified reinsurer on or after the date the reinsurer becomes certified. Certain states have eliminated the reinsurance collateral requirements for unauthorized reinsurers in certain qualifying jurisdictions that (i) meet specified requirements, such as minimum capital and surplus amounts and minimum solvency or capital ratios, and (ii) provide certain commitments to the ceding insurer’s domiciliary state, such as submission to such state’s jurisdiction and the filing of annual audited financial statements with the state. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.
AG Re and AGRO are not licensed, accredited or approved in any state and have established trusts to secure their reinsurance obligations. In 2017, AGRO obtained certified reinsurer status in Missouri, which allows AGRO to post 10% collateral in respect of any reinsurance assumed from a Missouri-domiciled ceding company on or after the date of AGRO’s certification (although, currently, AGRO does not assume any such reinsurance). See “International Regulation —Bermuda—Bermuda Insurance Regulation” for Bermuda regulations applicable to AG Re and AGRO.
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Regulation of Swap Transactions Under Dodd-Frank
The Company’s U.S. insurance businesses are subject to direct and indirect regulation under U.S. federal law. In particular, their derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd- Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Based on the size of its U.S. Insurance SubsidiariesSubsidiaries’ remaining legacy derivatives portfolios, AGL does not believe any of its U.S. subsidiaries are required to register with the Commodity Futures Trading Commission (CFTC) as a “major swap participant” or with the SEC as a “major securities-based swap participant.” Certain of the Company's subsidiaries may be subject to Dodd-Frank Act requirements to post margin for, or to clear on a regulated execution facility, future swap transactions or with respect to certain amendments to legacy swap transactions, if they enter into such transactions.
Regulation of U.S. Asset Management Business
AGL has two principal operating asset management subsidiaries domiciled in the U.S.: AssuredIM LLC and AHP. AssuredIM LLC is registered as an investment adviser with the SEC and AHP is a relying adviser of AssuredIM LLC. Registered investment advisers, including their relying advisers, are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). As registered investment advisers, AssuredIM must submit periodic filings with the SEC on Forms ADV, which are publicly available. AssuredIM LLC’s SEC filings include information regarding AHP as a relying advisor. The Advisers Act also imposes additional requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its domestic state insurance departmentadvisory clients and annuallygeneral anti-fraud prohibitions. AssuredIM is also registered with the CFTC as a commodity pool operator and is a member of the National Futures Association (NFA), therefore subject to furnish financialtheir respective periodic filing and other information aboutrequirements. BlueMountain CLO Management, LLC (BMCLO), a third asset management subsidiary, has limited activity with a relatively small AUM and, accordingly, ceased to be registered with the operationsSEC in 2022.
In addition, private funds advised by AssuredIM LLC, AHP and BMCLO rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. These exemptions are complex and may in certain circumstances depend on compliance by third parties which are not controlled by the Company.
International Regulation
General
A portion of the Company’s business is conducted in foreign countries. Generally, the Company’s subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Certain of these jurisdictions require registration and periodic reporting by insurance and reinsurance companies within its holding company system. Generally, all transactions amongthat are licensed or authorized in such jurisdictions and are controlled by other entities. Applicable legislation also typically requires periodic disclosure concerning the entity that controls the insurer and reinsurer and the other companies in the holding company system to which anyand prior approval of the Assured Guaranty U.S. Insurance Subsidiaries is a party (including sales, loans, reinsurance agreementsintercompany transactions and service agreements) must be fair and, if material ortransfers of a specified category, such as reinsurance or service agreements, require prior notice and approval or non-disapprovalassets, including, in some instances, payment of dividends by the insurance department whereand reinsurance subsidiary within the applicable subsidiaryholding company system.
In addition to these licensing, disclosure and asset transfer requirements, the Company’s foreign operations are also regulated in various jurisdictions with respect to, among other matters, policy language and terms, amount and type of reserves, amount and type of capital to be held, amount and type of local investment, local tax requirements, and restrictions on changes in control. AGL, as a Bermuda-domiciled holding company, is domiciled.
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Bermuda
The Bermuda Monetary Authority (the Authority) regulates the Company’s operating insurance and reinsurance subsidiaries in Bermuda. AG Re and AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations (collectively, the Insurance Act). AG Re is registered and licensed as a Class 3B insurer and is authorized to carry on general insurance business (as understood under the Insurance Act), subject to any conditions attached to its license and to compliance with the requirements imposed by the Insurance Act.
AGRO is registered and licensed as both a Class 3A insurer and a Class C long-term insurer, and therefore carries on both general and long-term business (as understood under the Insurance Act), subject to any conditions attached to its license. In particular, AGRO must keep its accounts in respect of its general business and its long-term business separate in respect of any other business. AGRO is required to maintain both a general business fund and a long-term business fund (as defined in the Insurance Act.)
Bermuda Insurance Regulation
The Insurance Act, as enforced by the Authority, imposes on AG Re and AGRO a variety of requirements and restrictions, including the filing of annual GAAP financial statements and audited statutory financial statements; compliance with minimum enhanced capital requirements; compliance with the Authority’s Insurance Code of Conduct; compliance with the Authority’s Insurance Sector Operational Cyber Risk Management Code of Conduct; compliance with minimum solvency and liquidity standards; restrictions on the declaration and payment of dividends and distributions; preparation and publication of an annual Financial Condition Report providing details on measures governing the business operations, corporate governance framework, solvency and financial performance of the insurer and reinsurer; restrictions on changes in control of regulated insurers and reinsurers; restrictions on the reduction of statutory capital; and the need to have a principal representative and a principal office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Authority the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance and reinsurance companies and in certain circumstances share information with foreign regulators.
Shareholder Controllers
Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or more or 50% or more of the Company’s common shares must notify the Authority in writing within 45 days of becoming such a holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may direct, among other things, that the voting rights attached to their common shares are not exercisable.
Minimum Solvency Margin and Enhanced Capital Requirements
Under the Insurance Act, AG Re and AGRO must each ensure that the value of its general business statutory assets exceeds the amount of its general business statutory liabilities by an amount greater than a prescribed minimum solvency margin and each company’s applicable enhanced capital requirement, which is established by reference to either its Bermuda Solvency Capital Requirement (BSCR) model or an approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an insurer’s capital requirements (statutory economic capital and surplus) by establishing capital requirements for ten categories of risk in the insurer’s business: fixed income investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentration risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk.
Restrictions on Dividends and Distributions
The Insurance Act limits the declaration and payment of dividends by AG Re and AGRO, including by prohibiting each company from declaring or paying any dividends during any financial year if it is in breach of its prescribed minimum solvency margin, minimum liquidity ratio or enhanced capital requirement, or if the declaration or payment of such dividends would cause such a breach. Dividends are paid out of each insurer's statutory surplus and, therefore, dividends cannot exceed such surplus. See “Minimum Solvency Margin and Enhanced Capital Requirements” above and “Minimum Liquidity Ratio” below.
The Companies Act 1981 of Bermuda (Companies Act) also limits the declaration and payment of dividends and other distributions by Bermuda companies such as AGL and its Bermuda subsidiaries, which, in addition to AG Re and AGRO,
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also include Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries). Such companies may only declare and pay a dividend or make a distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing that the company is, and after the payment will be, able to meet and pay its liabilities as they become due and the realizable value of the company’s assets will not be less than its liabilities.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding insurers and any other assets which the Authority accepts on application. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit, corporate guaranties and other instruments.
Certain Other Bermuda Law Considerations
Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.
AGL is not currently subject to taxes computed on profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual government fees, business fees, payroll tax and other taxes and duties. See “— Tax Matters—Taxation of AGL and Subsidiaries—Bermuda.”
United Kingdom Insurance and Financial Services Regulation
Each of AGUK and Assured Guaranty Finance Overseas Ltd. (AGFOL) are subject to the FSMA, which covers financial services relating to deposits, insurance, investments and certain other financial products. Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K. each constitutes a “regulated activity” requiring authorization by the appropriate regulator.
The PRA and the FCA are the main regulatory authorities responsible for insurance regulation in the U.K. These two regulatory bodies cover the following areas:
•the PRA, a part of the Bank of England, is responsible for prudential regulation of certain classes of financial services firms, including insurance companies, and
•the FCA is responsible for the prudential regulation of all non-PRA firms and the regulation of market conduct by all firms.
AGUK, as an insurance company, is regulated by both the PRA and the FCA. They impose on AGUK a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; intervention and enforcement; and fees and levies. AGFOL, as an insurance intermediary, is regulated by the FCA. AGFOL’s permissions from the FCA allow it to introduce business to the U.S. Insurance Subsidiaries, so that AGFOL can arrange financial guaranties underwritten by the U.S. Insurance Subsidiaries. AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or places.
AGUK also is the principal of Assured Guaranty Credit Protection Ltd. (AGCPL). Prior to 2009, AGCPL entered into a limited number of derivative contracts, some of which are still outstanding, that provide credit protection on certain referenced obligations. AGUK guarantees AGCPL’s obligations under such derivative contracts. AGCPL is not authorized by the PRA or FCA, but is an appointed representative of AGUK. This means that AGCPL can carry on insurance distribution activities without a license because AGUK has regulatory responsibility for it.
PRA Supervision and Enforcement
The PRA has extensive powers to intervene in the affairs of an authorized firm, including the power in certain circumstances to withdraw the firm’s authorization to carry on a regulated activity. The PRA carries out the prudential
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supervision of insurance companies like AGUK through a variety of methods, including the collection of information from statistical returns, the review of accountants’ reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of insurance companies.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The PRA weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its regulatory objectives. It is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
AGUK calculates its minimum required capital according to the Solvency II criteria and is in compliance.
Other U.K. Regulatory Requirements
In 2010 it was agreed between AGUK’s management and its then regulator, the Financial Services Authority (now the PRA), that new business written by AGUK would be guaranteed using a co-insurance structure pursuant to which AGUK would co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGUK's financial guaranty for each transaction covers a proportionate share (currently fixed from 2018 at 15%) of the total exposure, and AGM or AGC, as the case may be, guarantees the remaining exposure under the transaction. AGM or AGC, as the case may be, will also provide a second-to-pay guaranty to cover AGUK’s financial guaranty.
Solvency II and Solvency Requirements
Solvency II took effect from January 1, 2016, in the U.K. and remains in effect as part of the U.K.’s retained EU law after the withdrawal of the U.K. from the EU (Brexit). The reform of Solvency II as it applies in the U.K. is currently under consideration by the U.K. government. Solvency II provides rules on capital adequacy, governance and risk management and regulatory reporting and public disclosure. Under Solvency II, AGUK is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the PRA may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGUK calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
U.K. company law prohibits each of AGUK and AGFOL from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s capital requirements may in practice act as a restriction on dividends for AGUK.
Change of Control
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an insurance company) they must give the PRA (if regulated by the PRA and FCA) or the FCA (if regulated solely by the FCA) notice in writing before making the acquisition. The PRA and the FCA have up to 60 working days (without including any period of interruption) in which to assess a change of control case. Any person (a company or individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power, of a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and Markets in Financial Instruments Directive (MiFID)
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investment firms, and the 20% threshold to insurance brokers and certain other firms that are Non-Directive firms for the purposes of the Solvency II Directive.
U.K. Withdrawal from the European Union
Through 2019, AGUK wrote business in the U.K. and various countries throughout the EU as well as certain other non-EU countries. In mid-2019, to address the impact of the withdrawal of the U.K. from the EU, AGL established AGE as a French incorporated company. AGE was authorized by the French insurance and banking supervisory authority, the ACPR, to conduct financial guarantee business from January 2, 2020, and from that date AGUK ceased the underwriting of new business within the EEA. In October 2020, in preparation for Brexit, AGUK transferred to AGE certain existing AGUK policies relating to risks in the EEA under the Part VII Transfer.
AGUK will continue to write new business in the U.K. and certain other non-EEA countries.
Regulation of U.K. Asset Management Business
AssuredIM London is domiciled in the U.K. and is authorized by the FCA as an investment manager in the U.K. with certain permissions. The FSMA and rules promulgated thereunder, together with certain additional legislation, govern all aspects of the U.K. investment business, including sales, research and trading practices, the provision of investment advice, and discretionary management services, the use and safekeeping of client funds and securities, regulatory capital, margin practices and procedures, the approval standards for individuals, anti-money laundering, periodic reporting and settlement procedures.
AssuredIM London acts as a subadvisor to AssuredIM LLC, is a relying adviser of AssuredIM LLC for US regulatory purposes and its information is incorporated into AssuredIM LLC’s periodic filings on Forms ADV, which are publicly available. As a result of its FCA registration and being a relying adviser of AssuredIM LLC, AssuredIM London is subject to both U.K. and U.S. requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. In 2022, AssuredIM London ceased to be registered as a commodity trading adviser with the CFTC and is no longer a member of the NFA due to its limited role as a subadvisor to AssuredIM LLC.
In addition, AssuredIM London relies on complex exemptions from the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. Such exemptions may in certain circumstances depend on compliance by third parties not controlled by the Company.
France
As an insurance company licensed in France, AGE is regulated by the ACPR and is subject to the provisions of Solvency II as well as related EU delegated regulations as implemented in France, and by the French Insurance Code and the Monetary and Financial Code, both of which set out the primary rules governing the insurance industry in France. In accordance with French insurance regulation and Solvency II, AGE is permitted to carry on its activities in the countries of the EEA where it is authorized to operate under the freedom to provide services regime.
French regulation of insurance companies imposes on AGE a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; and intervention and enforcement.
ACPR Supervision and Enforcement
The ACPR has extensive powers to intervene in the affairs of an insurance company, including the power in certain circumstances to withdraw the company’s authorization to carry on a regulated activity. The ACPR carries out the prudential supervision of insurance companies like AGE through a variety of methods, including the collection of information from statistical returns, the review of accountants' reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews.
The ACPR assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The ACPR is forward-looking, assessing its objectives not just against current risks, but also against those that
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could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
Solvency II and Solvency Requirements
Solvency II came into effect in France on January 1, 2016, and is the legal and regulatory basis for the supervision of insurance firms in France. It provides rules on capital adequacy, governance, risk management, and regulatory reporting and public disclosure. Under Solvency II, AGE is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the ACPR may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGE calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
French company law prohibits AGE from declaring a dividend to its shareholders unless it has “profits and/or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While French law imposes no statutory restrictions on an insurer's ability to declare a dividend, the ACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE.
Change of Control
The French insurance code has requirements regarding acquisitions, disposals, and increases or decreases in ownership of a French-licensed insurance company.
Any transaction enabling a person (a company or individual), acting alone or in concert with other persons, to acquire, increase, dispose of or reduce its ownership in an insurance company licensed in France requires express or implied approval from the ACPR: (i) where such transaction results directly or indirectly in the proportion of shares or voting rights held by that person or those persons rising above 10%, 20%, one-third or 50% of all shares or voting rights; (ii) where the insurance or reinsurance company becomes a subsidiary of that person or those persons; and (iii) where the transaction allows this person or persons to exercise a significant influence over the management of this company.
As a matter of principle, the ACPR has 60 business days from the date on which it acknowledges receipt of the notification of the transaction to notify the reporting entity and the insurance company whose ownership change is contemplated of its refusal or approval of the transaction. In approving or refusing the transaction, the ACPR takes into account various factors, including the reputation of the acquirer, the effect of the transaction on the business and the management of the company, the impact of the transaction on the financial strength of the company, or the ability of the company to continue to comply with applicable regulation.
Human Capital Management
The Company recognizes that its workforce, as a key driver of long-term performance, is among its most valued assets. Accordingly, the Company’s key human capital management objectives are to attract, retain, develop and support a diverse group of the highest quality employees, including talented and experienced business leaders who drive its corporate strategies and build long-term shareholder value. To promote these objectives, the Company’s human capital management programs are designed to reward and support employees with competitive compensation and benefit packages in each of its locations around the globe, and with professional development opportunities to cultivate talented employees and prepare them for critical roles and future leadership positions.
As of December 31, 2022, the Company employed 411 people worldwide; approximately 89% of employees are based in the U.S. and Bermuda and approximately 11% are based in the U.K. and France. Approximately 36% of the Company’s
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workforce is female and 64% is male. The average tenure is 11.9 years. Other than in France, none of the Company’s employees are subject to collective bargaining agreements. The Company believes its employee relations are satisfactory.
Learning and Development; Mentoring. The Company invests in the professional development of its workforce. To support the advancement of its employees, the Company endeavors to strengthen their knowledge and skills by providing equitable access to training, including in particular unsolicited transactions.leadership, management and effective communication skills, mentoring opportunities, as well as tuition reimbursement assistance. Employee evaluations and performance reviews are conducted annually, during which managers and employees are encouraged to discuss employee goals and opportunities for development, including, as appropriate, training and coaching.
Compensation and Benefits. The compensation program is designed to attract, retain and motivate talented individuals and to recognize and reward outstanding achievement. The components of the program consist of base salary and may include incentive compensation in the form of an annual cash incentive and deferred compensation in the form of cash and/or equity (including, in the case of certain AssuredIM professionals, an entitlement to a portion of carried interest allocated to the general partners of certain AssuredIM Funds). The Company believes that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns the interests of employees and investors. To maintain the wellness of its employees, the Company offers a benefits package designed to promote and support physical and mental health as well as financial security. Benefits include life and health (medical, dental and vision) insurance, authorities have broad regulatory powersretirement savings plans, an employee stock purchase plan, paid time off, paid family leave, an employee assistance program, commuter benefits, tuition reimbursement, fertility and family planning resources, emergency backup child, elder and pet care, reimbursement of health club fees, online classes for children, and corporate matches of an employee’s charitable contributions.
Culture. The Company seeks to foster and maintain strong ethical standards and a reputation as a business that conducts itself professionally and with a high degree of integrity. In addition, the Company works to provide and support a respectful and inclusive environment that values the abilities of each employee, leading to enhanced engagement and improved retention. Education and awareness are critical components in promoting the Company’s cultural values across the organization. Upon onboarding and annually, all employees are required to complete training in the Company’s Global Code of Ethics as well as its policies on the prevention of sexual harassment and discrimination. The Company also provides additional targeted training and guidance to specific personnel regarding anti-fraud, anti-bribery and anti-corruption related matters. Transparency towards stakeholders, including shareholders, policyholders, investors and employees, is another hallmark of the Company’s culture. Each quarter after the Company issues its financial results, in addition to meeting with shareholders and policyholders, the AGL Chief Executive Officer and Chief Financial Officer hold a town-hall style meeting for all employees where they provide an update on the Company’s performance and strategy, acknowledge contributions made by employees to the continued success of its business and answer questions.
Employee Engagement. In 2022, the Company launched its inaugural employee engagement survey. While the Company encourages open dialogue, the engagement survey provided a confidential forum for employees to provide more candid feedback. The Company engaged a third-party provider to foster confidentiality; the vendor conducted the survey, collected and aggregated feedback and benchmarked results relative to other similar-size financial services companies. The survey was sent to the total global workforce; 88% of all employees participated in the survey. The overall engagement score exceeded the benchmark.
Diversity and Inclusion. Diversity and inclusion are ingrained within Assured Guaranty’s policies and practices, including its Diversity and Inclusion Policy, and integrated throughout the Company. Assured Guaranty is committed to building and sustaining at all levels of the organization a diverse workforce that is representative of its communities, in a manner consistent with its business needs, scale and resources, and fostering an inclusive culture and workplace that embrace the differences within its staff and effectively utilize the many and varied talents of its employees. Responsibility for implementing the goals of diversity and inclusion is shared by board members, who participate in forums, senior management, who serve as mentors and executive sponsors of employee resource groups (ERGs) (described below) and the global workforce,
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who serve on the Diversity and Inclusion Committee (D&I Committee) (described below). To incentivize and hold senior leadership accountable, the Company incorporates environmental and social responsibility considerations (including with respect to diversity and inclusion) in its executive compensation program.
The Company has taken a number of steps to demonstrate its organizational commitment to diversity and inclusion.
Training. In 2021, the Company provided bias awareness training for all of its employees on how to identify and interrupt unconscious bias and the role each employee can play to promote diversity, equity and inclusion. In 2022, the Company provided workshops on inclusive interviewing for managers and others with hiring responsibilities.
Recruiting. The Company added a number of talent acquisition strategies to its recruiting practices in order to deliberately reach and attract a diverse and qualified applicant pool. To cast a wider net, positions are posted on Assured Guaranty’s websites and other public job and recruiting websites. For positions which require the use of a search firm, the Company has instructed its executive recruiters and search firms to present more diverse and qualified applicant pools. The Company’s internal recruiting team also works with organizations that promote the development and advancement of women and underrepresented minorities to help source more diverse applicant pools. The Company does not use artificial intelligence or other software to screen applicants.
Employee-led Diversity and Inclusion Committee. The Company’s employee-led D&I Committee is a critical ally in the Company’s commitment to promoting diversity, fostering inclusion, and addressing racial inequity. The D&I Committee is composed of dedicated employees with different backgrounds, points of view, levels of seniority and tenure with the Company, who provide input into policies and strategies for achieving a diverse workforce and an inclusive culture. The D&I Committee has played a key role in recommending and working to implement strategies and initiatives to achieve its diversity and inclusion goals, such as the mentoring program, ERGs, hosting firm-wide events designed to provide education and facilitate discussion around topics such as bias, gender and race, and investing in organizations that work to create a pipeline of diverse and qualified candidates.
Employee Resource Groups. Based on employee feedback, the Company launched employee resource groups for African Americans, women and working parents to create community and awareness and encourage employees to engage with and support one another. The ERGs also provide mentorship and career development opportunities to members and assist the Company in its efforts to retain, develop and promote diverse professionals and to foster a more inclusive culture. The ERGs are employee-led with the support of executive sponsors; membership in the ERGs is voluntary and open to all employees. Throughout the year, the ERGs sponsored various aspectsevents, firm-wide as well as focused for group members, including a panel discussion on women in the workforce, a workshop for parents on helping children cope with the stress resulting from the COVID-19 pandemic, and discussions on the business case for, and importance of, diversity and inclusion.
Conversations Around Gender and Race. In 2022, the ERGs and the D&I Committee sponsored several firm-wide presentations and panel discussions designed to facilitate difficult conversations around race, gender, and bias. The chair of the AGL Board and the chair of the Environmental and Social Responsibility Committee each visited the New York office, on separate occasions, to participate in a question and answer discussion about the business case for diversity and inclusion, balancing the goals of diversity and meritocracy, and the Board’s support for the Company’s diversity and inclusion initiatives. Women directors from AGL’s Board as well as AGUK’s Board participated in a panel discussion where they shared insights and advice about careers and balancing professional and personal goals.
The women’s ERG is currently planning Assured Guaranty’s first international women’s conference. Women employees and allies are invited to gather in New York in March 2023 (coinciding with International Women’s Day) to network in person with women colleagues, hear inspiring speakers, participate in round table educational sessions on key professional issues, and to celebrate collective and individual accomplishments.
COVID-19 Response and Hybrid Work. At the start of the global COVID-19 pandemic in 2020, Assured Guaranty initiated its business continuity protocols and instructed its employees to work from home, placing an emphasis on the well-being of its employees and their families. The Company’s investments in technology and the regular testing of its business continuity plan allowed it to quickly shift to remote work. The success of remote work, both at the Company and across the broader labor market, sparked a collective re-evaluation of the nature of office work. The Company surveyed its employees for their feedback while also observing industry trends and peer practices to craft a viable and sustainable remote work policy. Currently, the Company offers employees the option to work remotely for a portion of their time– both as a convenience to employees and to remain competitive as an employer.
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Governance. The AGL Board’s Environmental and Social Responsibility Committee and Compensation Committee, pursuant to their respective charters, provide oversight of the Company’s human capital management strategies, policies, and initiatives, including the attraction, development and retention of personnel, the promotion of diversity, and the fostering of an inclusive culture. The Environmental and Social Responsibility Committee is periodically updated on workforce demographics and tenure, culture and workplace safety, and initiatives of the employee-led D&I Committee and the Corporate Philanthropy Committee. The Compensation Committee, which is advised by an independent compensation consultant, is responsible for the oversight of management development and evaluation of succession planning for senior management, and a review of the Company’s senior management compensation benchmarked against a comparison group.
Board members also support the Company’s D&I Committee programming by participating in panel discussion and presentations sponsored by the Company’s ERGs and D&I Committee, as described above.
Tax Matters
United States Tax Reform
The 2017 Tax Cuts and Jobs Act of 2017 (the TCJA) lowered the corporate U.S. tax rate to 21%, eliminated the alternative minimum tax, limited the deductibility of interest expense and required a one-time tax on a deemed repatriation of untaxed earnings of non-U.S. subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies including licensing thesesuch as the Company, the TCJA also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. In addition, the TCJA included certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections and U.S. persons investing in such companies. For example, the TCJA includes a base erosion and anti-abuse tax (BEAT) that could make affiliate reinsurance between U.S. and non-U.S. members of the Company’s group economically unfeasible. In addition, the TCJA introduced a current tax on global intangible low-taxed income that may result in an increase in U.S. corporate income tax imposed on the Company’s U.S. group members with respect to transact business, accreditationearnings of reinsurers, determining whether assets are "admitted"their non-U.S. subsidiaries. As discussed in more detail below, the TCJA also revised the rules applicable to passive foreign investment companies (PFICs) and counted in statutory surplus, prohibiting unfair tradecontrolled foreign corporations (CFCs). Further, it is possible that other legislation could be introduced and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends and, in certain instances, approving policy forms and related materials and approving premium rates. State insuranceenacted by the current Congress or future Congresses that could have an adverse impact on the Company. Additionally, tax laws and regulations require the Assured Guarantyinterpretations regarding whether a company is engaged in a U.S. Insurance Subsidiaries to file financial statements withtrade or business or whether a company is a CFC or a PFIC or has related person insurance departments everywhere they are licensed, authorized or accredited to conduct insurance business, and their operationsincome (RPII) are subject to examination by those departments at any time.change, possibly on a retroactive basis. The Assured Guaranty U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with Statutory Accounting Principles, or SAP,Treasury Department recently issued final and procedures prescribed or permitted by these departments. State insurance departments also conduct periodic examinationsproposed regulations intended to clarify the application of the booksinsurance income exception to the classification of a non-U.S. insurer as a PFIC and records, financial reporting, policy filingsprovide guidance on a range of issues relating to PFICs, and market conduct of insurance companies domiciled in their states, generally once every three to five years. Market conduct examinations by regulators other thanrecently issued proposed regulations that would expand the domestic regulator are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance Commissioners.
Taxation of Operations, LiquidityAGL and Capital Resources, forSubsidiaries
Bermuda
Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by AGL or its Bermuda Subsidiaries. AGL, AG Re and AGRO have each obtained from the maximum amountMinister of dividendsFinance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, canin the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be paid without regulatory approval, recent dividend history andapplicable to AGL, AG Re or AGRO or to any of their operations or their shares, debentures or other recent capital movements.
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Contingency Reserves
In both New York and Maryland, when considering the principal amount guaranteed, the insurer is permitted to take into account amounts that it has ceded to reinsurers. In addition, releases from the insurer'sinsurer’s contingency reserve may be permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.
From time to time, AGM and AGCthe U.S. Insurance Subsidiaries have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer'sinsurer’s outstanding insured obligations. In 2019, on2022, the latter basis,U.S. Insurance Subsidiaries each requested a release of accumulated contingency reserve which were deemed excessive in relation to the Company’s outstanding insured obligations. AGM and MAC obtained the NYDFS's approval for contingency reserve releases of approximately $124 million and $25 million, respectively, and AGC obtained the MIA'sNYDFS’s approval for a contingency reserve release of approximately $4 million. The MAC$87.3 million and AGC releases consisted entirelyobtained the MIA’s approval for a contingency reserve release of approximately $1.3 million, which represented the assumed contingency reserves maintained by those companies,AGC, as reinsurersa reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM's $124AGM’s $87.3 million release. Similarly,Both AGM’s and AGC’s release were recorded in 2018, on the same basis,2022. In 2021 AGM and MAC obtained the NYDFS's approval for contingency reserve releases of approximately $142 million and $45 million, respectively, and AGC obtained the MIA'sNYDFS’s approval for a contingency reserve release of approximately $11 million. As in 2019, the MAC$104 million and AGC releases in 2018 consistedobtained the MIA’s approval for a contingency reserve release of approximately $246 million, of which approximately $1.5 million represented the assumed contingency reserves maintained by those companies,AGC, as reinsurersa reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM's $142AGM’s $104 million release, except for a portion of AGC's $11 million release relating to the exposures AGC assumed in June 2018 from SGI.release.
Applicable New York and Maryland laws and regulations require regular, quarterly contributions to contingency reserves, but such laws and regulations permit the discontinuation of such quarterly contributions to an insurer's contingency reserves when such insurer'sinsurer’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the insurer'sinsurer’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category. In accordance with such laws and regulations, and with the approval of the NYDFS and the MIA, respectively, AGM ceased making quarterly contributions to its contingency reserves for non-municipal business and AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business, in each case beginning in the fourth quarter of 2014. Such cessations are expected to continue for as long as AGM and AGC satisfy the foregoing condition for their applicable line(s) of business.
Single and Aggregate Risk Limits
The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty insurers applicable to all obligations insured by a financial guaranty insurer that are issued by a single entity and backed by a single revenue source. For example, under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders'policyholders’ surplus and contingency reserves. In addition, the insured unpaid principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and collateral, is limited to 75% of the insurer's policyholders'insurer’s policyholders’ surplus and contingency reserves.
Under the limit applicable to qualifying asset-backed securities, the lesser of:
•the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or
•the insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral,
may not exceed 10% of the sum of the insurer's policyholders'insurer’s policyholders’ surplus and contingency reserves, subject to certain conditions.
Single-risk limits are also specified for other categories of insured obligations, and generally are more restrictive than those listeddescribed above for municipal and asset-backed or municipal obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to a catch-all or “other” limit under which the "corporate" unpaid principal limit (applicable to insurance of unsecured corporate obligations) equal tothe single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders'policyholders’ surplus and contingency reserves. For example, "triple-X"“triple-X” and "future flow"“future flow” securitizations, as well as unsecured corporate obligations and unsecured investor-owned utility obligations, are generally subject to these "corporate"this catch-all or “other” single-risk limits.limit.
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The New York Insurance Law and the Code of Maryland Regulations also establish an aggregate risk limitslimit on the basis of the aggregate net liability insured by a financial guaranty insurer as compared with its statutory capital. "Aggregate“Aggregate net liability"liability” is defined for this purpose as the outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under these limits, policyholders'this limit, an insurer’s combined policyholders’ surplus and contingency reserves must not be less than the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment-grade obligations. As of December 31, 2019,2022, the aggregate net liability of each of AGM MAC and AGC utilized approximately 23%, 19%26% and 9% of their respective policyholders'policyholders’ surplus and contingency reserves.
The NewNYDFS Superintendent (New York SuperintendentSuperintendent) and the Maryland Commissioner each have broad discretion to order a financial guaranty insurer to cease new business originations if the insurer fails to comply with single or aggregate risk limits. In the Company'sCompany’s experience in New York, the New York Superintendent has shown a willingness to work with insurers to address these concerns.
Investments
The U.S. Insurance Subsidiaries are subject to laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain asset categories, such as BIG fixed-maturity securities, real estate, equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. In addition, any investment by a U.S. Insurance Subsidiary must be authorized or approved by that insurance company’s board of directors or a committee thereof that is responsible for supervising or making such investment.
Group Regulation
In connection with AGL’s establishment of tax residence in the U.K., as discussed in greater detail under "Tax Matters"“Tax Matters” below, the NYDFS has been designated as group-wide supervisor for the Assured Guaranty group. Group-wide supervision by the NYDFS results in additional regulatory oversight over Assured Guaranty, particularly with respect to group-wide enterprise risk, and may subject Assured Guaranty to new regulatory requirements and constraints.
The Assured Guaranty U.S. Insurance Subsidiaries are subject to lawsCompany’s Bermuda reinsurance subsidiaries, AG Re and regulations that require diversification of their investment portfolio and limit the amount of investments in certain asset categories, such as BIG fixed-maturity securities, equity real estate, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. The Company believes that the investments made by the Assured Guaranty U.S. Insurance Subsidiaries complied with such regulations as of December 31, 2019. In addition, any investment must be approved by the insurance company's board of directors or a committee thereof that is responsible for supervising or making such investment.
AG Re and AGRO are not licensed, accredited or approved in any state and accordingly have established trusts to secure their reinsurance obligations. In 2017, AGRO obtained certified reinsurer status in Missouri, which allows AGRO to post 10% collateral in respect of any reinsurance assumed from a Missouri-domiciled ceding companiescompany on or after the date of AGRO’s certification. certification (although, currently, AGRO does not assume any such reinsurance). See “International Regulation —Bermuda—Bermuda Insurance Regulation” for Bermuda regulations applicable to AG Re and AGRO.
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The Company’s U.S. insurance businesses are subject to direct and indirect regulation under U.S. federal law. In particular, the Company’stheir derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd- Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act.Act). Based on the size of its subsidiaries'U.S. Insurance Subsidiaries’ remaining legacy derivatives portfolios, AGL does not believe any of its U.S. subsidiaries are required to register with the Commodity Futures Trading Commission (CFTC) as a “major swap participant” or with the SEC as a "major“major securities-based swap participant."” Certain of the Company's subsidiaries may be subject to Dodd-Frank Act requirements to post margin for, or to clear on a regulated execution facility, future swap transactions or with respect to certain amendments to legacy swap transactions, if they enter into such transactions.
Regulation of U.S. Asset Management Business
AGL has two principal operating asset management subsidiaries domiciled in the U.S.: AssuredIM LLC and AHP. AssuredIM LLC is registered as an investment adviser with the SEC and AHP is a relying adviser of AssuredIM LLC. Registered investment advisers, including their relying advisers, are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). As registered investment advisers, AssuredIM must submit periodic filings with the SEC on Forms ADV, which are publicly available. AssuredIM LLC’s SEC filings include information regarding AHP as a relying advisor. The Advisers Act also imposes additional requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. AssuredIM is also registered with the CFTC as a commodity pool operator and is a member of the National Futures Association (NFA), therefore subject to their respective periodic filing and other requirements. BlueMountain CLO Management, LLC (BMCLO), a third asset management subsidiary, has limited activity with a relatively small AUM and, accordingly, ceased to be registered with the SEC in 2022.
In addition, private funds advised by AssuredIM LLC, AHP and BMCLO rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. These exemptions are complex and may in certain circumstances depend on compliance by third parties which are not controlled by the Company.
International Regulation
General
A portion of the Company’s business is conducted in foreign countries. Generally, the Company’s subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Certain of these jurisdictions require registration and periodic reporting by insurance and reinsurance companies that are licensed or authorized in such jurisdictions and are controlled by other entities. Applicable legislation also typically requires periodic disclosure concerning the entity that controls the insurer and reinsurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including, in some instances, payment of dividends by the insurance and reinsurance subsidiary within the holding company system.
In addition to these licensing, disclosure and asset transfer requirements, the Company’s foreign operations are also regulated in various jurisdictions with respect to, among other matters, policy language and terms, amount and type of reserves, amount and type of capital to be held, amount and type of local investment, local tax requirements, and restrictions on changes in control. AGL, as a Bermuda-domiciled holding company, is also subject to shareholding restrictions. Such shareholding restrictions of AGL and restrictions on changes in control of our foreign operations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and, in particular, unsolicited transactions, that some or all of its shareholders might consider to be desirable. See Item 1A. Risk Factors, Risks Related to GAAP, Applicable Law and Regulations captioned “Applicable insurance laws may make it difficult to effect a change of control of AGL.”
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Bermuda
The Bermuda Monetary Authority (the Authority) regulates the Company’s operating insurance and reinsurance subsidiaries in Bermuda. AG Re and AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations (collectively, the Insurance Act). AG Re is registered and licensed as a Class 3B insurer and is authorized to carry on general insurance business (as understood under the Insurance Act), subject to any conditions attached to its license and to compliance with the requirements imposed by the Insurance Act.
AGRO is registered and licensed as both a Class 3A insurer and a Class C long-term insurer.insurer, and therefore carries on both general and long-term business (as understood under the Insurance Act), subject to any conditions attached to its license. In particular, AGRO must keep its accounts in respect of its general business and its long-term business separate in respect of any other business. AGRO is required to maintain both a general business fund and a long-term business fund (as defined in the Insurance Act.)
Bermuda Insurance Regulation
The Insurance Act, as enforced by the Authority, imposes on insurance companiesAG Re and AGRO a variety of requirements and restrictions, including the filing of annual GAAP financial statements and audited statutory financial statements; compliance with minimum enhanced capital requirements; compliance with the Authority’s Insurance Code of Conduct; compliance with the Authority’s Insurance Sector Operational Cyber Risk Management Code of Conduct; compliance with minimum solvency and liquidity standards; restrictions on the declaration and payment of dividends and distributions; preparation and publication of an annual Financial Condition Report providing details on measures governing the business operations, corporate governance framework, solvency and financial performance of the insurer and reinsurer; restrictions on changes in control of regulated insurers and reinsurers; restrictions on the reduction of statutory capital; restrictions on the winding up of long-term insurers; and auditing and reporting requirements; and the need to have a principal representative and a principal office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Bermuda Monetary Authority (the Authority) the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance and reinsurance companies and in certain circumstances share information with foreign regulators. Class 3A and Class 3B insurers are authorized to carry on general insurance business (as understood under the Insurance Act), subject to conditions attached to the license and to compliance with minimum capital and surplus requirements, solvency margin, liquidity ratio and other requirements imposed by the Insurance Act. Class C long-term insurers are permitted to carry on long-term business (as understood under the Insurance Act) subject to conditions attached to the license and to similar compliance requirements and the requirement to maintain its long-term business fund (a segregated fund).
Shareholder Controllers
Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or more or 50% or more of the Company'sCompany’s common shares must notify the Authority in writing within 45 days of becoming such a holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may direct, among other things, that the voting rights attached to their common shares are not exercisable. A person that does not comply with such a notice or direction from the Authority will be guilty of an offense.
Minimum Solvency Margin and Enhanced Capital Requirements
Under the Insurance Act, AG Re and AGRO must each ensure that the value of its general business statutory assets exceeds the amount of its general business statutory liabilities by an amount greater than thea prescribed minimum solvency margin and each company's applicable enhanced capital requirement.
Restrictions on Dividends and Distributions
The Insurance Act limits the declaration and payment of dividends and other distributions by AG Re and AGRO. Under the Insurance Act:
The Companies Act 1981 of Bermuda (Companies Act) also limits the declaration and payment of dividends and other distributions by Bermuda companies such as AGL and its Bermuda subsidiaries, which, consist ofin addition to AG Re and AGRO, and
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also include Cedar Personnel Ltd. (Bermuda(collectively, the Bermuda Subsidiaries). Such companies may only declare and pay a dividend or make a distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing that the company is, and after the payment will be, able to meet and pay its liabilities as they become due and the realizable value of the company'scompany’s assets will not be less than its liabilities. The Companies Act also regulates and restricts the reduction and return of capital and paid in share premium, including the repurchase of shares. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Insurance Company Regulatory Requirements, for more information, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding reinsurersinsurers and any other assets which the Authority accepts on application in any particular case made to it with reasons, accepts in that case. There are certain categories of assets which, unless specifically permitted by the Authority, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans.
application. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit, corporate guaranteesguaranties and other instruments.
Certain Other Bermuda Law Considerations
Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.
United Kingdom Insurance and Financial Services Regulation
Each of AGE UKAGUK and Assured Guaranty Finance Overseas Ltd. (AGFOL) are subject to the U.K.'s Financial Services and Markets Act 2000 (FSMA),FSMA, which covers financial services relating to deposits, insurance, investments and certain other financial products.
Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K. each constitutes a “regulated activity” requiring authorization by the appropriate regulator. An authorized insurance company must have permission for each class of insurance business it intends to write.
The PRA and the FCA were established on April 1, 2013 and are the main regulatory authorities responsible for financialinsurance regulation in the U.K. These two regulatory bodies cover the following areas:
•the PRA, a part of the Bank of England, is responsible for prudential regulation of certain classes of financial services firms, (which includesincluding insurance companies, among others), and
•the FCA is responsible for the conduct of businessprudential regulation of all non-PRA firms and the regulation of market conduct and the prudential regulation ofby all non-PRA firms.
AGUK, as an insurance company, is regulated by both the PRA and the FCA. They impose on AGUK a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; intervention and enforcement; and fees and levies. AGFOL, as an insurance intermediary, is regulated by the FCA. AGFOL’s permissions from the FCA allow it to introduce business to the U.S. Insurance Subsidiaries, so that AGFOL can arrange financial guaranties underwritten by the U.S. Insurance Subsidiaries. AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or places.
AGUK also is the principal of Assured Guaranty Credit Protection Ltd. (AGCPL). Prior to 2009, AGCPL entered into a limited number of derivative contracts, some of which are still outstanding, that provide credit protection on certain referenced obligations. AGUK guarantees AGCPL’s obligations under such derivative contracts. AGCPL is not authorized by the PRA or FCA, but is an appointed representative of AGUK. This means that AGCPL can carry on insurance distribution activities without a license because AGUK has regulatory responsibility for it.
PRA Supervision and Enforcement
The PRA has extensive powers to intervene in the affairs of an authorized firm, including the power in certain circumstances to withdraw the firm’s authorization to carry on a regulated activity. The PRA carries out the prudential
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supervision of insurance companies like AGUK through a variety of methods, including the collection of information from statistical returns, the review of accountants'accountants’ reports and insurers'insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of insurance companies.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and so whether they meet, and are likely to continue to meet, the threshold conditions. ItThe PRA weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its regulatory objectives. It is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise further
AGUK calculates its minimum required capital according to the FCA’s rules for non-Capital Requirements Directive firms,Solvency II criteria and is in compliance.
In 2010 it was agreed between AGUK’s management and AGE UK'sits then regulator, the Financial Services Authority (now the PRA), that new business written by AGE UKAGUK would be guaranteed using a co-insurance structure pursuant to which AGE UKAGUK would co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGE UK'sAGUK's financial guaranty for each transaction covers a proportionate share (currently fixed from 20192018 at 15%) of the total exposure, and AGM or AGC, as the case may be, guarantees the remaining exposure under the transaction (subject to compliance with EEA licensing requirements).transaction. AGM or AGC, as the case may be, will also provide a second-to-pay guaranty to cover AGE UK'sAGUK’s financial guaranty.
Solvency II took effect from January 1, 2016, in the U.K. AGCPL isand remains in effect as part of the only European entity withinU.K.’s retained EU law after the AGL group which has entered into derivative contracts andwithdrawal of the U.K. from the EU (Brexit). The reform of Solvency II as such it is the only entityapplies in the group whichU.K. is directly subject to EMIR. AGCPL has notifiedcurrently under consideration by the European SecuritiesU.K. government. Solvency II provides rules on capital adequacy, governance and Markets Authorityrisk management and the FCA of its status under EMIR as a non-financial counterparty which has exceeded a clearing threshold (an NFC+). AGCPLregulatory reporting and public disclosure. Under Solvency II, AGUK is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under EMIRSolvency II is one of the grounds on which the wide powers of intervention conferred upon the PRA may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with respecta probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGUK calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
U.K. company law prohibits each of AGUK and AGFOL from declaring a dividend to its portfolioshareholders unless it has “profits available for distribution.” The determination of derivative contracts including: (i)whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the requirementU.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to centrally cleardeclare a dividend, the PRA’s capital requirements may in practice act as a restriction on dividends for AGUK.
Change of Control
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an insurance company) they must give the PRA (if regulated by the PRA and FCA) or the FCA (if regulated solely by the FCA) notice in writing before making the acquisition. The PRA and the FCA have up to 60 working days (without including any period of interruption) in which to assess a change of control case. Any person (a company or individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power, of a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and Markets in Financial Instruments Directive (MiFID)
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investment firms, and the 20% threshold to insurance brokers and certain classesother firms that are Non-Directive firms for the purposes of standardized OTC derivatives (although AGCPL does not currently enter into such classesthe Solvency II Directive.
U.K. Withdrawal from the European Union
Through 2019, AGUK wrote business in the U.K. and various countries throughout the EU as well as certain other non-EU countries. In mid-2019, to address the impact of derivatives,the withdrawal of the U.K. from the EU, AGL established AGE as a French incorporated company. AGE was authorized by the French insurance and so this requirement is not currently relevant); (ii) an obligationbanking supervisory authority, the ACPR, to employconduct financial guarantee business from January 2, 2020, and from that date AGUK ceased the underwriting of new business within the EEA. In October 2020, in preparation for Brexit, AGUK transferred to AGE certain risk mitigation techniquesexisting AGUK policies relating to derivatives that cannot be centrally cleared;risks in the EEA under the Part VII Transfer.
AGUK will continue to write new business in the U.K. and (iii) a requirement to report derivative transactions to a trade repository, whether directly or through a delegated reporting arrangement. The Companycertain other non-EEA countries.
Regulation of U.K. Asset Management Business
AssuredIM London is aware that circumstances existdomiciled in which EMIR may apply to non-European entities when transacting derivatives.
AssuredIM London acts as a subadvisor to AssuredIM LLC, is a relying adviser of AssuredIM LLC for US regulatory purposes and its information is incorporated into AssuredIM LLC’s periodic filings on Forms ADV, which are publicly available. As a result of its FCA registration and being a relying adviser of AssuredIM LLC, AssuredIM London is subject to both U.K. and U.S. requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. In 2022, AssuredIM London ceased to be registered as a commodity trading adviser with the CFTC and is no longer a member of the NFA due to its limited role as a subadvisor to AssuredIM LLC.
In addition, AssuredIM London relies on complex exemptions from the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. Such exemptions may in certain circumstances depend on compliance by third parties not controlled by the Company.
France
As an insurance company licensed in France, AGE is regulated by the ACPR and is subject to the provisions of Solvency II as well as related EU delegated regulations as implemented in France, and by the French Insurance Code and the Monetary and Financial Code, both of which set out the primary rules governing the insurance industry in France. In accordance with French insurance regulation and Solvency II, AGE is permitted to carry on its activities in the countries of the EEA where it is authorized to operate under the freedom to provide services regime.
French regulation of insurance companies imposes on AGE a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; and intervention and enforcement.
ACPR Supervision and Enforcement
The ACPR has extensive powers to intervene in the affairs of an insurance company, including the power in certain circumstances to withdraw the company’s authorization to carry on a regulated activity. The ACPR carries out certain investment business (andthe prudential supervision of insurance distribution) activities. It may “advisecompanies like AGE through a variety of methods, including the collection of information from statistical returns, the review of accountants' reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews.
The ACPR assesses, on investments (except on pension transfersan ongoing basis, whether insurers are acting in a manner consistent with safety and pension opt outs)” relatingsoundness and appropriate policyholder protection, and whether they meet, and are likely to most investment instruments (butcontinue to meet, threshold conditions. The ACPR is forward-looking, assessing its objectives not including insurance contracts). In addition, it may arrange or bring about transactionsjust against current risks, but also against those that
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could plausibly arise in investments and make “arrangements with a view to transactions in investments," in each case in relation to investments and insurance contracts (but only “non-investment insurance contracts”). In all cases, it may deal only with clients who are eligible
Solvency II and Solvency Requirements
Solvency II has been transposedcame into national law through changeseffect in France on January 1, 2016, and is the legal and regulatory basis for the supervision of insurance firms in France. It provides rules on capital adequacy, governance, risk management, and regulatory reporting and public disclosure. Under Solvency II, AGE is subject to existing provisions incertain limits and requirements, including the FCAmaintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the PRA’s respective handbooksother risks to which it is exposed) and rulebookthe establishment of technical provisions, which include projected losses and through amendmentspremium earnings. Failure to primary legislation. Themaintain capital at least equal to the capital requirements under Solvency II “Delegated Acts,”is one of the grounds on which set out more detailed rules underlying Solvency II have direct effect in all EEA member states, and in the U.K. duringwide powers of intervention conferred upon the transition period to December 31, 2020 (see also “U.K. referendum vote to leave the European Union” below).ACPR may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following "Pillar 1" regulatory capital rules:
features: (1) assets and liabilities are generally to be valued at their market value;
(2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and
(3) reinsurance recoveries will beare treated as a separate asset (rather than being netted againstoff the underlying insurance liabilities).
AGE UK has agreed withcalculates its solvency capital requirements using the PRA that it will use the "Standard Formula" prescribed byStandard Formula under Solvency II for calculation of its capital requirements.and is in compliance.
Restrictions on Dividend Payments
French company law prohibits each of AGE UK and AGFOL from declaring a dividend to its shareholders unless it has “profits and/or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws imposeFrench law imposes no statutory restrictions on a generalan insurer's ability to declare a dividend, the PRA'sACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE UK.
Change of Control
The French insurance code has requirements regarding acquisitions, disposals, and increases or increase “control”decreases in ownership of a U.K. authorized firm (including anFrench-licensed insurance company) they must give the PRA (if regulated by the PRA and FCA) or the FCA (if regulated solely by the FCA) notice in writing before making the acquisition. The PRA and the FCA have up to 60 working days (without including any period of interruption) in which to assesscompany.
Any transaction enabling a change of control case. Any person (a company or individual) that directly, acting alone or indirectly acquires 10%in concert with other persons, to acquire, increase, dispose of or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power,reduce its ownership in a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and MiFID investment firms, and the 20% threshold to insurance brokers and certain other firms that are non-directive firms.
As a matter of principle, the ACPR has 60 business days from the date on which it acknowledges receipt of the notification of the transaction to notify the reporting entity and the insurance company whose ownership change is regulated bycontemplated of its refusal or approval of the Autorité de Contrôle Prudentiel et de Résolution (ACPR)transaction. In approving or refusing the transaction, the ACPR takes into account various factors, including the reputation of the acquirer, the effect of the transaction on the business and the management of the company, the impact of the transaction on the financial strength of the company, or the ability of the company to continue to comply with applicable regulation.
Human Capital Management
The Company recognizes that its workforce, as a key driver of long-term performance, is among its most valued assets. Accordingly, the Company’s key human capital management objectives are to attract, retain, develop and support a diverse group of the highest quality employees, including talented and experienced business leaders who drive its corporate strategies and build long-term shareholder value. To promote these objectives, the Company’s human capital management programs are designed to reward and support employees with competitive compensation and benefit packages in each of its locations around the globe, and with professional development opportunities to cultivate talented employees and prepare them for critical roles and future leadership positions.
As of December 31, 2022, the Company employed 411 people worldwide; approximately 89% of employees are based in the U.S. and Bermuda and approximately 11% are based in the U.K. and France. Approximately 36% of the Company’s
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workforce is female and 64% is male. The average tenure is 11.9 years. Other than in France, none of the Company’s employees are subject to collective bargaining agreements. The Company believes its employee relations are satisfactory.
Learning and Development; Mentoring. The Company invests in the provisionsprofessional development of Solvency IIits workforce. To support the advancement of its employees, the Company endeavors to strengthen their knowledge and skills by providing equitable access to training, including in leadership, management and effective communication skills, mentoring opportunities, as well as related EU delegated regulationstuition reimbursement assistance. Employee evaluations and performance reviews are conducted annually, during which managers and employees are encouraged to discuss employee goals and opportunities for development, including, as implementedappropriate, training and coaching.
The Company also provides opportunities for qualified employees to work abroad in France,another of the Company’s offices as part of its international rotation program.
The Company’s collegial and bycollaborative culture fosters informal mentoring and learning. The Company also has a formal one-on-one mentoring program to provide an additional learning resource for its employees, facilitate the French Insurance Codeonboarding of new recruits and reinforce connectedness. The mentoring program is offered to all employees across the MonetaryCompany’s offices. The Company utilizes an outside consultant to provide workshops for both mentors and Financial Code, bothmentees. In addition, the Company sponsors memberships for its employees in external organizations to provide further opportunities for professional development, mentoring and networking.
Compensation and Benefits. The compensation program is designed to attract, retain and motivate talented individuals and to recognize and reward outstanding achievement. The components of which set out the primary rules governing the insurance industry in France. Additional lawsprogram consist of base salary and regulations laid downmay include incentive compensation in the Civil Codeform of an annual cash incentive and other codesdeferred compensation in the form of cash and/or equity (including, in the case of certain AssuredIM professionals, an entitlement to a portion of carried interest allocated to the general partners of certain AssuredIM Funds). The Company believes that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns the interests of employees and investors. To maintain the wellness of its employees, the Company offers a benefits package designed to promote and support physical and mental health as well as the "soft law" issued by the ACPR (codesfinancial security. Benefits include life and health (medical, dental and vision) insurance, retirement savings plans, an employee stock purchase plan, paid time off, paid family leave, an employee assistance program, commuter benefits, tuition reimbursement, fertility and family planning resources, emergency backup child, elder and pet care, reimbursement of conduct, guidelines, communicationshealth club fees, online classes for children, and binding recommendations) may apply to French insurance companies such as AGE SA.
Employee Engagement. In 2022, the Company launched its inaugural employee engagement survey. While the Company encourages open dialogue, the engagement survey provided a confidential forum for employees to provide more candid feedback. The Company engaged a third-party provider to foster confidentiality; the vendor conducted the survey, collected and aggregated feedback and benchmarked results relative to other similar-size financial services companies. The survey was sent to the total global workforce; 88% of all employees participated in the survey. The overall engagement score exceeded the benchmark.
Diversity and Inclusion. Diversity and inclusion are ingrained within Assured Guaranty’s policies and practices, including its Diversity and Inclusion Policy, and integrated throughout the Company. Assured Guaranty is committed to building and sustaining at all levels of the organization a diverse workforce that is representative of its communities, in a manner consistent with its business needs, scale and resources, and fostering an inclusive culture and workplace that embrace the differences within its staff and effectively utilize the many and varied talents of its employees. Responsibility for implementing the goals of diversity and inclusion is shared by board members, who participate in forums, senior management, who serve as mentors and executive sponsors of employee resource groups (ERGs) (described below) and the global workforce,
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who serve on the Diversity and Inclusion Committee (D&I Committee) (described below). To incentivize and hold senior leadership accountable, the Company incorporates environmental and social responsibility considerations (including with respect to diversity and inclusion) in its executive compensation program.
The Company has taken a number of steps to demonstrate its organizational commitment to diversity and inclusion.
Training. In 2021, the Company provided bias awareness training for all of its employees on how to identify and interrupt unconscious bias and the role each employee can play to promote diversity, equity and inclusion. In 2022, the Company provided workshops on inclusive interviewing for managers and others with hiring responsibilities.
Recruiting. The Company added a number of talent acquisition strategies to its recruiting practices in order to deliberately reach and attract a diverse and qualified applicant pool. To cast a wider net, positions are posted on Assured Guaranty’s websites and other public job and recruiting websites. For positions which require the use of a search firm, the Company has instructed its executive recruiters and search firms to present more diverse and qualified applicant pools. The Company’s internal recruiting team also works with organizations that promote the development and advancement of women and underrepresented minorities to help source more diverse applicant pools. The Company does not use artificial intelligence or other software to screen applicants.
Employee-led Diversity and Inclusion Committee. The Company’s employee-led D&I Committee is a critical ally in the Company’s commitment to promoting diversity, fostering inclusion, and addressing potential conflictsracial inequity. The D&I Committee is composed of interest, an effective compliance program, recordkeepingdedicated employees with different backgrounds, points of view, levels of seniority and reporting, disclosure, limitations on agency cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. BlueMountain is also registeredtenure with the CFTCCompany, who provide input into policies and strategies for achieving a diverse workforce and an inclusive culture. The D&I Committee has played a key role in recommending and working to implement strategies and initiatives to achieve its diversity and inclusion goals, such as the mentoring program, ERGs, hosting firm-wide events designed to provide education and facilitate discussion around topics such as bias, gender and race, and investing in organizations that work to create a pipeline of diverse and qualified candidates.
Employee Resource Groups. Based on employee feedback, the Company launched employee resource groups for African Americans, women and working parents to create community and awareness and encourage employees to engage with and support one another. The ERGs also provide mentorship and career development opportunities to members and assist the Company in its efforts to retain, develop and promote diverse professionals and to foster a more inclusive culture. The ERGs are employee-led with the support of executive sponsors; membership in the ERGs is voluntary and open to all employees. Throughout the year, the ERGs sponsored various events, firm-wide as well as focused for group members, including a panel discussion on women in the workforce, a workshop for parents on helping children cope with the stress resulting from the COVID-19 pandemic, and discussions on the business case for, and importance of, diversity and inclusion.
Conversations Around Gender and Race. In 2022, the ERGs and the D&I Committee sponsored several firm-wide presentations and panel discussions designed to facilitate difficult conversations around race, gender, and bias. The chair of the AGL Board and the chair of the Environmental and Social Responsibility Committee each visited the New York office, on separate occasions, to participate in a question and answer discussion about the business case for diversity and inclusion, balancing the goals of diversity and meritocracy, and the Board’s support for the Company’s diversity and inclusion initiatives. Women directors from AGL’s Board as well as AGUK’s Board participated in a panel discussion where they shared insights and advice about careers and balancing professional and personal goals.
The women’s ERG is currently planning Assured Guaranty’s first international women’s conference. Women employees and allies are invited to gather in New York in March 2023 (coinciding with International Women’s Day) to network in person with women colleagues, hear inspiring speakers, participate in round table educational sessions on key professional issues, and to celebrate collective and individual accomplishments.
COVID-19 Response and Hybrid Work. At the start of the global COVID-19 pandemic in 2020, Assured Guaranty initiated its business continuity protocols and instructed its employees to work from home, placing an emphasis on the well-being of its employees and their families. The Company’s investments in technology and the regular testing of its business continuity plan allowed it to quickly shift to remote work. The success of remote work, both at the Company and across the broader labor market, sparked a collective re-evaluation of the nature of office work. The Company surveyed its employees for their feedback while also observing industry trends and peer practices to craft a viable and sustainable remote work policy. Currently, the Company offers employees the option to work remotely for a portion of their time– both as a commodity pool operatorconvenience to employees and is a memberto remain competitive as an employer.
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Governance. The AGL Board’s Environmental and Social Responsibility Committee and Compensation Committee, pursuant to their respective charters, provide oversight of the National Futures Association (NFA). BlueMountain LondonCompany’s human capital management strategies, policies, and initiatives, including the attraction, development and retention of personnel, the promotion of diversity, and the fostering of an inclusive culture. The Environmental and Social Responsibility Committee is registered as a commodity trading advisor with the CFTCperiodically updated on workforce demographics and is a membertenure, culture and workplace safety, and initiatives of the NFA. Registered commodity pool operatorsemployee-led D&I Committee and commodity trading advisers are each subject to the requirementsCorporate Philanthropy Committee. The Compensation Committee, which is advised by an independent compensation consultant, is responsible for the oversight of management development and regulationsevaluation of succession planning for senior management, and a review of the U.S. Commodity Exchange Act, as amended (the Commodity Exchange Act). The requirements ofCompany’s senior management compensation benchmarked against a comparison group.
Board members also support the Commodity Exchange Act relate to, among other things, maintaining an effective compliance program, recordkeepingCompany’s D&I Committee programming by participating in panel discussion and reporting, disclosure, business conduct and general anti-fraud prohibitions.
Tax Matters
United States Tax Reform
Taxation of AGL and Subsidiaries
Bermuda
Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by AGL or its Bermuda Subsidiaries. AGL, AG Re and AGRO have each obtained from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to AGL, AG Re or AGRO or to any of their operations or their shares, debentures or other obligations, until March 31, 2035. This assurance is subject to the provision that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda, or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any land leased to AGL, AG Re or AGRO. AGL, AG Re and AGRO each pays annual Bermuda government fees, and AG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.
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United States
AGL has conducted and intends to continue to conduct substantially all of its operations outside the U.S. and to limit the U.S. contacts of AGL and its non-U.S. subsidiaries (except AGRO, which elected to be taxed as a U.S. corporation) so that they should not be engaged in a trade or business in the U.S. A non-U.S. corporation, such as AG Re, that is deemed to be engaged in a trade or business in the United StatesU.S. would be subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business, unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a non-U.S. corporation would generally be entitled to deductions and credits only if it timely files a U.S. federal income tax return. AGL, AG Re and certain of the other non-U.S. subsidiaries have and will continue to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim
income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax. The highest marginal federal income tax rates currently are 21% for a corporation'scorporation’s effectively connected income and 30% for the "branch profits"“branch profits” tax.
Under the income tax treaty between Bermuda and the U.S. (the Bermuda Treaty), a Bermuda insurance company would not be subject to U.S. income tax on income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the U.S. AG Re currently intends to conduct its activities so that it does not have a permanent establishment in the U.S.
An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty ifif: (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the U.S. or Bermuda or U.S. citizenscitizens; and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities of, persons who are neither residents of either the U.S. or Bermuda nor U.S. citizens.
Non-U.S. insurance companies carrying on an insurance business within the U.S. have a certain minimum amount of effectively connected net investment income determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If AG Re or another of the Company'sCompany’s Bermuda subsidiaries is considered to be engaged in the conduct of an insurance business in the U.S. and is not entitled to the benefits of the Bermuda Treaty in general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Internal Revenue Code of 1986, as amended (the Code), could subject a significant portion of AG Re'sRe’s or another of the Company'sCompany’s Bermuda subsidiary'ssubsidiary’s investment income to U.S. income tax.
AGL, as a U.K. tax resident, would not be subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business under the income tax treaty between the U.S. and the U.K. (the U.K. Treaty), unless that trade or business is conducted through a permanent establishment in the United States.U.S. AGL intends to conduct its activities so that it does not have a permanent establishment in the United States.U.S.
Non-U.S. corporations not engaged in a trade or business in the U.S., and those that are engaged in a U.S. trade or business with respect to their non-effectively connected income are nonetheless subject to U.S. withholding tax on certain "fixed“fixed or determinable annual or periodic gains, profits and income"income” derived from sources within the U.S. (such as dividends and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The standard non-treaty rate of U.S. withholding tax is currently 30%. The Bermuda Treaty does not reduce the U.S. withholding rate on U.S.-sourced investment income. The U.K. Treaty reduces or eliminates U.S. withholding tax on certain U.S. sourcedU.S.-sourced investment income, including dividends from U.S. companies to U.K. resident persons entitled to the benefit of the U.K. Treaty.
The U.S. also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers with respect to riskrisks of a U.S. person located wholly or partly within the U.S. or risks of a foreign person engaged in a trade or business in the U.S. which are located within the U.S. The rates of tax applicable to premiums paid are 4% for direct casualty insurance premiums and 1% for reinsurance premiums.
AGRO has elected to be treated as a U.S. corporation for all U.S. federal tax purposes and, as such, AGRO, together with AGL'sAGL’s U.S. subsidiaries, is subject to taxation in the U.S. at regular corporate rates.
If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.
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United Kingdom
In November 2013, AGL became tax resident in the U.K. AGL remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. The AGL common shares have not changed and continue to be listed on the New York Stock Exchange (NYSE).
As a company that is not incorporated in the U.K., AGL will be considered tax resident in the U.K. only if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. EffectiveFrom November 6, 2013, the AGL Board intendsbegan to manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K.
As a U.K. tax resident company, AGL is subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties.
As a U.K. tax resident, AGL is required to file a corporation tax return with HerHis Majesty’s Revenue & Customs (HMRC). AGL will beis subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The rate of corporation tax is currently 19% (which is due to increase to 25% from April 1, 2023). AGL has also registered in the U.K. to report its value addedvalue-added tax (VAT) liability. The current standard rate of VAT is 20%.
The dividends AGL receives from its direct subsidiaries should be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The non-U.K. resident subsidiaries intend to operate in such a manner that their profits are outside the scope of the charge under the "controlled“controlled foreign companies"companies” regime. Accordingly, Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be attributed to AGL and taxed in the U.K. under the CFC regime and hasregime. In 2013, Assured Guaranty obtained clearance from HMRC confirming this on the basis of currentthe facts and intentions.intentions as they were at the time.
Taxation of Shareholders
Bermuda Taxation
Currently, there is no Bermuda capital gains tax, or withholding or other tax payable on principal, interest or dividends paid to the holders of the AGL common shares.
United States Taxation
This discussion is based upon the Code, the regulations promulgated thereunder and any relevant administrative rulings or pronouncements or judicial decisions, all as in effect on the date of filing and as currently interpreted, and does not take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively. This discussion does not include any description of the tax laws of any state or local governments within the U.S. or any foreign government.
The following summary sets forth the material U.S. federal income tax considerations related to the purchase, ownership and disposition of AGL'sAGL’s shares. Unless otherwise stated, this summary deals only with holders that are U.S. Persons (as defined below) who purchase and hold their shares and who hold their shares as capital assets within the meaning of section 1221 of the Code. The following discussion is only a discussion of the material U.S. federal income tax matters as described herein and does not purport to address all of the U.S. federal income tax consequences that may be relevant to a particular shareholder in light of such shareholder'sshareholder’s specific circumstances. For example, special rules apply to certain shareholders, such as partnerships, insurance companies, regulated investment companies, real estate investment trusts, dealers or traders in securities, tax exempt organizations, expatriates, persons liable for alternative minimum tax, U.S. accrual method taxpayers subject to special tax accounting rules as a result of any item of gross income with respect to AGL’s shares being taken into account in an applicable financial statement as described in 451(b) of the Code, persons that do not hold their securities in the U.S. dollar, persons who are considered with respect to AGL or any of its non-U.S. subsidiaries as "United“United States shareholders"shareholders” for purposes of the CFC rules of the Code (generally, a U.S. Person, as defined below, who owns or is deemed to own 10% or more of the total combined voting power or value of all classes of AGL shares or the stockshares of any of AGL'sAGL’s non-U.S. subsidiaries (i.e., 10% U.S. Shareholders)), or persons who hold the common shares as part of a hedging or conversion transaction or as part of a short-sale or straddle. Any such shareholder should consult their tax advisor.adviser.
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If a partnership holds AGL'sAGL’s shares, the tax treatment of the partners will generally depend on the status of the partner and the activities of the partnership. Partners of a partnership owning AGL'sAGL’s shares should consult their tax advisers.
For purposes of this discussion, the term "U.S. Person"“U.S. Person” means: (i) a citizen or resident of the U.S.,; (ii) a partnership or corporation, created or organized in or under the laws of the U.S., or organized under any political subdivision thereof,thereof; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source,source; (iv) a trust if either (x) a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposespurposes; or (v) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.
Taxation of Distributions. Subject to the discussions below relating to the potential application of the CFC, RPII and PFIC rules, cash distributions, if any, made with respect to AGL'sAGL’s shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of AGL (as computed using U.S. tax principles). Dividends paid by AGL to corporate shareholders will not be eligible for the dividends received deduction. To the extent such distributions exceed AGL's earnings and profits, they will be treated first as a return of the shareholder'sshareholder’s basis in the common shares to the extent thereof, and then as gain from the sale of a capital asset.
AGL believes dividends paid by AGL on its common shares to non-corporate holders will be eligible for reduced rates of tax at the rates applicable to long-term capital gains as "qualified“qualified dividend income,"” provided that AGL is not a PFIC and certain other requirements, including stock holding period requirements, are satisfied.
Classification of AGL or its Non-U.S. Subsidiaries as a CFC. Each 10% U.S. Shareholder (as defined below) of a non-U.S. corporation that is a CFC at any time during a taxable year that owns, directly or indirectly through non-U.S. entities, shares in the non-U.S. corporation on the last day of the non-U.S. corporation'scorporation’s taxable year on which it is a CFC, must include in its gross income, for U.S. federal income tax purposes, its pro rata share of the CFC's "subpartCFC’s “subpart F income,"” even if the subpart F income is not distributed. "Subpart“Subpart F income"income” of a non-U.S. insurance corporation typically includes non-U.S.foreign personal holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income). A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e., constructively)) more than 50% of the total combined voting power of all classes of voting stock of such non-U.S. corporation, or more than 50% of the total value of all stock of such corporation on any day during the taxable year of such corporation. For purposes of taking into account insurance income, a CFC also includes a non-U.S. insurance companycorporation in which more than 25% of the total combined voting power of all classes of stock or more than 25% of the total value of the stock is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation. A "10%“10% U.S. Shareholder"Shareholder” is a U.S. Person who owns (directly, indirectly through non-U.S. entities or constructively) at least 10% of the total combined voting power or value of all classes of stock of the non-U.S. corporation. The Tax ActTCJA expanded the definition of 10% U.S. Shareholder to include ownership by value (rather than just vote), so provisions in the Company'sCompany’s organizational documents that cut back voting power to potentially avoid 10% U.S. Shareholder status will no longer mitigate the risk of 10% U.S. Shareholder status. AGL believes that because of the dispersion of AGL'sAGL’s share ownership, no U.S. Person who owns shares of AGL directly or indirectly through one or more non-U.S. entities should be treated as owning (directly, indirectly through non-U.S. entities, or constructively), 10% or more of the total voting power or value of all classes of shares of AGL or any of its non-U.S. subsidiaries. However, AGL’s shares may not be as widely dispersed as the Company believes due to, for example, the application of certain ownership attribution rules, and no assurance may be given that a U.S. Person who owns the Company's shares will not be characterized as a 10% U.S. Shareholder. In addition, the direct and indirect subsidiaries of Assured Guaranty US Holdings Inc. (AGUS) are characterized as CFCs and any subpart F income generated will be included in the gross income of the applicable domestic subsidiaries in the AGL group.
The RPII CFC Provisions. The following discussion generally is applicable only if the gross RPII of AG Re or any other non-U.S. insurance subsidiary that eithereither: (i) has not made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. federal tax purposes or (ii) is not a CFC owned directly or indirectly by AGUS (each a "Foreign“Foreign Insurance Subsidiary"Subsidiary” or collectively, with AG Re, the "Foreign“Foreign Insurance Subsidiaries"Subsidiaries”) is 20% or more of the Foreign Insurance Subsidiary'sSubsidiary’s gross insurance income for the taxable year and the 20% Ownership Exception (as defined below) is not met. The following discussion generally would not apply for any taxable year in which the Foreign Insurance Subsidiary'sSubsidiary’s gross RPII falls below the 20% threshold or the 20% Ownership Exception is met. Although the Company cannot be certain, it believes that each Foreign Insurance Subsidiary has been, in prior years of operations, and will be, for the foreseeable future, either below the 20% threshold or in compliance with the requirements of 20% Ownership Exception for each tax year.
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RPII is any "insurance income"“insurance income” (as defined below) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a "RPII shareholder"“RPII shareholder” (as defined below) or a "related person"“related person” (as defined below) to such RPII shareholder. In general, and subject to certain limitations, "insurance income" is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance company. For purposes of inclusion of the RPII of a Foreign Insurance Subsidiary in the income of RPII shareholders, unless an exception applies, the term "RPII shareholder" means any U.S. Person who owns (directly or indirectly through non-U.S. entities) any amount of AGL'sAGL’s common shares. Generally, the term "related person"“related person” for this purpose means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying certain constructive ownership principles. A Foreign Insurance Subsidiary will be treated as a CFC under the RPII provisions if RPII shareholders are treated as owning (directly, indirectly through non-U.S. entities or constructively) 25% or more of the shares of AGL by vote or value.
RPII Exceptions. The special RPII rules do not apply ifif: (i) at all times during the taxable year less than 20% of the voting power and less than 20% of the value of the stock of AGL (the 20% Ownership Exception) is owned (directly or indirectly through entities) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by a Foreign Insurance Subsidiary or related persons to any such person,person; (ii) RPII, determined on a gross basis, is less than 20% of a Foreign Insurance Subsidiary'sSubsidiary’s gross insurance income for the taxable year (the 20% Gross Income Exception),
; (iii) a Foreign Insurance Subsidiary elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business, and to waive all treaty benefits with respect to RPII and meet certain other requirementsrequirements; or (iv) a Foreign Insurance Subsidiary elects to be treated as a U.S. corporation and waive all treaty benefits and meet certain other requirements. The Foreign Insurance Subsidiaries do not intend to make either of these elections. Where none of these exceptions applies, each U.S. Person owning or treated as owning any shares in AGL (and therefore, indirectly, in a Foreign Insurance Subsidiary) on the last day of AGL'sAGL’s taxable year will be required to include in its gross income for U.S. federal income tax purposes its share of the RPII for the portion of the taxable year during which a Foreign Insurance Subsidiary was a CFC under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at that date, but limited by each such U.S. Person'sPerson’s share of a Foreign Insurance Subsidiary'sSubsidiary’s current-year earnings and profits as reduced by the U.S. Person'sPerson’s share, if any, of certain prior-year deficits in earnings and profits. The Foreign Insurance Subsidiaries intend to operate in a manner that is intended to ensure that each qualifies for either the 20% Gross Income Exception or 20% Ownership Exception.
Computation of RPII. For any year in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception, AGL may also seek information from its shareholders as to whether beneficial owners of shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons; to the extent AGL is unable to determine whether a beneficial owner of shares is a U.S. Person, AGL may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses. If a Foreign Insurance Subsidiary meets the 20% Ownership Exception or the 20% Gross Income Exception, RPII shareholders will not be required to include RPII in their taxable income.
Apportionment of RPII to U.S. Holders. Every RPII shareholder who owns shares on the last day of any taxable year of AGL in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception should expect that for such year it will be required to include in gross income its share of a Foreign Insurance Subsidiary's RPII for the portion of the taxable year during which the Foreign Insurance Subsidiary was a CFC under the RPII provisions, whether or not distributed, even though it may not have owned the shares throughout such period. A RPII shareholder who owns shares during such taxable year but not on the last day of the taxable year is not required to include in gross income any part of the Foreign Insurance Subsidiary'sSubsidiary’s RPII.
Basis Adjustments. A RPII shareholder'sshareholder’s tax basis in its common shares will be increased by the amount of any RPII the shareholder includes in income. The RPII shareholder may exclude from income the amount of any distributions by AGL out of previously taxed RPII income. The RPII shareholder'sshareholder’s tax basis in its common shares will be reduced by the amount of such distributions that are excluded from income.
Uncertainty as to Application of RPII. The RPII provisions are complex and have never been interpreted by the courts or the Treasury Department in final regulations; regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether theseFurther, recently proposed regulations will be adoptedcould, if finalized in their proposedcurrent form, or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or applicationsubstantially expand the definition of RPII byto include insurance income of our Foreign Insurance Subsidiaries related to affiliate reinsurance transactions. These regulations would apply to taxable years beginning after the Internal Revenue Service (IRS),date the courtsregulations are finalized. Although we
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cannot predict whether, when or in what form the proposed regulations might be finalized, the proposed regulations, if finalized in their current form, could limit our ability to execute affiliate reinsurance transactions that would otherwise might have retroactive effect. These provisions includebe undertaken for non-tax business reasons in the grantfuture and could increase the risk that gross RPII could constitute 20% or more of authoritythe gross insurance income of one or more of our Foreign Insurance Subsidiaries. in a particular taxable year, which could result in such RPII being taxable to the Treasury Department to prescribe "such regulationsU.S. Persons that own or are treated as may be necessary to carry out the purposeowning shares of this subsection including regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise."AGL. Accordingly, the meaning of the RPII provisions and the application thereof to the Foreign Insurance Subsidiaries is uncertain. In addition, the Company cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent IRSInternal Revenue Service (IRS) examination. Any prospective investor which does business with a Foreign Insurance Subsidiary and is considering an investment in commonU.S. Persons owning or treated as owning shares of AGL should consult histheir tax advisoradvisors as to the effectseffect of these uncertainties.
Information Reporting. Under certain circumstances, U.S. Persons owning shares (directly, indirectly or constructively) in a non-U.S. corporation are required to file IRS Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations,with their U.S. federal income tax returns. Generally, information reporting on IRS Form 5471 is required byby: (i) a person who is treated as a RPII shareholder,shareholder; (ii) a 10% U.S. Shareholder of a non-U.S. corporation that is a CFC at any time during any tax year of the non-U.S. corporation and who owned the stock on the last day of that year; and (iii) under certain circumstances, a U.S. Person who acquires stock in a non-U.S. corporation and as a result thereof owns 10% or more of the voting power or value of such non-U.S. corporation, whether or not such non-U.S. corporation is a CFC. For any taxable year in which AGL determines that neither the 20% Gross Income Exception andnor the 20% Ownership Exception does not apply,applies, AGL will provide to all U.S. Persons registered as shareholders of its shares a completed IRS Form 5471 or the relevant information necessary to complete the form. Failure to file IRS Form 5471 may result in penalties. In addition, U.S. shareholders should consult their tax advisorsadvisers with respect to other information reporting requirements that may be applicable to them.
U.S. Persons holding the Company'sCompany’s shares should consider their possible obligation to file FinCEN Form 114, Foreign Bank and Financial Accounts Report, with respect to their shares. Additionally, such U.S. and non-U.S. persons should consider their possible obligations to annually report certain information with respect to the non-U.S. accounts with their U.S. federal income tax returns. Shareholders should consult their tax advisorsadvisers with respect to these or any other reporting requirement which may apply with respect to their ownership of the Company'sCompany’s shares.
Tax-Exempt Shareholders. Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includable in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are tax exempt entities are urged to consult their tax advisorsadvisers as to the potential impact of the unrelated business taxable income provisions of the Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in certain circumstances.
Dispositions of AGL'sAGL’s Shares. Subject to the discussions below relating to the potential application of the Code section 1248 and PFIC rules, holders of shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other disposition of shares in the same manner as on the sale, exchange or other disposition of any other shares held as capital assets. If the holding period for these shares exceeds one year, any gain will be subject to tax at the marginal tax rate applicable to long term capital gains.
Code section 1248 provides that if a U.S. Person sells or exchanges stock in a non-U.S. corporation and such person owned, directly, indirectly through non-U.S. entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of the CFC'sCFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). The Company believes that because of the dispersion of AGL'sAGL’s share ownership, no U.S. shareholder of AGL should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power or value of AGL; to the extent this is the case this application of Code Section 1248 under the regular CFC rules should not apply to dispositions of AGL'sAGL’s shares. A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, AGL will provide a completed IRS Form 5471 or the relevant information necessary to complete the Form. Code section 1248 in conjunction with the RPII rules also applies to the sale or exchange of shares in a non-U.S. corporation if the non-U.S. corporation would be treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Ownership Exception or 20% Gross Income Exception applies. Existing proposed regulations do not address whether Code section 1248 would apply if a non-U.S. corporation is not a CFC but the non-U.S. corporation has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a U.S. domestic corporation. The Company believes, however, that this application of Code section 1248 under the RPII rules should not apply to dispositions of AGL'sAGL’s shares because AGL will
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not be directly engaged in the insurance business. The Company cannot be certain, however, that the IRS will not interpret the proposed regulations in a contrary manner or that the Treasury Department will not amend the proposed regulations to provide that these rules will apply to dispositions of common shares. Prospective investors should consult their tax advisorsadvisers regarding the effects of these rules on a disposition of common shares.
Passive Foreign Investment Companies. In general, a non-U.S. corporation will be a PFIC during a given year ifif: (i) 75% or more of its gross income constitutes "passive income"“passive income” (the 75% test); or (ii) 50% or more of its assets produce passive income (the 50% test) and once characterized as a PFIC will generally retain PFIC status for future taxable years with respect to its U.S. shareholders in the taxable year of the initial PFIC characterization.
If AGL were characterized as a PFIC during a given year, each U.S. Person holding AGL'sAGL’s shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an "excess distribution" with respect to, their shares, unless such personperson: (i) is a 10% U.S. Shareholder and AGL is a CFCCFC; or (ii) made a "qualified“qualified electing fund election"election” or "mark-to-market"“mark-to-market” election. It is uncertain that AGL would be able to provide its shareholders with the information necessary for a U.S. Person to make a qualified electing fund election. In addition, if AGL were considered a PFIC, upon the death of any U.S. individual owning common shares, such individual'sindividual’s heirs or estate would not be entitled to a "step-up"“step-up” in the basis of the common shares that might otherwise be available under U.S. federal income tax laws. In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the common shares during the three preceding taxable years (or shorter period during which the taxpayer held common shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the common shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the common shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder's period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such
period. In addition, a distribution paid by AGL to U.S. shareholders that is characterized as a dividend and is not characterized as an excess distribution would not be eligible for reduced rates of tax as qualified dividend income. A U.S. Person that is a shareholder in a PFIC may also be subject to additional information reporting requirements, including the annual filing of IRS Form 8621.8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC rules, as amended by the Tax Act,TCJA, provide that income derived in the active conduct of an insurance business by a qualifying insurance corporation is not treated as passive income. The PFIC provisions also contain a look-through rule under which a non-U.S. corporation shall be treated as if it "received“received directly its proportionate share of the income..."” and as if it "held“held its proportionate share of the assets..."” of any other corporation in which it owns at least 25% of the value of the stock. A second PFIC look-through rule would treat stock of a U.S. corporation owned by another U.S. corporation which is at least 25% owned (by value) by a non-U.S. corporation as a non-passive asset that generates non-passive income for purposes of determining whether the non-U.S. corporation is a PFIC.
The insurance income exception originally was intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. The Company expects, for purposes of the PFIC rules, that each of AGL'sAGL’s insurance subsidiaries is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of operations. However, the Tax ActTCJA limits the insurance income exception to a non-U.S. insurance company that is a qualifying insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or exceed 10% of its assets, is predominantly engaged in an insurance business and it satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25% threshold is due to runoff-related or rating-related circumstances) (the Reserve Test). Further, the U.S. Treasury Department and the IRS recently issued final and proposed regulations (the 2019 Proposed2020 Regulations) intended to clarify the application of the PFIC provisions to a non-U.S. insurance company and provide guidance on a range of issues relating to PFICs, including the application of the look-through rule, the treatment of income and assets of certain U.S. insurance subsidiaries for purposes of the look-through rule and the extension of the look-through rule to 25% or more owned partnerships. The 2019 Proposed2020 Regulations define insurance liabilities for purposes of the Reserve Test, tighten the Reserve Test and the statutory cap on insurance liabilities, and provide guidance on the runoff-related and rating-related circumstances for purposes of the 10% test. These 2019 Proposedtest (including a provision that deems certain financial guaranty insurers that fail the 25% test to meet the rating-related circumstances test). The 2020 Regulations also providepropose that a non-U.S. insurance company may onlywill qualify for the insurance company exception only if a factual requirements test or an exception to the PFIC rulesactive conduct percentage test is satisfied. The factual requirements test will be met if among other things, the non-U.S. insurance company’s officers and employees perform its substantial managerial and operational activities on a regular and continuous basis with respect to its core functions and virtually all of the active decision-making functions relevant to underwriting on a contract-by-contract basis (taking into account activities of officers and employees of certain related entities in certain cases). The 2019 Proposed Regulations also provide that an active conduct percentage test must will
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be satisfied forif: (1) the total costs incurred by the non-U.S. insurance company exceptionwith respect to apply, which test compares the expenses for services ofits officers and employees (including officers and employees of certain related entities) for services related to core functions (other than investment activities) equal at least 50% of the total costs incurred for all such services; and (2) the non-U.S. insurerinsurer’s officers and employees oversee any part of the non-U.S. insurance company’s core functions, including investment management, that are outsourced to an unrelated party. Services provided by officers and employees of certain related entities incurred forare only taken into account in the production of premium and certain investment income to all such expenses regardlessnumerator of the service provider.active conduct percentage if the non-U.S. insurance company exercises regular oversight and supervision over such services and compensation arrangements meet certain requirements. The 2019 Proposed2020 Regulations also introduce attribution rulespropose that taken togethera non-U.S. insurance company with other provisionsno or a nominal number of the regulations, could result in a U.S. Personemployees that directly owns any shares in a non-PFIC being treated as an indirect shareholder of a lower tier PFIC subjectrelies exclusively or almost exclusively upon independent contractors (other than certain related entities) to the general PFIC rules described herein. The 2019 Proposed Regulationsperform its core functions will not be effective until adoptedtreated as engaged in final form.the active conduct of an insurance business. The Company believes that, based on the application of the PFIC look-through rules described above and the Company's plan of operations for the current and future years, AGL should not be characterized as a PFIC. However, as the Company cannot predict the likelihood of finalization of the 2019 Proposedproposed 2020 Regulations or the scope, nature or impact of the proposed regulations2020 Regulations on us, should they be formally adopted or enacted or whether the Company'sCompany’s non-U.S. insurance subsidiaries will be able to satisfy the Reserve Test in future years and the interaction of the PFIC look-through rules is not clear, no assurance may be given that the Company will not be characterized as a PFIC. Prospective investors should consult their tax advisoradviser as to the effects of the PFIC rules.
Foreign tax credit. If U.S. Persons own a majority of AGL'sAGL’s common shares, only a portion of the current income inclusions, if any, under the CFC, RPII and PFIC rules and of dividends paid by AGL (including any gain from the sale of common shares that is treated as a dividend under section 1248 of the Code) will be treated as foreign source income for purposes of computing a shareholder'sshareholder’s U.S. foreign tax credit limitations. The Company will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the "subpart“subpart F income,"” RPII and dividends that are foreign source income will constitute either "passive"“passive” or "general"“general” income. Thus, it may not be possible for most shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income.
Information Reporting and Backup Withholding on Distributions and Disposition Proceeds. Information returns may be filed with the IRS in connection with distributions on AGL'sAGL’s common shares and the proceeds from a sale or other disposition of AGL'sAGL’s common shares unless the holder of AGL'sAGL’s common shares establishes an exemption from the information reporting rules. A holder of common shares that does not establish such an exemption may be subject to U.S. backup
withholding tax on these payments if the holder is not a corporation or non-U.S. Person or fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person'sPerson’s U.S. federal income tax liability and may entitle the U.S. Person to a refund, provided that the required information is furnished to the IRS.
United Kingdom
The following discussion is intended to be only a general guide to certain U.K. tax consequences of holding AGL common shares, under current law and the current practice of HMRC, either of which is subject to change at any time, possibly with retrospective effect. Except where otherwise stated, this discussion applies only to shareholders who are not (and have not recently been) resident or (in the case of individuals) domiciled for tax purposes in the U.K., who hold their AGL common shares as an investment and who are the absolute beneficial owners of their common shares. This discussion may not apply to certain shareholders, such as dealers in securities, life insurance companies, collective investment schemes, shareholders who are exempt from tax and shareholders who have (or are deemed to have) acquired their shares by virtue of an office or employment. Such shareholders may be subject to special rules.
The following statements do not purport to be a comprehensive description of all the U.K. considerations that may be relevant to any particular shareholder. Any person who is in any doubt as to their tax position should consult an appropriate professional tax adviser.
Dividends. Under current U.K. tax law, AGL is not required to withhold tax at source from dividends paid to the holders of the AGL common shares.
Capital gains. U.K. tax is not normally charged on any capital gains realized by non-U.K. shareholders in AGL unless, in the case of a corporate shareholder, at or before the time the gain accrues, the shareholding is used in or for the purposes of a trade carried on by the non-resident shareholder through a permanent establishment in the U.K. or for the purposes of that
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permanent establishment. Similarly, an individual shareholder who carries on a trade, profession or vocation in the U.K. through a branch or agency may be liable for U.K. tax on the gain if such shareholder disposes of shares that are, or have been, used, held or acquired for the purposes of such trade, profession or vocation or for the purposes of such branch or agency. This treatment applies regardless of the U.K. tax residence status of AGL.
Stamp Taxes. On the basis that AGL does not currently intend to maintain a share register in the U.K., there should be no U.K. stamp duty reserve tax on a purchase of common shares in AGL. A conveyance or transfer on sale of common shares in AGL will not be subject to U.K. stamp duty, provided that the instrument of transfer is not executed in the U.K. and does not relate to any property situated, or any matter or thing done, or to be done, in the U.K.
Description of Share Capital
The following summary of AGL'sAGL’s share capital is qualified in its entirety by the provisions of Bermuda law, AGL'sAGL’s memorandum of association and its Bye-Laws, copies of which are incorporated by reference as exhibits to this Annual Report on Form 10-K.
Voting Rights and Adjustments
In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL'sAGL’s shares) of a shareholder are treated as "controlled shares"“controlled shares” (as determined pursuant to section 958 of
the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL'sAGL’s issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL's Bye-laws.AGL’s Bye-Laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a CFC as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL'sAGL’s Bye-Laws as a 9.5% U.S. Shareholder). In addition, AGL'sAGL’s Board may determine that shares held carry different voting rights when it deems it appropriate to do so toto: (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. "Controlled shares"“Controlled shares” includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL's Bye-lawsAGL’s Bye-Laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.
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Restrictions on Transfer of Common Shares
The restrictions on transfer and voting restrictions described above may have the effect of delaying, deferring or preventing a change in control of Assured Guaranty.
Acquisition of Common Shares by AGL
Under AGL'sAGL’s Bye-Laws and subject to Bermuda law, if AGL'sAGL’s Board determines that any ownership of AGL'sAGL’s shares may result in adverse tax, legal or regulatory consequences to AGL,the Company, any of AGL'sthe Company’s subsidiaries or any of AGL'sAGL’s shareholders or indirect holders of shares or its Affiliatesaffiliates (other than such as AGL'sAGL’s Board considers de minimis), AGLthe Company has the option, but not the obligation, to require such shareholder to sell to AGL or to a third party to whom AGL assigns the repurchase right the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board to represent the shares'shares’ fair market value (as defined in AGL'sAGL’s Bye-Laws).
Other Provisions of AGL'sAGL’s Bye-Laws
Shareholders may only remove a director for cause (as defined in AGL'sAGL’s Bye-Laws) at a general meeting, provided that the notice of any such meeting convened for the purpose of removing a director shall contain a statement of the intention to do so and shall be provided to that director at least two weeks before the meeting. Vacancies on the Board can be filled by the Board if the vacancy occurs in those events set out in AGL'sAGL’s Bye-Laws as a result of death, disability, disqualification or resignation of a director, or from an increase in the size of the Board.
Generally under AGL'sAGL’s Bye-Laws, the affirmative votes of a majority of the votes cast at any meeting at which a quorum is present is required to authorize a resolution put to vote at a meeting of the Board, including one relating to a merger, acquisition or business combination. Corporate action may also be taken by a unanimous written resolution of the Board without a meeting. A quorum shall be at least one-half of directors then in office present in person or represented by a duly authorized representative, provided that at least two directors are present in person.
Shareholder Action
At the commencement of any general meeting, two or more persons present in person and representing, in person or by proxy, more than 50% of the issued and outstanding shares entitled to vote at the meeting shall constitute a quorum for the transaction of business. In general, any questions proposed for the consideration of the shareholders at any general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the Bye-Laws.
The Bye-Laws contain advance notice requirements for shareholder proposals and nominations for directors, including when proposals and nominations must be received and the information to be included.
Amendment
The Bye-Laws may be amended only by both a resolution adopted by the Board and by a resolution ofadopted by the shareholders.
Voting of Non-U.S. Subsidiary Shares
When AGL is required or entitled to vote at a general meeting (for example, an annual meeting) of any of AG Re, AGFOL or any other of its directly held non-U.S. subsidiaries, AGL'sAGL’s Board is required to refer the subject matter of the vote to AGL'sAGL’s shareholders and seek direction from such shareholders as to how they should vote on the resolution proposed by the non-U.S. subsidiary. AGL'sAGL’s Board in its discretion shall require that substantially similar provisions are or will be contained in
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the bye-lawsBye-Laws (or equivalent governing documents) of any direct or indirect non-U.S. subsidiaries other than AGRO and subsidiaries incorporated in the U.K.
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'sCompany’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'sCompany’s Corporate Governance Guidelines, its Global Code of Conduct,Ethics, AGL's Bye-Laws and the charters for its Board committees.committees, as well as certain of the Company's environmental and social policies and statements. 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 also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses thisits web site and may use its social media account 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'sCompany’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company'sCompany’s press releases, SEC filings, public conference calls, presentations and webcasts.
The information contained on, or that may be accessed through, the Company'sCompany’s web site is not incorporated by reference into, and is not a part of, this report.
ITEM 1A. RISK FACTORS
You should carefully consider the following information, together with the information contained in AGL'sAGL’s other filings with the SEC. The risks and uncertainties discussed below are not the only ones the Company faces. However, these are the risks that the Company'sCompany’s management believes are material. The Company may face additional risks or uncertainties that are not presently known to the Company or that management currently deems immaterial, and such risks or uncertainties also may impair its business or results of operations. The risks discussed below could result in a significant or material adverse effect on the Company'sCompany’s financial condition, results of operations, liquidity, or business prospects.
The following summarizes some of the risks and uncertainties that may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects or share price. It is provided for convenience and should be read together with the more expansive explanations below this summary.
Risks Related to Economic, Market and Political Conditions and Natural Phenomena
•Some of the state and local governments that issue the obligations the Company insures have experienced significant budget deficits and pension funding and revenue collection shortfalls that required them to significantly raise taxes and/or cut spending in order to satisfy their obligations. While the U.S. government has provided some financial support and although overall state revenues have increased in recent years, significant budgetary pressures remain, especially at the local government level and in relation to retirement obligations. Certain local governments, including ones that have issued obligations insured by the Company, have sought protection from creditors under chapter 9 of the U.S. Bankruptcy Code as a means of restructuring their outstanding debt. In some recent instances where local governments were seeking to restructure their outstanding debt, pension and other obligations owed to workers were treated more favorably than senior bond debt owed to the capital markets. If the issuers of the obligations in the Company's public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its public finance obligations, which could materially and adversely affect its business, financial condition and results of operations. If such issuers succeed in restructuring pension and other obligations owed to workers so that they are treated more favorably than obligations insured by the Company, such losses or impairments could be greater than the Company otherwise anticipated when the insurance was written.
•The Company is exposed to correlation risk across the various assets the Company insures and in which it invests. During periods of strong macroeconomic performance, stress in an individual transaction generally occurs for idiosyncratic reasons or as a result of issues in a single asset class (so impacting only transactions in that sector). During a broad economic downturn, a wider range of the Company's insurance and investment portfolios could be exposed to stress at the same time. This stress may manifest itself in any or all of the following: ratings downgrades of insured risks, which may require more capital in the Company’s insurance subsidiaries; a reduction in the value of the Company’s investments and /or AUM; and actual defaults and losses in its insurance and / or investment portfolios. In addition, while the Company's insurance portfolio has experienced many catastrophic events in the past without material loss, unexpected catastrophic events may have a material adverse effect upon the Company's insured portfolio and/or its investment portfolios, especially where the obligor is already under financial stress. For example, Hurricane Maria negatively impacted the Company’s insurance exposure to Puerto Rico and its related authorities and public corporations.
•Downgrades to the Company's liquidity and resultsU.S. government’s sovereign credit ratings, or to the credit ratings of operations.
•The Company has an aggregate $4.3 billion net par exposure as of December 31, 2019COVID-19 pandemic, and the governmental and private actions taken in response to the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations, and claim payments on such insured exposures in excess of those expected by the Company could have a negative effect on the Company's liquidity and results of operations. Most of the Puerto Rican entities with obligations insured by the Company have defaulted on their debt service payments, and the Company has paid claims on them. The total net expected loss the Company carries related to such exposures is net of a significant credit for estimated recoveries on claims already paid, and recoveries below those expected by the Company could also have a negative effect on the Company's liquidity and results of operations.pandemic.
•Changes in attitudes toward debt repayment could negatively impactimpacting the Company’s insurance portfolio.
•Persistently low interest rate levels and credit spreads adversely affecting demand for financial guaranty business.insurance.
•Global climate change may impactadversely affecting the Company’s insurance and investment portfolios.
•The Company's operating results are affected, in part, by the performance of its investment portfolio which primarily consists of fixed-income securities and short-term investments. As of December 31, 2019, fixed-maturity securities and short-term investments held by the Company had a fair value of approximately $10.1 billion. Credit losses and changes in interest rates could have an adverse effect on the Company's shareholders' equity and net income. Credit losses result in realized losses on the Company's investment portfolio, which reduce net income and shareholders' equity. Changes in interest rates can affect both shareholders' equity and investment income. For example, if interest rates decline, funds reinvested will earn less than expected, reducing the Company's future investment income compared to the amount it would earn if interest rates had not declined. However, the value of the Company's fixed-rate investments would generally increase if interest rates decreased, resulting in an unrealized gain on investments included in shareholders' equity. Conversely, if interest rates increase, the value of the fixed-rate investment portfolio will be reduced, resulting in unrealized losses that the Company is required to include in shareholders' equity. Accordingly, interest rate increases could reduce the Company's shareholders' equity.
•Expansion of the categories and types of investments in the Company’s investment portfolio may exposeinvestments exposing it to increased credit, interest rate, liquidity and other risks.
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Risks Related to Estimates, Assumptions and Valuations
•Estimates of expected insurance losses to be paid (recovered), including losses with respect to related legal proceedings, are subject to uncertainties and actual amounts may not be adequate to cover potential paid claims.
•The valuation of many of the Company’s assets and liabilities and AUM includes methodologies, estimates and assumptions that are subject to differing interpretations and could result in changes to valuations of the Company’s assets and liabilities that may materially adversely affect the Company’s financial condition, results of operations, capital, business prospects and financial condition.share price.
Strategic Risks
•Competition in the Company's industries may adversely affect its revenues.Company’s industries.
•A downgrade of the financial strength or financial enhancement ratings of any of the Company's insurance and reinsurance subsidiaries would adversely affect its business and prospects and, consequently, its results of operations and financial condition.
Operational Risks
•The Company's reporting currency isLess predictable, political, credit or legal risks associated with the U.S. dollar. The functional currenciessome of the Company’s primary insurance and reinsurance subsidiaries are the U.S. dollar. The Company's non-U.S. subsidiaries maintain both assets and liabilities in currencies different from their functional currency, which exposes the Company to changes in currency exchange rates. In addition, assets of non-U.S. subsidiaries are primarily invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.operations.
•The principal currencies creating foreign exchange risk are the pound sterling and the Euro. The Company cannot accurately predict the nature or extent of future exchange rate variability between these currencies or relative to the U.S. dollar. Foreign exchange rates are sensitive to factors beyond the Company's control.
•Errors in, overreliance on, or misuse of, models may result in financial loss, reputational harm or adverse regulatory action.models.
•Significant claim payments may reduce the Company'sCompany’s liquidity.
•The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Risks Related to Taxation
•Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company’s investments.
•Certain of the Company’s non-U.S. subsidiaries may be subject to U.S. tax.
•AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035.
•In certain circumstances, U.S. Persons holding AGL’s shares may be subject to taxation under the U.S. CFC rules, additional U.S. income taxation on their proportionate share of the Company's RPII or unrelated business taxable income rules, and may be subject to adverse tax consequences if AGL is considered to be a PFIC for U.S. federal income tax purposes.
•Changes in U.S. federal income tax law adversely affecting an investment in AGL’s common shares.
•An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
•A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
•Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
•An adverse adjustment under U.K. transfer pricing legislation could adversely impact Assured Guaranty’s tax liability.
•An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their non-U.K. subsidiaries adversely affecting Assured Guaranty's tax liability.
•Assured Guaranty’s financial results may be affected by measures taken in response to the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.
Risks Related to GAAP, Applicable Law and Litigation
•Changes in the fair value of the Company’s insured credit derivatives portfolio, its committed capital securities (CCS), its FG VIEs, its CIVs, and/or the Company’s decision to consolidate or deconsolidate one or more FG VIEs and/or CIVs during a financial reporting period, subjecting its financial condition and results of operations to volatility.
•Changes in industry and other accounting practices.
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•Changes in or inability to comply with applicable law and regulations.
•Legislation, regulation or litigation arising out of the struggles of distressed obligors.
•Certain insurance regulatory requirements and restrictions constraining AGL’s ability to pay dividends and fund share repurchases and other activities.
•Applicable insurance laws may make it difficult to effect a change of control of AGL.
Risks Related to AGL’s Common Shares
•Volatility in the market price of AGL’s common shares.
•Provisions in the Code and AGL’s Bye-Laws reducing or increasing the voting rights of its common shares.
•Provisions in AGL’s Bye-Laws potentially restricting the ability to transfer common share or requiring shareholders to sell their common shares.
Risks Related to Economic, Market and Political Conditions and Natural Phenomena
Developments in the U.S. and global financial markets and economy generally may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
In recent years, the global financial markets and economy generally have been impacted by changes in inflation and interest rates, the COVID-19 pandemic, political events such as trade confrontations between the U.S. and traditional allies and between the U.S. and China as well as the withdrawal of the U.K. from the EU (commonly known as “Brexit”). The global economic and political systems also have been impacted by events in the Middle East and Eastern Europe (including events in the Ukraine), as well as Africa and Southeast Asia, and could be impacted by other events in the future, including natural and man-made events and disasters.
These and other risks could materially and negatively affect the Company’s ability to access the capital markets, the cost of the Company’s debt, the demand for its credit enhancement and asset management products, the amount of losses incurred on transactions it guarantees, the value and performance of its investments (including those that are accounted for as CIVs), the value of its AUM and amount of its related asset management fees (including performance fees), the capital and liquidity position and financial strength and enhancement ratings of its insurance subsidiaries, and the price of its common shares.
Some of the state and local governments and entities that issue obligations the Company insures are experiencing significant budget deficits and pension funding and revenue shortfalls that could result in increased credit losses or impairments and increased rating agency capital charges on those insured obligations.
Some of the state, territorial, and local governments that issue the obligations the Company insures are experiencing significant budget deficits and pension funding and revenue collection shortfalls. Certain territorial or local governments, including ones that have issued obligations insured by the Company, have sought protection from creditors under Chapter 9 of the U.S. Bankruptcy Code, or, in the case of Puerto Rico, the similar provisions of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), as a means of restructuring their outstanding debt. In some instances where local governments were seeking to restructure their outstanding debt, pension and other obligations owed to workers were treated more favorably than senior bond debt owed to the capital markets. If the issuers of the obligations in the Company’s public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its insured public finance obligations.
In addition, obligations supported by revenue streams, which may include both revenue and non-revenue bonds, such as those issued by toll road authorities, municipal utilities, airport authorities or mass transit, may be adversely affected by revenue declines resulting from reduced demand, changing demographics, evolving business practices that began during the COVID-19 pandemic including hybrid work models, telecommuting, video conferencing and other alternative work arrangements, or other causes. These obligations, which may not necessarily benefit from financial support from other tax revenues or governmental authorities, may also experience increased losses if the revenue streams are insufficient to pay scheduled interest and principal payments.
The Company may be subjected to significant risks from large individual or correlated insurance exposures.
The Company is exposed to the risk that issuers of obligations that it insures or other counterparties may default on their financial obligations, whether as a result of insolvency, lack of liquidity, operational failure or other reasons, and the amount of insurance exposure the Company has to some the risks is quite large. The Company seeks to reduce this risk by
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managing exposure to large single risks, as well as concentrations of correlated risks, through tracking its aggregate exposure to single risks in its various lines of insurance business and establishing underwriting criteria to manage risk aggregations. Should the Company's risk assessments prove inaccurate and should the applicable limits prove inadequate, the Company could be exposed to larger than anticipated losses, and could be required by the rating agencies to hold additional capital against insured exposures whether or not downgraded by the rating agencies. The Company’s ultimate exposure to a single risk may exceed its underwriting guidelines (caused by, for example, acquisitions, reassumptions, or amortization of the portfolio faster than the single risk).
The Company is exposed to correlation risk across the various assets the Company insures and in which it invests. During periods of strong macroeconomic performance, stress in an individual transaction generally occurs for idiosyncratic reasons or as a result of issues in a single asset class (so impacting only transactions in that sector). During a broad economic downturn or in the face of a significant natural or man-made event or disaster (such as the COVID-19 pandemic or events in Ukraine), a wider range of the Company’s insurance and investments could be exposed to stress at the same time. This stress may manifest itself in any or all of the following: ratings downgrades of insured risks, which may require more capital in the Company’s insurance subsidiaries; a reduction in the value of the Company’s investments and /or AUM; and actual defaults and losses in its insurance portfolio and / or investments.
Losses on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations insured by the Company significantly in excess of those currently expected by the Company or recoveries significantly below those currently expected by the Company could have a negative effect on the Company’s financial condition, results of operations, capital, business prospects and share price.
The Company has an aggregate $1.4 billion net par exposure as of December 31, 2022 to the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations, and losses on such insured exposures significantly in excess of those currently expected by the Company could have a negative effect on the Company’s financial condition, results of operations, capital, business prospects and share price. Most of the Puerto Rican entities with obligations insured by the Company have defaulted on their debt service payments, and the Company has paid claims on them. The total net expected loss the Company calculates related to such exposures is net of a significant credit for estimated recoveries on claims already paid, and recoveries significantly below those expected by the Company could also have a negative effect on the Company’s financial condition, results of operations, capital, liquidity, business prospects and share prices. Additional information about the Company’s exposure to Puerto Rico and legal actions related to that exposure may be found in, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, Exposure to Puerto Rico.
Downgrades to the U.S. government’s sovereign credit ratings, or to the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in a deterioration in general economic conditions, increased credit losses in the Company’s insured portfolio, impairments or losses in its investment portfolio, and other risks to the Company and its credit ratings that the Company is not able to predict.
In the U.S., debt ceiling and budget deficit concerns, which have increased the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings, could weaken the U.S. dollar, global economy and banking system, cause market volatility, raise the cost of credit, negatively impact the Company’s insured and investment portfolios, and disrupt general economic conditions in ways that the Company is not able to predict, which could materially and adversely affect the Company’s business, financial condition and results of operations. While rating agencies currently permit sub-sovereign and corporate credits in the U.S. to be rated higher than sovereign credits, in the event that the U.S. government is downgraded and if the rating agencies no longer permit sub-sovereign and/or corporate credit ratings to be higher than the U.S. government, the resulting downgrades could result in a material adverse impact to the Company’s credit ratings and its insurance and investment portfolios.
The Company may be exposed to a higher risk of default of U.S. public finance obligations in connection with a U.S. government default. While the Company historically has experienced low levels of defaults in its U.S. public finance insured portfolio, from time-to-time state and local governments that issue some of the obligations the Company insures have reported budget shortfalls that have required them to raise taxes and/or cut spending in order to satisfy their obligations. While there has been support provided by the U.S. federal government designed to provide aid to state and local governments, including during the COVID-19 pandemic, certain state and local governments remain under financial stress. If the issuers of the obligations in the Company’s U.S. public finance insurance portfolio are reliant on financial assistance from the U.S. government in order to meet their obligations, and the U.S. government does not provide such assistance, the Company may experience credit losses or impairments on those obligations.
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A downgrade of the U.S. government may also result in higher interest rates, which could adversely affect the distressed RMBS that are in the Company’s insured portfolio, reduce the market value of the fixed-maturity securities held in the Company’s investment portfolio and dampen municipal bond issuance.
The development, course and duration of the COVID-19 pandemic, and the governmental and private actions taken in response to the pandemic may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
In addition to its human toll, the COVID-19 pandemic and the governmental and private actions taken in response have caused economic and financial disruption on a global scale and may continue to do so. While vaccines and therapeutics have been developed and approved and deployed by governments, the remaining course and duration of the pandemic, and future governmental and private responses to its course, remain unknown. While there has been approximately three years of experience with the pandemic, not all of the direct and indirect consequences of COVID-19 are known yet. The Company believes the most material of these risks include the following, all of which are discussed in more detail in this Risk Factors section:
•Impact on its insurance business, including potential:
◦Increased insurance claims and loss reserves;
◦Increased correlation of risks;
◦Difficulty in meeting applicable capital requirements as well as other regulatory requirements;
◦Reduction in one or more of the financial strength and enhancement ratings of the Company’s insurance subsidiaries;
•Impact on the Company’s asset management business, including potential:
◦Difficulty in attracting third-party funds to manage;
◦Reduction and/or deferral of asset management fees (including performance fees) as occurred with respect to the deferral of CLO management fees in 2020 (although such deferred performance fees have since been received);
◦Impairment of goodwill and other intangible assets associated with the BlueMountain Acquisition;
•Impact of legislative or regulatory responses to the pandemic;
•Losses in the Company’s investments; and
•Operational disruptions and security risks from remote working arrangements.
The Company believes that state, territorial 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 various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims from the impact of the COVID-19 pandemic and the governmental and private actions taken in response. Moreover, state and local governments under financial stress and dependent on U.S. federal government assistance provided in connection with the COVID-19 pandemic may be at risk of experiencing credit losses or impairment on their obligations as a result of cessation of the U.S. federal government’s support. In addition to obligations already internally rated in the low investment grade or BIG categories, the Company believes that its sectors most at risk include: (i) Mass Transit - Domestic; (ii) Toll Roads and Transportation - International; (iii) Hotel / Motel Occupancy Tax; (iv) Stadiums; (v) UK University Housing - International; (vi) Privatized Student Housing: Domestic; and (vii) Commercial Receivables.
The Company continues to provide the services and communications it did prior to the COVID-19 pandemic, and to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades, establish new funds and attract third-party funds to manage. 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.
The COVID-19 pandemic and governmental and private actions taken in response may also exacerbate many of the risks applicable to the Company in ways or to an extent not yet identified by the Company.
Changes in attitudes toward debt repayment could negatively impact the Company’s insurance portfolio.
The likelihood of debt repayment is impacted by both the ability and the willingness of the obligor to repay their debt. Debtors generally understand that debt repayment is not only a legal obligation but is also appropriate, and that a failure to repay their debt will impede their access to debt in the future. To the extent societal attitudes toward the repayment of debt by struggling obligors softens and such obligors believe there to be less of a penalty for nonpayment, some struggling debtors may be more likely to default and, if they default, less likely to agree to repayment plans they view as burdensome. If the issuers of
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the obligations in the Company’s public finance insurance portfolio become unwilling to raise taxes, decrease spending or receive federal assistance in order to repay their debt, the Company may experience increased levels of losses on its public finance obligations, which could adversely affect its financial condition, results of operations, capital, liquidity, business prospects and share price.
Persistently low interest rate levels and credit spreads could adversely affect demand for financial guaranty insurance.
Demand for financial guaranty insurance generally fluctuates with changes in market credit spreads. Credit spreads, which are based on the difference between interest rates on high-quality or “risk free” securities versus those on lower-rated securities, fluctuate due to a number of factors, and are sensitive to the absolute level of interest rates, current credit experience and investors’ risk appetite. When interest rates are low, or when the market is relatively less risk averse, the credit spread between high-quality or insured obligations versus lower-rated obligations typically narrows. As a result, financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively wider credit spreads. Issuers are less likely to use financial guaranties on their new issues when credit spreads are narrow, so (absent other factors) this results in decreased demand or premiums obtainable for financial guaranty insurance.
Global climate change may adversely impact the Company’s insurance portfolio and investments.
Global climate change and climate change regulations may impact asset prices and general economic conditions and may disproportionately impact particular sectors, industries or locations. Due to the significant uncertainty of forecasted data related to the impact of climate change, the Company cannot predict the long-term consequences to the Company resulting from the physical, transition, legal, regulatory and reputational risks associated with climate change. The Company considers environmental risk in its insurance underwriting and surveillance process and its investment process and manages its insurance and investment risks by maintaining a well-diversified portfolio of insurance and investments both geographically and by sector and monitors these measures continuously. While the Company can adjust its investment exposure to sectors and/or geographical areas that face severe risks due to climate change or climate change regulation, the Company has less flexibility in adjusting the existing exposure in its insurance portfolio because the majority of the financial guaranties issued by the Company’s insurance subsidiaries 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 insurance.
Credit losses and changes in interest rates could adversely affect the Company’s investments and AUM.
The Company’s results of operations are affected by the performance of its investments, which primarily consist of fixed-income securities and short-term investments. As of December 31, 2022, fixed-maturity securities and short-term investments held by the Company had a fair value of approximately $8.2 billion. Credit losses on the Company’s investments adversely affect the Company’s financial condition and results of operations by reducing net income and shareholders’ equity. In recent years the Company has increased the amount it invests in alternative investments. In addition, the Company received a significant amount of New Recovery Bonds and CVIs as a result of the 2022 Puerto Rico Resolutions. Alternative investments, Loss Mitigation Securities, Puerto Rico New Recovery Bonds and CVIs may be more susceptible to credit losses than most of the rest of the Company’s fixed-income portfolio.
The impact of changes in interest rates may also adversely affect both the Company’s financial condition and results of operations. For example, if interest rates decline, funds reinvested will have a lower yield than expected, reducing the Company’s future investment income compared to the amount it would earn if interest rates had not declined. However, the value of the Company’s fixed-rate investments would generally increase, resulting in an unrealized gain on investments and improving the Company’s financial condition. Conversely, if interest rates increase, the Company’s results of operations would improve as a result of higher future reinvestment income, but its financial condition would be adversely affected, since value of the fixed-rate investments generally would be reduced.
Credit losses and changes in interest rates could also have an adverse impact on the amount of the Company’s AUM, which could impact results of operations. For example, if there are credit losses in the portfolios managed by AssuredIM or, to a lesser extent, if interest rates increase, AUM will decrease, reducing the amount of management fees earned by the Company.
Interest rates are highly sensitive to many factors, including monetary policies, U.S. and non-U.S. economic and political conditions and other factors beyond the Company’s control. The Company does not engage in active management, or hedging, of interest rate risk in its investment portfolio, and may not be able to mitigate interest rate sensitivity effectively.
Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs) may expose it to increased credit, interest rate, liquidity and other risks.
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The Company is using AssuredIM’s investment knowledge and experience to expand the categories and types of its investments (including those accounted for as CIVs) by both: (a) allocating $750 million of capital in AssuredIM Funds; and (b) expanding the categories and types of its alternative investments not managed by AssuredIM. This expansion of categories and types of investments may increase the credit, interest rate and liquidity risk in the Company’s investments (including those accounted for as CIVs). In addition, the fair value of some of these assets may be more volatile than other investments made by the Company. As a result of the Company’s expansion of the categories and types of its investments, as of December 31, 2022, the U.S. Insurance Subsidiaries had investments in AssuredIM Funds with a fair value of $569 million, which are reported as CIVs, in the Company’s consolidated financial statements. In addition, the Company had $123 million of other non-AssuredIM alternative investments reported in the consolidated financial statements. This expansion also has resulted in the Company investing a portion of its portfolio in assets that are less liquid than some of its other investments, and so may increase the risks described below under “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited”. Expanding the categories and types of Company investments (including those accounted for as CIVs) may also expose the Company to other types of risks, including reputational risks.
Risks Related to Estimates, Assumptions and Valuations
Estimates of expected insurance losses to be paid (recovered), including losses with respect to related legal proceedings, are subject to uncertainties and actual amounts may be different, causing the Company to reserve either too little or too much for future losses.
The financial guaranties issued by the Company’s insurance subsidiaries 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 losses to be paid (recovered) on a policy is subject to significant uncertainty over the life of the insured transaction. Additionally, even after the Company pays a claim on its financial guaranties (or determines no claim is owing), subsequent related litigation may result in additional losses. If the Company’s actual losses exceed its current estimate, the Company’s financial condition, results of operations, capital, liquidity, business prospects, financial strength ratings and ability to raise additional capital may all be adversely affected.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses to be paid (recovered). The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, probability weightings, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, future interest rates, the perceived strength of legal protections, the perceived strength of the Company’s position in any ongoing legal proceedings, governmental actions, negotiations, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. Actual losses will ultimately depend on future events, legal rulings, and/or transaction performance and may be influenced by many interrelated factors that are difficult to predict. As a result, the Company’s current estimates of losses to be paid (recovered), including losses with respect to related legal proceedings, may be subject to considerable volatility and may not reflect the Company’s future ultimate losses paid (recovered).
The Company’s expected loss models and reserve assumptions take into account current and expected future trends, which contemplate the impact of current and possible developments in the performance of the exposure and any related legal proceedings. These factors, which are integral elements of the Company's reserve estimation methodology, are updated on a quarterly basis based on current information. Also, in some instances, the Company may not be able to reasonably estimate the amount or range of loss that could result from an unfavorable outcome of a legal proceeding based on the information available at the stage of the legal proceeding or its estimate may prove to be materially different than the actual results. Loss models and reserve assumptions may be impacted by changes to interest rates due both to discounting and transaction structures that include floating rates, which could impact the calculation of expected losses. Because such information changes over time, sometimes materially, the Company’s projection of losses and its related reserves may also change materially. Much of the recent development in the Company’s loss projections and reserves relate to the Company’s insured Puerto Rico exposures.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, for additional information.
The valuation of many of the Company’s assets and liabilities and AUM includes methodologies, estimates and assumptions that are subject to differing interpretations and could result in changes to valuations of the Company’s assets and liabilities that may materially adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
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The Company carries a significant portion of its assets and liabilities and reports a significant portion of its AUM at fair value. The approaches used by the Company to calculate the fair value of those assets and liabilities it carries at fair value are described under, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement. The determination of fair values is made at a specific point in time, based on available market information and judgments about the assets and liabilities being valued, including estimates of timing and amounts of cash flows and the credit rating of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on estimated fair value amounts.
During periods of market disruption, including periods of rapidly changing credit spreads or illiquidity, it may be difficult to value certain of the Company’s assets and liabilities and AUM, particularly if trading becomes less frequent or market data becomes less observable. An increase in the amount of the Company’s alternative investments in its investment portfolio and/or CIVs may increase the amount of the Company’s assets subject to this risk. During such periods, more assets and liabilities may fall to the Level 3 valuation level, which describes model derived valuations in which one or more significant inputs or significant value drivers are unobservable, thereby resulting in values that may not be indicative of net realizable value or reflective of future fair values. Rapidly changing credit and equity market conditions could materially impact the valuation of assets and liabilities as reported within the financial statements, and period-to-period changes in value could vary significantly.
Strategic Risks
Competition in the Company’s industries may adversely affect its results of operations, business prospects and share price.
As described in greater detail under Item 1, Business — Insurance Segment — Competition, the Company can face competition in its insurance business, either in the form of current or new providers of credit enhancement, such as nonpayment insurance, letters of credit or credit derivatives, or in terms of alternative structures, including uninsured offerings, or pricing competition. Increased competition could have an adverse effect on the Company’s insurance business.
The Company’s Asset Management segment operates in highly competitive markets. The Company competes with many other firms in every aspect of the asset management industry, including raising funds, seeking investments, and hiring and retaining professionals. The Company’s ability to 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. In addition, if the Company’s successful competitors charge lower fees for substantially similar products, the Company may face pressure to lower fees to attract and retain asset management clients, which may reduce the Company’s revenues and /or income.
Some of the Company’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by the Company. Some of these competitors also may have a lower cost of capital and access to funding sources that are not available to the Company, which may create further competitive disadvantages with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships than those available to AssuredIM and/or the Company.
Strategic transactions may not result in the benefits anticipated.
From time to time the Company evaluates strategic opportunities and conducts diligence activities with respect to transactions with other financial services companies including transactions involving asset managers, asset management contracts, legacy financial guaranty companies and financial guaranty portfolios, and other financial services companies, and has executed a number of such transactions in the past. For example, the Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. From time to time the Company also evaluates expanding its business by hiring teams of professionals engaged in activities it wishes to pursue and conducts due diligence with respect to such individuals and their current positions. Such strategic transactions related to entities, portfolios or teams may involve some or all of the various risks commonly associated with such strategic transactions, including, among other things: (a) failure to adequately identify and value potential exposures and liabilities associated with a new entity, portfolio or team; (b) difficulty in estimating the value of a new entity, portfolio or team; (c) potential diversion of management’s time and attention; (d) exposure to asset quality issues of a new entity or portfolio; (e) difficulty and expense of integrating the operations, systems and personnel of a new entity; (f) difficulty integrating the culture of a new entity or team; (g) failure to identify legal risks associated with the strategic transaction with an entity, portfolio or team, and (h) in the case of acquisitions of a financial guaranty company or portfolio, concentration of insurance exposures, including insurance exposures which may exceed single risk limits, aggregate risk limits, BIG limits and/or non-U.S. dollar exposure limits, due to the addition of the target insurance portfolio. Such strategic transactions related to entities, portfolios or
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teams may also have unintended consequences on ratings assigned by the rating agencies to the Company or its insurance subsidiaries or on the applicability of laws and regulations to the Company’s existing businesses. These or other factors may cause any past or future strategic transactions relating to financial services entities, portfolios or teams not to result in the benefits to the Company that the Company anticipated when the transaction was agreed. Past or future transactions may also subject the Company to non-monetary consequences that may or may not have been anticipated or fully mitigated at the time of the transaction.
Additionally, if the Company enters into discussions regarding a strategic transaction and a transaction is not consummated, especially if such discussions become known, related portions of the Company’s business may be negatively impacted.
Asset Management may present risks that may adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
The expansion of the Company’s asset management business segment and the establishment of AssuredIM has exposed the Company’s financial condition, results of operations, business prospects and share price to some of the risks faced by asset managers generally and the risk of AssuredIM’s investment business more specifically. Asset management services are primarily a fee-based business, and the Company’s asset management and performance fees are based on the amount of its AUM as well as the performance of those assets. Volatility or declines in the markets in which the Company invests as an asset manager, or poor performance of its investments, may negatively affect its AUM and its asset management and performance fees, and may deter future investment by third parties in the Company’s asset management products. The Company’s asset management business is also subject to legal, regulatory, compliance, accounting, valuation and political risks that differ from those involved in the Company’s insurance business. In addition, the asset management business is an intensely competitive business, creating new competitive risks.
The Company had a carrying value as of December 31, 2022, of $157 million for goodwill and other intangible assets established in connection with the acquisition of BlueMountain (now known as AssuredIM LLC). External factors, such as the impact of the war in Ukraine or the COVID-19 pandemic on global financial markets, general macroeconomic factors, and industry conditions, as well as the financial performance of AssuredIM relative to the Company’s expectations at the time of acquisition, could impact the Company’s assessment of the goodwill and other intangible assets carrying value. The Company’s goodwill impairment assessment also is sensitive to the Company’s assumptions of discount rates, market multiples, projections of AUM growth and other factors, which may vary. A change in the Company’s assessment may, in the future, result in an impairment, which could adversely affect the Company’s financial condition, results of operations and share price.
Alternative investments may not result in the benefits anticipated.
The Company and its CIVs have invested in alternative investments, and may over time increase the proportion of the Company’s assets invested in alternative investments. Alternative investments may be riskier than other investments the Company makes, and may not result in the benefits anticipated at the time of the investment. In addition, although the Company uses what it believes to be excess capital to make alternative investments, whether directly or through CIVs, measures of required capital can fluctuate and such assets may not be given much, or any, value under the various rating agency, regulatory and internal capital models to which the Company is or may be subject. Also, alternative investments may be less liquid than most of the Company’s other investments and so may be difficult to convert to cash or investments that do receive more favorable treatment under the capital models to which the Company is subject. See “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”
A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries may adversely affect its business prospects.
The financial strength and financial enhancement ratings assigned by S&P, Moody’s, KBRA and A.M. Best Company, Inc. to each of the Company’s insurance and reinsurance subsidiaries represent such rating agencies’ opinions of the insurer’s financial strength and ability to meet ongoing obligations to policyholders and cedants in accordance with the terms of the financial guaranties it has issued or the reinsurance agreements it has executed. Issuers, investors, underwriters, ceding companies and others consider the Company’s financial strength or financial enhancement ratings an important factor when deciding whether or not to utilize a financial guaranty or purchase reinsurance from one of the Company’s insurance or reinsurance subsidiaries. A downgrade by a rating agency of the financial strength or financial enhancement ratings of one or more of the Company’s insurance subsidiaries could impair the Company’s financial condition, results of operation, capital, liquidity, business prospects and/or share price. The ratings assigned by the rating agencies to the Company’s insurance subsidiaries are subject to review and may be lowered by a rating agency at any time and without notice to the Company.
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The rating agencies have changed their methodologies and criteria from time to time. Factors influencing the rating agencies are beyond management's control and not always known to the Company. In the event of an actual or perceived deterioration in creditworthiness of large risks in the Company’s insurance portfolio, or other large increases in liabilities (including those related to legal proceedings), or a change in a rating agency’s capital model or rating methodology, a rating agency may require the Company to increase the amount of capital it holds to maintain its financial strength and financial enhancement ratings under the rating agencies’ capital adequacy models, or a rating agency may identify an issue that additional capital would not address. The amount of any capital required may be substantial, and may not be available to the Company on favorable terms and conditions or at all, especially if it were known that additional capital was necessary to preserve the Company’s financial strength or financial enhancement ratings. The failure to raise any additional required capital, or successfully address another issue or issues raised by a rating agency, could result in a downgrade of the ratings of the Company’s insurance subsidiaries and thus have an adverse impact on its business, results of operations and financial condition.
The Company periodically assesses the value of each rating assigned to each of its subsidiaries, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its subsidiaries. Rating agencies may choose not to honor the Company’s request, and continue to rate a subsidiary after the Company’s request to drop the rating, as Moody’s did with respect to AGC.
The insurance subsidiaries’ financial strength and financial enhancement ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of one or more of the Company’s insurance subsidiaries were reduced below current levels, the Company expects the number of transactions that would benefit from the Company’s insurance would be reduced; consequently, a downgrade by rating agencies could harm the Company’s new insurance business production.
In addition, a downgrade may have a negative impact on the Company’s insurance subsidiaries in respect of transactions that they have insured or that they have assumed through reinsurance. For example, beneficiaries of financial guaranties issued by the Company’s insurance subsidiaries may have the right to cancel the credit protection provided by them, which would result in the loss of future premium earnings and the reversal of any fair value gains recorded by the Company. In addition, a downgrade of AG Re, AGC or AGRO could result in certain ceding companies recapturing business that they had ceded to these reinsurers.
Operational Risks
Fluctuations in foreign exchange rates may adversely affect the Company’s financial position and results of operations.
The Company’s reporting currency is the U.S. dollar. The functional currency of the Company’s insurance and reinsurance subsidiaries is the U.S. dollar. The Company’s subsidiaries maintain both assets and liabilities in currencies different from their functional currencies, which exposes the Company to changes in currency exchange rates. The investment portfolios of non-U.S. subsidiaries are primarily invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.
The principal currencies creating foreign exchange risk to the Company are the pound sterling and the euro. The Company cannot accurately predict the nature or extent of future exchange rate variability between these currencies or relative to the U.S. dollar. Foreign exchange rates are sensitive to factors beyond the Company’s control.
The Company does not engage in active management, or hedging, of its foreign exchange rate risk. Therefore, fluctuation in exchange rates between the U.S. dollar and the pound sterling or the euro could adversely impact the Company’s financial position, results of operations and cash flows. See Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk — Sensitivity to Foreign Exchange Rate Risk.
Some of the Company’s non-U.S. operations expose it to less predictable political, credit and legal risks.
The Company pursues new business opportunities in non-U.S. markets. The underwriting of obligations of an issuer in a country other than the U.S. involves the same process as that for a U.S. issuer, but additional risks must be addressed, such as the evaluation of currency exchange rates, non-U.S. business and legal issues, and the economic and political environment of the country or countries in which an issuer does business. Changes in such factors could impede the Company’s ability to insure, or increase the risk of loss from insuring, obligations in the non-U.S. countries in which it currently does business and limit its ability to pursue business opportunities in other non-U.S. countries.
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The Company is dependent on key executives and the loss of any of these executives, or its inability to retain other key personnel, could adversely affect its business.
The Company’s success substantially depends upon its ability to attract, motivate and retain qualified employees and upon the ability of its senior management and other key employees to implement its business strategy. The Company believes there are only a limited number of available qualified executives in the insurance business lines in which the Company competes, and that there is strong competition for qualified asset management executives, including portfolio managers. The Company relies substantially upon the services of Dominic J. Frederico, President and Chief Executive Officer, and other executives.
Beginning in 2021, there has been a dramatic increase in U.S. workers leaving their positions generally in what has been referred to as the “great resignation,” and the market to build, retain and replace talent has become even more highly competitive. Although the Company has designed its executive compensation with the goal of retaining and creating incentives for its executive officers and other key employees, including portfolio managers, the Company may not be successful in retaining their services. The loss of the services of any of these individuals or other key members of the Company’s management team could adversely affect the implementation of its business strategy, including the Company’s development of its asset management business.
The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in the Company’s or a vendor’s information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system, could adversely affect the Company’s business.
The Company relies upon information technology and systems, including technology and systems provided by or interfacing with those of third parties, to support a variety of its business processes and activities. In addition, the Company receives and stores confidential information, including personally identifiable information, in connection with certain loss mitigation and due diligence activities related to its structured finance insurance and asset management businesses, along with information regarding employees and directors and asset management clients, among others. Information technology security threats and events are increasing in frequency and sophistication. The Company’s data systems and those of third parties on which it relies will continue to be vulnerable to security and data privacy breaches due to, and continue to be the target of, cyberattacks, viruses, malware, ransomware, other malicious codes, hackers, unauthorized access, or other computer-related penetrations, and other external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct. Over time, the frequency and sophistication of such threats continue to increase and often become further heightened in connection with geopolitical tensions. Like other global companies, the Company has an increasing challenge of attracting and retaining highly qualified security personnel to assist in combating these security threats. A breach of these systems could, for example, result in lost business, reputational harm, the disclosure or misuse of confidential or proprietary information, incorrect reporting, legal costs and regulatory penalties, including under the EU’s General Data Protection Regulation, the California Consumer Privacy Act and similar laws and regulations.
The Company’s business operations rely on the continuous availability of its computer systems as well as those of certain third parties. In addition to disruptions caused by cyberattacks or data privacy breaches, such systems may be adversely affected by natural and man-made catastrophes. The Company’s failure to maintain business continuity in the wake of such events, particularly if there were an interruption for an extended period, could prevent the timely completion of critical processes across its operations, including, for example, claims processing, treasury and investment operations and payroll. These failures could result in additional costs, loss of business, fines and litigation.
The Company began operating remotely in accordance with its business continuity plan, and instituted mandatory work-from-home policies at all of its global offices, in March 2020. The Company has shifted to a hybrid work-from-home and work-from-office paradigm. This shift to working from home at least part of the time has made the Company more dependent on internet and communications access and capabilities and has heightened the risk of cybersecurity attacks to its operations.
The Company and its subsidiaries are subject to numerous data privacy and protection laws and regulations in a number of jurisdictions, particularly with regard to personally identifiable information. The Company’s failure to comply with these requirements, even absent a security breach, could result in penalties, reputational harm or difficulty in obtaining desired consents from regulatory authorities.
The Board oversees the risk management process and engages with Company cybersecurity and data privacy risk issues, including reinforcing related policies, standards and practices, and the expectation that employees will comply with these policies. The Audit Committee of the Board of Directors has specific responsibility for overseeing information technology
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matters, including cybersecurity and data privacy risk, and the Risk Oversight Committee of the Board addresses cybersecurity and data privacy matters as part of its enterprise risk management responsibilities.
Errors in, overreliance on or misuse of models may result in financial loss, reputational harm or adverse regulatory action.
The Company uses models for numerous purposes in its business. For example, it uses models to project future cash flows associated with pricing models, calculating insurance expected losses to be paid (recoveries), evaluating risks in its insurance and investments, valuing assets and liabilities and projecting liquidity needs. It also uses models to determine and project capital requirements under its own risk model as well as under regulatory and rating agency requirements. While the Company has a model validation function and has adopted procedures to protect its models, the models may not operate properly (including as a result of errors or damage) and may rely on assumptions that are inherently uncertain and may prove to have been incorrect.
Significant claim payments may reduce the Company’s liquidity.
Claim payments and payments made in connection with related legal proceedings reduce the Company’s invested assets and result in reduced liquidity and net investment income, even if the Company is reimbursed in full over time and does not experience ultimate loss on the claim. In the years after the financial crisis that began in 2008, many of the larger claims paid by the Company were with respect to insured U.S. RMBS securities. More recently, the Company has been paying large claims related to certain insured Puerto Rico exposures, which it has been doing since 2016. The Company had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.4 billion and $3.6 billion, respectively, as of December 31, 2022 and December 31, 2021, all of which was rated BIG under the Company’s rating methodology. For a discussion of the Company’s Puerto Rico risks, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. For a discussion of the Company’s plans to fund large claim payments associated with the anticipated resolution of these exposures, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries.
The Company plans for future claim payments. If the amount of future claim payments is significantly more than that projected by the Company, the Company’s ability to make other claim payments and its financial condition, financial strength ratings and business prospects and share price could be adversely affected.
The Company may face a sudden need to raise additional capital as a result of insurance losses, whether related to Puerto Rico or otherwise, substantially in excess of the stress scenarios for which it plans, or as a result of changes in regulatory or rating agency capital requirements applicable to its insurance companies, which additional capital may not be available or may be available only on unfavorable terms.
The Company’s capital requirements depend on many factors, primarily related to its in-force book of insurance business and rating agency capital requirements for its insurance companies. Failure to raise additional capital if and as needed may result in the Company being unable to write new insurance business and may result in the ratings of the Company and its insurance subsidiaries being downgraded by one or more rating agency. The Company’s access to external sources of financing, as well as the cost of such financing, is dependent on various factors, including the market supply of such financing, the Company’s long-term debt ratings and insurance financial strength and enhancement ratings and the perceptions of its financial strength and the financial strength of its insurance subsidiaries. The Company’s debt ratings are in turn influenced by numerous factors, such as financial leverage, balance sheet strength, capital structure and earnings trends. If the Company’s need for capital arises because of significant insurance losses substantially in excess of the stress scenarios for which it plans, the occurrence of such losses may make it more difficult for the Company to raise the necessary capital.
Future capital raises for equity or equity-linked securities could also result in dilution to the Company’s shareholders. In addition, some securities that the Company could issue, such as preferred stock or securities issued by the Company's operating subsidiaries, may have rights, preferences and privileges that are senior to those of its common shares.
Large insurance losses, whether related to Puerto Rico or otherwise, could increase substantially the Company’s insurance subsidiaries’ leverage ratios, which may prevent them from writing new insurance.
Insurance regulatory authorities impose capital requirements on the Company’s insurance subsidiaries. These capital requirements, which include leverage ratios and surplus requirements, may limit the amount of insurance that the subsidiaries may write. A material reduction in the statutory capital and surplus of an insurance subsidiary, whether resulting from underwriting or investment losses, a change in regulatory capital requirements or another event, or a disproportionate increase
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in the amount of risk in force, could increase a subsidiary’s leverage ratio. This in turn could require that subsidiary to obtain reinsurance for existing business or add to its capital base (neither of which may be available, or may be available only on terms that the Company considers unfavorable). Failure to maintain regulatory capital levels could limit that insurance subsidiary’s ability to write new business.
The Company’s holding companies’ ability to meet their obligations may be constrained.
Each of AGL, AGUS and AGMH is a holding company and, as such, has no direct operations of its own. None of the holding companies expect to have any significant operations or assets other than its ownership of the stock of its subsidiaries. The Company expects that while it is building its asset management business, dividends and other payments from the insurance companies will be the primary source of funds for AGL, AGUS and AGMH to meet ongoing cash requirements, including operating expenses, intercompany loan payments, any future debt service payments and other expenses, to pay dividends to their respective shareholders, to fund any acquisitions, and, in the case of AGL, to repurchase its common shares. The insurance subsidiaries’ ability to pay dividends and make other payments depends, among other things, upon their financial condition, results of operations, cash requirements, 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. Additionally, in recent years AGM and AGC have sought and been granted permission from their insurance regulators to make discretionary payments to their corporate parents in excess of the amounts permitted by right under the insurance laws and related regulations. There can be no assurance that such regulators will permit discretionary payments in the future. Accordingly, if the insurance subsidiaries are unable to pay sufficient dividends and other permitted payments at the times or in the amounts that are required, that would have an adverse effect on the ability of AGL, AGUS and AGMH to satisfy their ongoing cash requirements and on their ability to pay dividends to shareholders or repurchase common shares or fund other activities, including acquisitions.
The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Each of AGL, AGUS and AGMH requires liquidity, either in the form of cash or in the ability to easily sell investment assets for cash, in order to meet its payment obligations, including, without limitation, its operating expenses, interest and principal payments on debt and dividends on common shares, and to make capital investments in operating subsidiaries. Such cash is also used by AGL to repurchase its common shares. The Company’s operating subsidiaries require substantial liquidity to meet their respective payment and/or collateral posting obligations, including under financial guaranty insurance policies or reinsurance agreements. They also require liquidity to pay operating expenses, reinsurance premiums, dividends to AGUS or AGMH for debt service and dividends to AGL, as well as, where appropriate, to make capital investments in their own subsidiaries. In addition, the Company may require substantial liquidity to fund any future acquisitions. The Company cannot give any assurance that the liquidity of AGL and its subsidiaries will not be adversely affected by adverse market conditions, changes in insurance regulatory law, insurance claim payments and related litigation substantially in excess of those projected by the Company in its stress scenarios, or changes in general economic conditions.
AGL anticipates that its liquidity needs will be met by the ability of its operating subsidiaries to pay dividends or to make other payments; external financings; investment income from its invested assets; and current cash and short-term investments. The Company expects that its subsidiaries’ need for liquidity will be met by the operating cash flows of such subsidiaries; external financings; investment income from their invested assets; and proceeds derived from the sale of their investments, significant portions of which are in the form of cash or short-term investments. The value of the Company’s investments may be adversely affected by changes in interest rates, credit risk and capital market conditions that therefore may adversely affect the Company’s potential ability to sell investments quickly and the price which the Company might receive for those investments. Part of the Company’s investment strategy is to invest more of its excess capital in alternative investments, which may be particularly difficult to sell at adequate prices, or at all.
The Company’s sources of liquidity are subject to market, regulatory or other factors that may impact the Company’s liquidity position at any time. As discussed above, AGL’s insurance subsidiaries are subject to regulatory and rating agency restrictions limiting their ability to declare and to pay dividends and make other payments to AGL. As further noted above, external financing may or may not be available to AGL or its subsidiaries in the future on satisfactory terms.
Risks Related to Taxation
Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company's investment portfolio.Company’s investments.
The Tax ActTCJA included provisions that could result in a reduction of supply, such as the termination of advance refunding bonds. Any such lower volume of municipal obligations could impact the amount of such obligations that could benefit from
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insurance. The supply of municipal bonds in each of 2018 and 2019 was below that in 2017, possibly due at least in part to the impact of the Tax Act. In addition, the reduction of the U.S. corporate income tax rate to 21% could make municipal obligations less attractive to certain institutional investors such as banks and property and casualty insurance companies, resulting in lower demand for municipal obligations.
Further, future changes in U.S. federal, state or local laws that materially adversely affect the tax treatment of municipal securities or the market for those securities or other changes negatively affecting the municipal securities market, may lower volume and demand for municipal obligations and also may adversely impact the Company's investment portfolio,value and liquidity of the Company’s investments, a significant portion of which is invested in tax-exempt instruments. These adverse changes may adversely affect the value of the Company's tax-exempt portfolio, or its liquidity.
Certain of the Company'sCompany’s non-U.S. subsidiaries may be subject to U.S. tax.
The Company manages its business so that AGL and its non-U.S. subsidiaries (other than AGRO) operate in such a manner that none of them should be subject to U.S. federal tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks, and U.S. withholding tax on certain U.S. source investment income). However because there is considerable uncertainty as to the activities which constitute being engaged in a trade or business within the U.S., the Company cannot be certain that the IRS will not contend successfully that AGL or any of its non-U.S. subsidiaries (other than AGRO) is/are engaged in a trade or business in the U.S. If AGL and its non-U.S. subsidiaries (other than AGRO) were considered to be engaged, in a trade or business in the U.S.,which case each such company could be subject to U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such U.S. business. See Item 1. Business — Tax Matters — Taxation of AGL and Subsidiaries— United States.
AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035, which may have a material adverse effect onadversely affect the Company'sCompany’s future results of operations and on an investment in the Company.
The Bermuda Minister of Finance, under Bermuda'sBermuda’s Exempted Undertakings Tax Protection Act 1966, as amended, has given AGL, AG Re and AGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or AGRO, or any of AGL'sAGL’s or its subsidiaries'subsidiaries’ operations, shares,stocks, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance'sFinance’s assurance, the Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035.
U.S. Persons who hold 10% or more of AGL'sAGL’s shares directly or through non-U.S. entities may be subject to taxation under the U.S. CFC.CFC rules.
U.S. Persons who hold shares may be subject to U.S. income taxation at ordinary income rates on their proportionate share of the Company's related person insurance income.Company’s RPII.
If any Foreign Insurance Subsidiary generates RPII (broadly defined as insurance and related investment income attributable to the following conditions are true, theninsurance of a U.S. shareholder and certain related persons to such shareholder) and certain exceptions are not met, each U.S. Person who owns AGL'sowning AGL shares (directly or indirectly through non-U.S.foreign entities) on the last day of the taxable year wouldmay be required to include in its income for U.S. federal income tax purposes such person'sits pro rata share of the RPII of such Foreign Insurance Subsidiary (as defined above) for the entire taxable year, determined as if suchSubsidiary’s RPII, were distributed proportionately only to U.S. Persons at that date, regardless of whether such income is distributed:
The Company believes that each of its Foreign Insurance Subsidiaries either should not inqualify for an exception to the foreseeable future have RPII income which equals or exceeds 20% of its gross insurance income or have direct or indirect insureds, as provided for by RPII rules and the rules that directlysubject gain on sale or indirectly own 20% or moredisposition of eithershares to ordinary tax rates would not apply to the voting power or valuedisposition of AGL'sAGL shares. However, the Company cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond its control.control and rules regarding the treatment of gain on disposition of shares have not been interpreted or finalized. Recently proposed regulations could, if finalized in their current form, substantially expand the definition of RPII to include insurance income of our Foreign Insurance Subsidiaries related to affiliate reinsurance
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transactions. If these proposed regulations are finalized in their current form, it could limit our ability to execute affiliate reinsurance transactions that would otherwise be undertaken for non-tax business reasons in the future and could increase the risk that gross RPII could constitute 20% or more of the gross insurance income of one or more of our Foreign Insurance Subsidiaries in a particular taxable year, which could result in such RPII being taxable to U.S. Persons that own or are treated as owning shares of AGL. U.S. Persons owning or treated as owning shares of AGL should consult their tax advisors as to the effect of these uncertainties. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — The RPII CFC Provisions; Disposition of AGL Shares.
U.S. Persons who dispose of AGL's sharestax-exempt shareholders may be subject to U.S.the unrelated business taxable income taxation at dividend tax rates on a portion of their gain, if any.
U.S. Person disposes of shares in a non-U.S. insurance corporation in which U.S. Persons own (directly, indirectly, through non-U.S. entities or by attribution) 25% or more of the shares (even if the amount of gross RPII is less than 20% of the corporation's gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as dividend income to the extent of the holder's share of the corporation's undistributed earnings and profits that were accumulated during the period that the holder owned the shares. This provision applies whether or not such earnings and profits are attributable to RPII. In addition, such a holder willtax-exempt shareholders may be required to comply with certain reporting requirements, regardless oftreat insurance income includable under the amount of shares owned by the holder.
U.S. Persons who hold commonAGL’s shares will be subject to adverse tax consequences if AGL is considered to be a "passive foreign investment company"PFIC for U.S. federal income tax purposes.
If AGL is considered a PFIC for U.S. federal income tax purposes, a U.S. Person who owns any shares of AGL will be subject to adverse tax consequences that could materially adversely affect its investment, including subjecting the investor to both a greater tax liability than might otherwise apply and an interest charge.charge or other unfavorable rules (either a mark-to-market or current inclusion regime). The Company believes that AGL was not a PFIC
for U.S. federal income tax purposes for taxable years through 20192022 and, based on the application of certain PFIC look-through rules and the Company'sCompany’s plan of operations for the current and future years, should not be a PFIC in the future. However, as discussed above, theSee Item 1. Business — Tax Act limits the insurance income exception to a non-U.S. insurance company that is a qualifying insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance liabilitiesMatters — Taxation of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal to 10% of its assets and it satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25% threshold is due to runoff-related or rating-related circumstances) (the Reserve Test).Shareholders — United States Taxation — Passive Foreign Investment Companies.
Changes in U.S. federal income tax law could materiallymay adversely affect an investment in AGL'sAGL’s common shares.
Further, U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the U.S. is a PFIC, or whether U.S. Persons would be required to include in their gross income the "subpart“subpart F income"income” of a CFC or RPII CFC are subject to change, possibly on a retroactive basis. There currently are only recently proposed regulations regarding the application of the PFIC rules to insurance companies, and the regulations regarding RPII have been in proposed form since 1991. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when, or in what form suchany future regulations or pronouncements may be implemented or made, or whether such guidance will have a retroactive effect. See Item 1. Business — Tax Matters — United States Tax Reform.
An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
If AGL were to issue equity securities in the future, including in connection with any strategic transaction, or if previously issued securities of AGL were to be sold by the current holders, AGL may experience an "ownership change"“ownership change” within the meaning of Section 382 of the Code. In general terms, an ownership change would result from transactions increasing the aggregate ownership of certain stockholdersholders in AGL's stockAGL’s shares by more than 50 percentage points over a testing period (generally three years). If an ownership change occurred, the Company'sCompany’s ability to use certain tax attributes, including certain built-in losses, credits, deductions or tax basis and/or the Company'sCompany’s ability to continue to reflect the associated tax benefits as assets on AGL'sAGL’s balance sheet, may be limited. The Company cannot give any assurance that AGL will not undergo an ownership change at a time when these limitations could materially adversely affect the Company'sCompany’s financial condition.
A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
AGL is not incorporated in the U.K. and, accordingly, is only resident in the U.K. for U.K. tax purposes if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. AGL believes it is entitled to take advantage of the benefits of income tax treaties to which the U.K. is a party on the basis that it is has established central management and control in the U.K. In 2013, AGL has obtained confirmation that there iswas a low risk of challenge to its residency status from HMRC underon the facts as they stand today.were at that time. The Board intends to
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manage the affairs of AGL in such a way as to maintain its status as a company that is tax-residenttax resident in the U.K. for U.K. tax purposes and to qualify for the benefits of income tax treaties to which the U.K. is a party. However, the concept of central management and control is a case-law concept that is not comprehensively defined in U.K. statute. In addition, it is a question of fact. Moreover, tax treaties may be revised in a way that causes AGL to fail to qualify for benefits thereunder. Accordingly, a change in relevant U.K. tax law or in tax treaties to which the U.K. is a party, or in AGL’s central management and control as a factual matter, or other events, could adversely affect the ability of Assured Guaranty to manage its capital in the efficient manner that it contemplated in establishing U.K. tax residence.
Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
As a U.K. tax resident, AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to applicable exemptions. The rate of corporation tax is currently 19%.
•With respect to income, the dividends that AGL receives from its subsidiaries should be exempt from U.K. corporation tax under the exemption contained in section 931D of the Corporation Tax Act 2009.
•With respect to capital gains, if AGL were to dispose of shares in its direct subsidiaries or if it were deemed to have done so, it may realize a chargeable gain for U.K. tax purposes. Any tax charge would be based on AGL’s original acquisition cost. It is anticipated that any such future gain should qualify for exemption under the substantial shareholding exemption in Schedule 7AC to the Taxation of Chargeable Gains Act 1992. However, the availability of such exemption would depend on facts at the time of disposal, in particular the “trading” nature of the relevant subsidiary. There is no statutory definition of what constitutes “trading” activities for this purpose and in practice reliance is placed on the published guidance of HMRC.
A change in U.K. tax law or its interpretation by HMRC, or any failure to meet all the qualifying conditions for relevant exemptions from U.K. corporation tax, could affect Assured Guaranty’s financial results of operations or its ability to provide returns to shareholders.
An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their non-U.K. subsidiaries could adversely impact Assured Guaranty'sGuaranty’s tax liability.
Under the U.K. "controlled“controlled foreign company"company” regime, the income profits of non-U.K. resident companies may, in certain circumstances, be attributed to controlling U.K. resident shareholders for U.K. corporation tax purposes. The non-U.K. resident members of the Assured Guaranty group intend to operate and manage their levels of capital in such a manner that their profits would not be taxed on AGL under the U.K. CFC regime. In 2013, Assured Guaranty has obtained clearance from HMRC that none of the profits of the non-U.K. resident members of the Assured Guaranty group should be subject to U.K. tax as a result of attribution under the CFC regime on the facts as they currently stand.were at the time. However, a change in the way in which Assured Guaranty operates or any further change in the CFC regime, resulting in an attribution to AGL of any of the income profits of and of AGL'sAGL’s non-U.K. resident subsidiaries for U.K. corporation tax purposes, could adversely affect Assured Guaranty'sGuaranty’s financial results of operations.
An adverse adjustment under U.K. transfer pricing legislation or the imposition of diverted profits tax could adversely impact Assured Guaranty'sGuaranty’s tax liability.
If any arrangements between U.K. resident companies in the Assured Guaranty group and other members of the Assured Guaranty group (whether resident in or outside the U.K.) are found not to be on arm's length terms and as a result a U.K. tax advantage is being obtained, an adjustment will be required to compute U.K. taxable profits as if such arrangement were on arm's length terms. Any transfer pricing adjustment could adversely affect Assured Guaranty's financialGuaranty’s results of operations.
Since January 1, 2016, the U.K. has implemented a country by countrycountry-by-country reporting (CBCR) regime whereby large multi-national enterprises are required to report details of their operations and intra-group transactions in each jurisdiction. The U.K. CBCR legislation includes power to introduce regulations requiring public disclosure of U.K. CBCR reports, although this power has not yet been exercised. It is possible that Assured Guaranty'sGuaranty’s approach to transfer pricing may become subject to greater scrutiny from the tax authorities in the jurisdictions in which the group operates in consequence of the implementation of a CBCR regime in the U.K. (or other jurisdictions).
The Organization for Economic Co-operation and Development (OECD) published its final reports on Base Erosion and Profit Shifting (the BEPS Reports) in October 2015. The recommended actions include measures to address the abuse of double tax treaties, and an updating of the definition of a “permanent establishment” and the rules for attributing profit to a permanent establishment. There are also recommended actions relating to the goal of ensuring that transfer pricing outcomes are in line with value creation, noting that the current rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place. In response to this, the U.K. Government has already introduced legislation to implement changes to transfer pricing, hybrid financial instruments and the deductibility of interest and to impose country-by-country reporting obligations. The U.K. Government has also ratified the multilateral instrument, which was developed as a result of the BEPS Report, with regard to changes to the U.K. double tax treaties. Any further changes in U.K. tax law or changes in U.S. tax law in response to the BEPS Reports could adversely affect Assured Guaranty’s tax liability.
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by reason of arrangements between companies in the same multinational group and involving a low-tax jurisdiction, including co-insurance and reinsurance. It is currently unclear whether DPT would constitute a creditable tax for U.S. foreign tax credit purposes. If any member of the Assured Guaranty group is liable tofor DPT, this could adversely affect the Company'sCompany’s results of operations.
Assured Guaranty’s financial results may be affected by measures taken in response to the OECD BEPS project.
In May 2019, the OECD published a “Programme of Work” designed to address the tax challenges created by an increasingly digitalized economy. The Programme is divided into two pillars. The first pillar focuses on the allocation of group profits between jurisdictions based on a new nexus rule that looks to the jurisdiction of the customer or user (the so-called “market jurisdiction”) as a supplement to the traditional “permanent establishment” concept. The outline proposals are broadly drafted and it is not possible to determine at this time whether they will, when implemented, apply to the financial guarantee sector and, if so, whether they would have any material adverse impact on the Company's operations and results. The second pillar addresses the remaining BEPS risk of profit shifting to entities in low tax jurisdictions by introducing a global minimum tax rate. Possible measures to implement such rate include the imposition of source-based taxation (including withholding tax) on certain payments to low tax jurisdictions and an effective extension of a “controlled foreign company” regime whereby parent companies would be subject to a “top-up” tax on the profits of all their subsidiaries in low tax jurisdictions. Again,The OECD published detailed blueprints of its proposals on October 14, 2020 and public consultations were held virtually in January 2021. Following agreement on the principles of the two pillar solution by the finance ministers of the G7 nations in June 2021 and by the OECD/G20 Inclusive Framework in July 2021, final political agreement on the two pillar framework was published on October 8, 2021 to which most of the member jurisdictions of the OECD/G20 Inclusive Framework have currently agreed. The agreement provided that regulated financial services are excluded from the application of Pillar One. The agreement also provided that the proposals under Pillar Two would apply to multinational groups with revenues exceeding EUR 750 million and would consist of a globally coordinated set of rules, including an Income Inclusion Rule and Undertaxed Payment Rule, which would operate with reference to a minimum tax rate of 15% (determined on a country-by-country basis). However, the ultimate impact of the proposals remains subject to agreement on certain design elements of the two pillars within the OECD/G20 Inclusive Framework. It is intended that Pillar Two will be implemented into law by participating jurisdictions before an intended effective date in 2023; to this end, model rules for Pillar Two were released on December 20, 2021, but further work on this aspect of the outlinedProgramme of Work remains, including with respect to domestic implementation in participating jurisdictions, detailed guidance and administrative aspects of the rules. As such, the proposals, in particular in relation to Pillar Two, are broadly describedbroad in scope and remain subject to further work, and it is therefore not possible to determine their impact.impact at this time. They could adversely affect Assured Guaranty’s tax liability.
Risks Related to GAAP, Applicable Law and Litigation
Changes in the fair value of the Company'sCompany’s insured credit derivatives portfolio, its CCS, and its FG VIEs, CIVs and/or the Company’s decision to consolidate or deconsolidate one or more FG VIEs and/or CIVs during a financial reporting period, may subject net incomeits financial condition and results of operations to volatility.
The Company is required to mark-to-market certain derivatives that it insures, including CDS that are considered derivatives under GAAP.GAAP as well as its CCS. Although there is no cash flow effect from this "marking-to-market,"“marking-to-market,” net changes in the fair value of the derivativethese derivatives are reported in the Company'sCompany’s consolidated statements of operations and therefore affect its reported earnings. As a resultfinancial condition and results of such treatment, and given the principal balance of the Company's CDS portfolio, small changes in the market pricing for insurance of CDS will generally result in the Company recognizing gains or losses, with material market price increases generally resulting in material reported losses under GAAP. Accordingly, the Company's GAAP earnings will be more volatile than would be suggested by the actual performance of its business operations and insured portfolio.
operations. If a credit derivative is held to maturity and no credit loss is incurred, any unrealized gains or losses previously reported would be reversed as the transactions reachtransaction reaches maturity. The Company also expects fluctuations in the fair value of its put option under its CCS to reverse over time. For discussion of the Company’s fair value methodology for credit derivatives, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement.
The Company is required to consolidate certain variable interest entities (VIEs) with respect to which it has provided financial guaranties, certain AssuredIM Funds in which it invests, and certain AssuredIM-managed CLOs and CLO warehouses in which it invests, if it concludes that it is the primary beneficiary of that FG VIE, AssuredIM Fund, CLO or CLO warehouse, respectively. Substantially all of the assets and liabilities of the consolidated FG VIEs and CIVs are reported at fair value. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs and, if circumstances change, may consolidate a VIE that was not previously consolidated or deconsolidate a VIE that had previously been consolidated, and such consolidation or deconsolidation would impact its financial condition and results of operations in the period in which such action is taken. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
The required treatment under GAAP of the Company’s insured credit derivatives portfolio, its CCS and its VIEs causes its financial condition and results of operations as reported under GAAP to be more volatile than would be suggested by the actual performance of its business operations. Due to the complexity of fair value accounting and the application of GAAP
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requirements, future amendments or interpretations of relevant accounting standards may cause the Company to modify its accounting methodology in a manner which may have an adverse impact on its financial results.
Change in industry and other accounting practices could impairadversely affect the Company's reportedCompany’s financial condition, results of operations, business prospects and impede its ability to do business.share price.
Changes in or the issuance of new accounting standards, as well as any changes in the interpretation of current accounting guidance, may have an adverse effect oncould adversely affect the Company's reportedCompany’s financial condition, results including future revenues,of operations, business prospects and may influence the types and/or volume of business that management may choose to pursue.share price. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for a discussion of the future application of accounting standards.
Changes in or inability to comply with applicable law and regulations could adversely affect the Company's ability to do business.Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
The Company’s businesses are subject to detailed insurance, asset management and other financial services laws and government regulation in all of the jurisdictions in which it operates across the globe. In addition to the insurance, asset management and other regulations and laws specific to the industries in which it operates, regulatory agencies in jurisdictions in which the Company operates across the globe have broad administrative power ofover many aspects of the Company’s business, which may include ethical issues, money laundering, privacy, recordkeeping and marketing and sales practices. Future legislative, regulatory, judicial or other legal changes in the jurisdictions in which the Company does business may adversely affect its ability to pursue its current mixthe Company’s financial condition, results of operations, capital, liquidity, business thereby materially impacting its financial resultsprospects and share price by, among other things, limiting the types of risks it may insure, lowering applicable single or aggregate risk limits related to its insurance business, increasing required reserves or capital for its insurance subsidiaries, providing insured obligors with additional avenues for avoiding or restructuring the repayment of their insured liabilities, increasing the level of supervision or regulation to which the Company’s operations may be subject, imposing restrictions that make the Company’s products less attractive to potential buyers and investors, lowering the profitability of the Company’s business activities, requiring the Company to change certain of its business practices and exposing it to additional costs (including increased compliance costs).
Compliance with applicable laws and regulations is time consuming and personnel-intensive. If the Company fails to comply with applicable insurance or investment advisory laws and regulations it could be exposed to fines, the loss of insurance or investment advisory licenses, limitations on the right to originate new business and restrictions on its ability to pay dividends, all of which could have an adverse impact on its business results and prospects.dividends. If an insurance subsidiary’s surplus declines below minimum required levels, the insurance regulator could impose additional restrictions on the insurance subsidiary or initiate insolvency proceedings. AGM, AGC and MAC may increase surplus by various means, including obtaining capital contributions from the Company, purchasing reinsurance or entering into other loss mitigation arrangements, reducing the amount of new business written or obtaining regulatory approval to release contingency reserves. From time to time, AGM, MAC and AGC have obtained approval from their regulators to release contingency reserves based on losses or because the accumulated contingency reserve is deemed excessive in relation to the insurer's outstanding insured obligations.
Legislation, regulation or litigation arising out of the struggles of distressed obligors may materiallyadversely impact the Company’s legal rights as creditor both inas well as its investments and the instance at hand and more generally.investments it manages.
Borrower distress or default, whether or not the relevant obligation is insured by one of the Company’s insurance subsidiaries, may result in legislation, regulation or litigation that may impact the Company’s legal rights as creditor.creditor or its investments or the investments it manages. For example, the default by the Commonwealth of Puerto Rico on much of its debt and the strategy Puerto Rico has chosen to employ have resulted in both legislation (including the enactment of PROMESA) and litigation that is continuing to impact the Company’s rights as creditor, most directly in Puerto Rico but also elsewhere in the U.S. municipal market. In addition to a number of laws and decrees in Puerto Rico, the U.S. government enacted PROMESA and established the Oversight Board which are directly impacting the Company’s ability enforce the contractual and constitutional rights it understood itself to have at the time it insured the obligations. In addition, there is a great deal of litigation (both involving the Company and not involving the Company) relating to Puerto Rico’s bond defaults that may impact the Company’s rights in Puerto Rico as well as creditor rights more generally. For example, the United States Court of Appeals for the First Circuit decided that the Bankruptcy Code permits, but does not require, continued payment of special revenues by a debtor during the pendency of a bankruptcy proceeding, while most professionals involved in the municipal market understood the continued payment of special revenues by a debtor during the pendency of a bankruptcy case is mandatory. The Company cannot predict how these or future legislative developments or litigation may impact the Company and its business.
The Company is, and may be in the future, involved in litigation, both as a defendant and as a plaintiff, in the ordinary course of its insurance and asset management business and other business operations. The outcome of such litigation could
materially impact the Company’s loss reserves and results of operations and cash flows. For a discussion of material litigation, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 5,3, Outstanding Insurance Exposure; Note 6,4, Expected LossesLoss to be Paid;Paid (Recovered); and Note 20,18, Commitments and Contingencies.
AGL is subject to Bermuda regulatory requirements that affect its ability to pay dividends on common shares and to make other payments. Under the Bermuda Companies Act 1981, as amended, AGL may declare or pay a dividend only if it has reasonable grounds for believing that it is, and after the payment would be, able to pay its liabilities as they become due, and if the realizable value of its assets would not be less than its liabilities. While AGL currently intends to pay dividends on its common shares, investors who require dividend income should carefully consider these risks before investing in AGL.
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AGL is dependent on dividends from its subsidiaries, including dividends from its insurance subsidiaries, for resources to pay holders of its common shares, fund share repurchases and pursue other activities. The ordinary dividends that AGL’s insurance subsidiaries may pay without regulatory approval are subject to legal and regulatory limitations. See “– Regulatory – State Dividend Limitations”, “– International Regulation – Bermuda – Restrictions on Dividends and Distributions”, “– International Regulation – United Kingdom Insurance and Financial Services Regulation – Restrictions on Dividend Payments” and “– International Regulation – France – Restrictions on Dividend Payments”. As a result, absent relief from the relevant regulator(s), the Company’s insurance subsidiaries may be required to retain capital in the insurance companies that is substantially in excess of what the Company believes is necessary to support its insurance businesses, reducing the Company’s ability to productively use or return to shareholders such excess capital. In addition, if, pursuant to the insurance laws and related regulations, of Bermuda, Maryland and New York, AGL'sAGL’s insurance subsidiaries cannotare not permitted to pay sufficientordinary dividends or make other permitted payments to AGL at the times or in thesufficient amounts that itAGL requires to fund its activities, and if AGL’s other operating subsidiaries were unable to provide such funds, it would have an adverse effect on AGL'sAGL’s ability to pay dividends to shareholders.shareholders or fund share repurchases or pursue other activities could be adversely affected. See “--“— Operational Risks --— The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”
Applicable insurance laws may make it difficult to effect a change of control of AGL.
Before a person can acquire control of a U.S., U.K. or U.K.French insurance company, prior written approval must be obtained from the insurancerelevant regulator commissioner of the state or country where the insurer is domiciled. In addition, once a person controls a Bermuda insurance company, the Authority may object to such a person who is not, or is no longer, a fit and proper person to exercise such control. Because a person acquiring 10% or more of AGL'sAGL’s common shares would indirectly control the same percentage of the stock of its U.S. insurance subsidiaries, the insurance change of control laws of Maryland, New York, and the U.K., France and Bermuda would likely apply to such a transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and in particular unsolicited transactions, that some or all of its shareholders might consider to be desirable. While AGL'sAGL’s Bye-Laws limit the voting power of any shareholder to less than 10%, the Company cannot provide assurances that the applicable regulatory bodybodies would agree that a shareholder who owned 10% or more of its common shares did not control the applicable insurance subsidiary,subsidiaries, notwithstanding the limitation on the voting power of such shares.
Risks Related to AGL'sAGL’s Common Shares
The market price of AGL'sAGL’s common shares may be volatile, which could causeand the value of an investment in the Company tomay decline.
The market price of AGL'sAGL��s common shares has experienced, and may continue to experience, significant volatility. Numerous factors, including many over which the Company has no control, may have a significant impact on the market price of its common shares. These risks include those described or referred to in this "Risk Factors"“Risk Factors” section as well as, among other things:
(a) investor perceptions of the Company, its prospects and that of the financial guaranty and asset management industries and the markets in which the Company operates;
(b) the Company'sCompany’s operating and financial performance;
(c) the Company'sCompany’s access to financial and capital markets to raise additional capital, refinance its debt or replace existing senior secured credit and receivables-backed facilities;
obtain other financing; (d) the Company'sCompany’s ability to repay debt;
(e) the Company'sCompany’s dividend policy;
(f) the amount of share repurchases authorized by the Company;
(g) future sales of equity or equity-related securities;
(h) changes in earnings estimates or buy/sell recommendations by analysts; and
(i) general financial, economic and other market conditions.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of AGL'sAGL’s common shares, regardless of its operating performance.AGL-specific factors.
Furthermore, future sales or other issuances of AGL equity may adversely affect the market price of its common shares.
Provisions in the Code and AGL'sAGL’s Bye-Laws may reduce or increase the voting rights of its common shares.
Under the Code, AGL'sAGL’s Bye-Laws and contractual arrangements, certain shareholders have their voting rights limited to less than one vote per share, resulting in other shareholders having voting rights in excess of one vote per share. Moreover, the relevant provisions of the Code and AGL'sAGL’s Bye-Laws may have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership.
More specifically, pursuant to the relevant provisions of the Code, if, and so long as, the common shares of a shareholder are treated as "controlled shares"“controlled shares” (as determined under section 958 of the Code) of any U.S. Person and such
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controlled shares constitute 9.5% or more of the votes conferred by AGL'sAGL’s issued shares, the voting rights with respect to the controlled shares of such U.S. Person (a 9.5% U.S. Shareholder) are limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in AGL'sAGL’s Bye-Laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. For these purposes, "controlled shares"“controlled shares” include, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code).
In addition, the Board may limit a shareholder'sshareholder’s voting rights where it deems appropriate to do so toto: (1) avoid the existence of any 9.5% U.S. Shareholders,Shareholders; and (2) avoid certain material adverse tax, legal or regulatory consequences to the Company or any of the Company'sCompany’s subsidiaries or any shareholder or its affiliates. AGL'sAGL’s Bye-Laws provide that shareholders will be notified of their voting interests prior to any vote taken by them.
As a result of any such reallocation of votes, the voting rights of a holder of AGL common shares might increase above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting in such holder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934. In addition, the reallocation of votes could result in such holder becoming subject to the short swing profit recovery and filing requirements under Section 16 of the Exchange Act.
AGL also has the authority under its Bye-Laws to request information from any shareholder for the purpose of determining whether a shareholder'sshareholder’s voting rights are to be reallocated under the Bye-Laws. If a shareholder fails to respond to a request for information or submits incomplete or inaccurate information in response to a request, the Company may, in its sole discretion, eliminate such shareholder'sshareholder’s voting rights.
Provisions in AGL'sAGL’s Bye-Laws may restrict the ability to transfer common shares, and may require shareholders to sell their common shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES |
Management believes its office space is adequate for its current and anticipated needs. The Company’s properties include the following:
•TheHamilton, Bermuda:
◦approximately 8,700 square feet of office space that serves as the principal executive offices of AGL and AG Re consist of approximately 8,250 square feet of office space located in Hamilton, Bermuda; theRe. The lease for this space expires in April 20212026 and is renewable at the option of the Company.
◦103,500 square feet of office space at one location subject to athat serves as the primary offices of the U.S. Insurance Subsidiaries. The lease expiringexpires in February 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent, and the U.S. asset management subsidiaries lease office space consisting of 78,400rent;
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◦approximately 52,000 square feet of office space at another locationthat serves as the primary offices of AssuredIM. This lease expires in December 2032; and
◦78,600 square feet of office space that previously served as the primary offices of AssuredIM. The lease expires in April 2024. As of December 31, 2022, this space is subleased to other tenants for a substantial portion of its remaining lease term.
•London, U.K.:
◦approximately 7,000 square feet of office space that serves as the primary office of AGUK. The lease expires in September 2029, with an option, subject to certain conditions, to renew for five years at a fair market rent; and
◦approximately 8,000 square feet of office space that previously served as the primary office of AssuredIM LLC. The lease expiringexpires in March 2024. As of December 31, 2022, this space is subleased to another tenant for its remaining term.
•Other: The U.S. insurance subsidiaries also leaseCompany leases other office space in San Francisco. In addition, AGE UKFrancisco, California; London, England; and the European operations of the Assured Investment Management platform lease separate office space in London.Paris, France.
ITEM 3. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is adequate for its current and anticipated needs.
Not applicable.
Information About Our Executive Officers
The table below sets forth the names, ages, positions and business experience of the executive officers of AGL.
| Name | Age | Position(s) | ||||||||||||
| Dominic J. Frederico | 70 | President and Chief Executive Officer; Deputy Chairman | ||||||||||||
| Robert A. Bailenson | 56 | Chief Financial Officer | ||||||||||||
| Ling Chow | 52 | General Counsel and Secretary | ||||||||||||
| 63 | ||||||||||||||
| Chief Investment Officer and Head of Asset Management | ||||||||||||||
| Stephen Donnarumma | 60 | Chief Credit Officer | ||||||||||||
| Jorge A. Gana | 52 | Chief Risk Officer | ||||||||||||
| Holly Horn | 62 | Chief Surveillance Officer | ||||||||||||
Dominic J. Frederico has been a director of AGL since the Company'sCompany’s 2004 initial public offering and the President and Chief Executive Officer of AGL since December 2003. Mr. Frederico served as Vice Chairman of ACE Limited from 2003 until 2004 and served as President and Chief Operating Officer of ACE Limited and Chairman of ACE INA Holdings, Inc. from 1999 to 2003. Mr. Frederico was a director of ACE Limited from 2001 through May 2005. From 1995 to 1999 Mr. Frederico served in a number of executive positions with ACE Limited. Prior to joining ACE Limited, Mr. Frederico spent 13 years working for various subsidiaries of American International Group.Group, Inc.
Robert A. Bailenson has been Chief Financial Officer of AGL since June 2011. Mr. Bailenson has been with Assured Guaranty and its predecessor companies since 1990. Mr. Bailenson became Chief Accounting Officer of AGC in 2003, of AGL in May 2005, and of AGM in July 2009, and served in such capacities until 2019. He was Chief Financial Officer and Treasurer of AG Re from 1999 until 2003 and was previously the Assistant Controller of Capital Re Corp., the Company'sCompany’s predecessor.
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Ling Chow has been General Counsel and Secretary of AGL since January 1, 2018. She is responsible for legal affairs and corporate governance at the Company, including its litigation and other legal strategies relating to distressed credits, and its corporate, compliance, regulatory and disclosure efforts. She is also responsible for the Company’s human resources function. Ms. Chow began her tenure at the Company in 2002 as a transactional attorney, working on the insurance of structured finance and derivative transactions. She previously served as Deputy General Counsel and Assistant Secretary of AGL from May 2015 and as Assured Guaranty'sGuaranty’s U.S. General Counsel from June 2016. Prior to that, Ms. Chow served as Deputy General Counsel of Assured Guaranty'sGuaranty’s U.S. subsidiaries in several capacities from 2004. Before joining Assured Guaranty, in 2002, Ms. Chow was an associate at law firms in New York City, most recently Brobeck, Phleger & Harrison LLP, where she was a senior associate responsible for transactional work associated with public and private mergers and acquisitions, venture capital investments, and private and public securities offerings.
Stephen Donnarummahas been the Chief Credit Officer of AGC since 2007, and of AGM since its 2009 acquisition, and of MAC since its 2012 capitalization.acquisition. Mr. Donnarumma has been withjoined Assured Guaranty since 1993. Over the past 25 years, Mr. Donnarummain 1993 and has held a number of positions at Assured Guaranty,over the years, including Deputy Chief Credit Officer of AGL, Chief Operating Officer and Chief Underwriting Officer of AG Re, Chief Risk Officer of AGC, and Senior Managing Director, Head of Mortgage and Asset-backed Securities of AGC. Prior to joining Assured Guaranty, Mr. Donnarumma was with Financial Guaranty Insurance Company from 1989 until 1993, where his responsibilities included underwriting domestic and international financial guaranty transactions. Prior to that, he served as a Director of Credit Risk Analysis at Fannie Mae from 1987 until 1989. Mr. Donnarumma was also an analyst with Moody’s Investors Services from 1985 until 1987.
Holly L. Horn has been Chief Surveillance Officer of AGL and the Company’s US Insurance Subsidiaries since January 2022. Prior to that, Ms. Horn served as AGM’s and AGC’s Chief Surveillance Officer, Public Finance where she was responsible for ongoing surveillance, monitoring and loss mitigation of municipal risks insured by the Company across all sectors of the municipal market. She joined AGM in 2003 Mr. Feldstein spent more thanas a decade at J.P. Morgan,director in the health care underwriting group, where heshe was a Managing Directorresponsible for analyzing and recommending the insurability of health care credits. She also served as Head of Structured Credit; Head of High Yield Sales, Tradinga director in AGM’s health care surveillance group. Ms. Horn began her public finance career at Inova Health System, a nationally ranked integrated health care delivery system, and Research; and Head of Global Credit Portfolio.subsequently served as a senior manager for the national health care strategy practice at Ernst & Young.
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PART II
AGL’s common shares are listed on the NYSE under the symbol "AGO."“AGO.” On February 25, 2020,24, 2023, the approximate number of shareholders of record at the close of business on that date was 80.82.
AGL is a holding company whose principal source of incomeliquidity is dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to AGL and AGL'sAGL’s ability to pay dividends to its shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of AGL'sAGL’s Board and will be dependent upon the Company'sCompany’s profits and financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as the Board deems relevant. AGL paid quarterly cash dividends in the amount of $0.18$0.25 and $0.16$0.22 per common share in 20192022 and 2018,2021, respectively. For more information concerning AGL'sAGL’s dividends, see Item 7, Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources and Item 8, Financial Statements and Supplementary Data, Note 21, Shareholders'19, Shareholders’ Equity.
Issuer’s Purchases of Equity Securities
In 2019,2022, the Company repurchased a total of 11.2 million8,847,981 common shares for approximately $500$503 million at an average price of $44.79$56.79 per share.
From time to time, the Board authorizes the repurchase of additional common shares.shares under a program without an expiration date that it initiated on January 18, 2013. Most recently, on February 26, 2020,August 3, 2022, the Board approvedauthorized the repurchase of an additional $250 million of share repurchases, and the remaining authorization, asits common shares. As of February 27, 2020, is $408 million.28, 2023, the Company was authorized to purchase $201 million of its common shares. The Company expects future common share repurchases under the current authorization to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, other potential uses for such funds, market conditions, the Company'sCompany’s capital position, legal requirements and other factors. The repurchase authorization may be modified, extended or terminated by the Board at any time. It does not have an expiration date. See Item 8, Financial Statements and Supplementary Data, Note 21, Shareholders'19, Shareholders’ Equity for additional information about share repurchases and authorizations.
The following table reflects purchases of AGL common shares made by the Company during the fourth quarter of 2019.2022.
| 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) | 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) | ||||||||||||||||||||||||||||||
| October 1 - October 31 | 1,064,208 | $ | 45.68 | 1,062,300 | 309,345,134 | October 1 - October 31 | 648,249 | $ | 52.97 | 648,249 | $ | 268,933,146 | |||||||||||||||||||||||||||
| November 1 - November 30 | 1,078,733 | $ | 48.34 | 1,076,436 | 257,307,202 | November 1 - November 30 | 576,084 | $ | 60.11 | 571,992 | $ | 234,542,994 | |||||||||||||||||||||||||||
| December 1 - December 31 | 1,224,646 | $ | 49.66 | 1,196,781 | 197,873,422 | December 1 - December 31 | 493,770 | $ | 63.34 | 493,175 | $ | 203,303,329 | |||||||||||||||||||||||||||
| Total | 3,367,587 | $ | 47.98 | 3,335,517 | Total | 1,718,103 | $ | 58.35 | 1,713,416 | ||||||||||||||||||||||||||||||
____________________
(1) After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through February 28, 2023, the Company has repurchased a total of 141 million common shares for approximately $4.7 billion, excluding commissions, at an average price of $33.09 per share. The repurchase program has no expiration date and the Board has previously increased the authorization periodically.
(2) Excludes commissions.
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Performance Graph
Set forth below are a line graph and a table comparing the dollar change in the cumulative total shareholder return on AGL'sAGL’s common shares from December 31, 20142017 through December 31, 20192022 as compared to the cumulative total return of the Standard & Poor'sPoor’s 500 Stock Index, the cumulative total return of the Standard & Poor'sPoor’s 500 Financials Sector GICS Level 1 Index and the cumulative total return of the Russell Midcap Financial Services Index. The Company added the Russell Midcap Financial Services Index in 2018 because it believes that this index, which includes the Company, provides a useful comparison to other companies in the financial services sector, and excludes companies that are included in the Standard & Poor's 500 Financials Sector GICS Level 1 Index but are many times larger than the Company. The chart and table depict the value on December 31 of each year from 20142017 through 20192022 of a $100 investment made on December 31, 2014,2017, with all dividends reinvested:
| Assured Guaranty | S&P 500 Index | S&P 500 Financials Sector GICS Level 1 Index | Russell Midcap Financial Services Index | |||||||||||||||||||||||||||||||||||
| Assured Guaranty | S&P 500 Index | S&P 500 Financials Sector GICS Level 1 Index | Russell Midcap Financial Services Index | |||||||||||||||||||||||||||||||||||
| 12/31/2014 | $ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||||||||||||||||||||||||||
| 12/31/2015 | 103.50 | 101.37 | 98.44 | 102.35 | ||||||||||||||||||||||||||||||||||
| 12/31/2016 | 150.70 | 113.49 | 120.83 | 117.86 | ||||||||||||||||||||||||||||||||||
| 12/31/2017 | 137.08 | 138.26 | 147.58 | 137.44 | 12/31/2017 | $ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | |||||||||||||||||||||||||
| 12/31/2018 | 157.58 | 132.19 | 128.34 | 123.64 | 12/31/2018 | 114.96 | 95.61 | 86.96 | 89.96 | |||||||||||||||||||||||||||||
| 12/31/2019 | 205.06 | 173.80 | 169.52 | 165.13 | 12/31/2019 | 149.59 | 125.70 | 114.87 | 120.14 | |||||||||||||||||||||||||||||
| 12/31/2020 | 12/31/2020 | 98.82 | 148.81 | 112.85 | 126.08 | |||||||||||||||||||||||||||||||||
| 12/31/2021 | 12/31/2021 | 160.44 | 191.48 | 152.20 | 171.28 | |||||||||||||||||||||||||||||||||
| 12/31/2022 | 12/31/2022 | 202.48 | 156.77 | 136.11 | 149.87 | |||||||||||||||||||||||||||||||||
___________________
Source: Calculated from total returns published by Bloomberg.
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| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (dollars in millions, except per share amounts) | |||||||||||||||||||
| Statement of operations data: | |||||||||||||||||||
| Revenues: | |||||||||||||||||||
| Net earned premiums | $ | 476 | $ | 548 | $ | 690 | $ | 864 | $ | 766 | |||||||||
| Net investment income (1) | 378 | 395 | 417 | 408 | 423 | ||||||||||||||
| Asset management fees | 22 | — | — | — | — | ||||||||||||||
| Net realized investment gains (losses) | 22 | (32 | ) | 40 | (29 | ) | (26 | ) | |||||||||||
| Net change in fair value of credit derivatives | (6 | ) | 112 | 111 | 98 | 728 | |||||||||||||
| Fair value gains (losses) on FG VIEs | 42 | 14 | 30 | 38 | 38 | ||||||||||||||
| Foreign exchange gains (losses) on remeasurement | 24 | (37 | ) | 60 | (37 | ) | (18 | ) | |||||||||||
| Bargain purchase gain and settlement of pre-existing relationships | — | — | 58 | 259 | 214 | ||||||||||||||
| Commutation gains (losses) | 1 | (16 | ) | 328 | 8 | 28 | |||||||||||||
| Other income (loss) (1) | 4 | 17 | 5 | 66 | 51 | ||||||||||||||
| Total revenues | 963 | 1,001 | 1,739 | 1,675 | 2,204 | ||||||||||||||
| Expenses: | |||||||||||||||||||
| Loss and loss adjustment expenses | 93 | 64 | 388 | 295 | 424 | ||||||||||||||
| Interest expense | 89 | 94 | 97 | 102 | 101 | ||||||||||||||
| Amortization of deferred acquisition costs (DAC) | 18 | 16 | 19 | 18 | 20 | ||||||||||||||
| Employee compensation and benefit expenses | 178 | 152 | 143 | 133 | 126 | ||||||||||||||
| Other operating expenses | 125 | 96 | 101 | 112 | 105 | ||||||||||||||
| Total expenses | 503 | 422 | 748 | 660 | 776 | ||||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 460 | 579 | 991 | 1,015 | 1,428 | ||||||||||||||
| Equity in net earnings of investees (1) | 4 | 1 | — | 2 | 3 | ||||||||||||||
| Income (loss) before income taxes | 464 | 580 | 991 | 1,017 | 1,431 | ||||||||||||||
| Provision (benefit) for income taxes | 63 | 59 | 261 | 136 | 375 | ||||||||||||||
| Net income (loss) | 401 | 521 | 730 | 881 | 1,056 | ||||||||||||||
| Less: Redeemable noncontrolling interests | (1 | ) | — | — | — | — | |||||||||||||
| Net income (loss) attributable to Assured Guaranty Ltd. | $ | 402 | $ | 521 | $ | 730 | $ | 881 | $ | 1,056 | |||||||||
| Diluted earnings per share | $ | 4.00 | $ | 4.68 | $ | 5.96 | $ | 6.56 | $ | 7.08 | |||||||||
| Cash dividends declared per share | $ | 0.72 | $ | 0.64 | $ | 0.57 | $ | 0.52 | $ | 0.48 | |||||||||
| As of December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (dollars in millions, except per share amounts) | |||||||||||||||||||
| Balance sheet data: | |||||||||||||||||||
| Assets: | |||||||||||||||||||
| Investments and cash | $ | 10,409 | $ | 10,977 | $ | 11,539 | $ | 11,103 | $ | 11,358 | |||||||||
| Premiums receivable, net of commissions payable | 1,286 | 904 | 915 | 576 | 693 | ||||||||||||||
| Ceded unearned premium reserve | 39 | 59 | 119 | 206 | 232 | ||||||||||||||
| Salvage and subrogation recoverable | 747 | 490 | 572 | 365 | 126 | ||||||||||||||
| Variable interest entities’ assets (3) | 1,014 | 569 | 700 | 876 | 1,261 | ||||||||||||||
| Goodwill and other intangible assets | 216 | 24 | 24 | 25 | 24 | ||||||||||||||
| Total assets | 14,326 | 13,603 | 14,433 | 14,151 | 14,544 | ||||||||||||||
| Liabilities and shareholders' equity: | |||||||||||||||||||
| Unearned premium reserve | 3,736 | 3,512 | 3,475 | 3,511 | 3,996 | ||||||||||||||
| Loss and loss adjustment expense reserve | 1,050 | 1,177 | 1,444 | 1,127 | 1,067 | ||||||||||||||
| Long-term debt | 1,235 | 1,233 | 1,292 | 1,306 | 1,300 | ||||||||||||||
| Credit derivative liabilities | 191 | 209 | 271 | 402 | 446 | ||||||||||||||
| Variable interest entities’ liabilities (3) | 951 | 619 | 757 | 958 | 1,349 | ||||||||||||||
| Total liabilities | 7,674 | 7,048 | 7,594 | 7,647 | 8,481 | ||||||||||||||
| Shareholders' equity attributable to Assured Guaranty Ltd. | 6,639 | 6,555 | 6,839 | 6,504 | 6,063 | ||||||||||||||
| Shareholders' equity | 6,645 | 6,555 | 6,839 | 6,504 | 6,063 | ||||||||||||||
| Shareholders' equity attributable to Assured Guaranty Ltd. per share | 71.18 | 63.23 | 58.95 | 50.82 | 43.96 | ||||||||||||||
| Consolidated statutory financial information: | |||||||||||||||||||
| Policyholders' surplus | $ | 5,056 | $ | 5,148 | $ | 5,305 | $ | 5,126 | $ | 4,631 | |||||||||
| Contingency reserve | 1,607 | 1,663 | 1,750 | 2,008 | 2,263 | ||||||||||||||
| Claims-paying resources (2) | 11,162 | 11,815 | 12,021 | 11,954 | 12,567 | ||||||||||||||
| Financial Guaranty Exposure: | |||||||||||||||||||
| Net debt service outstanding | $ | 374,130 | $ | 371,586 | $ | 401,118 | $ | 437,535 | $ | 536,341 | |||||||||
| Net par outstanding | 236,807 | 241,802 | 264,952 | 296,318 | 358,571 | ||||||||||||||
| Asset Management Data: | |||||||||||||||||||
| Assets under management | 17,827 | — | — | — | — | ||||||||||||||
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, the following discussion and analysis of the Company’s financial condition and results of operations should be read in its entirety with the Company’s consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. The following discussion and analysis of the Company’s financial condition and results of operations contains forward looking statements that involve risks and uncertainties. See “Forward Looking Statements” for more information. The Company'sCompany’s actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the headings “Risk Factors” and “Forward Looking Statements.”
Discussion related to the results of operations for the Company’s comparison of 2021 results to 2020 results have been omitted in this Form 10-K. The Company’s comparison of 2021 results to 2020 results is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Business
The Company reports its results of BlueMountain, the Company realigned its reporting structure to be consistent with how management now views its different business lines. Management views its businessesoperations in two distinct segments: Insurance and Asset Management. The Company's Corporate division activities are presented separately. Thesegments, Insurance and Asset Management, businesses are conducted through separate legal entities, which isconsistent with the basis onmanner in which the results of operations are presented and reviewed by theCompany’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company’s Corporate division and other activities (including FG VIEs and CIVs) are presented separately.
In the Insurance segment, the Company provides credit protection products to the U.S. and internationalnon-U.S. 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 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 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.
In the Asset Management segment, Assured Investment Managementthe Company provides investment advisory services, which include the management of CLOs and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of December 31, 2019, Assured Investment Management had $17.8 billion of AUM of which $12.8 billion is from CLOs, $1.0 billion is from opportunity funds and $4.0 billion is from wind-down funds. These amounts are inclusive of $191 million that Assured Investment Management manages 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 Assured Investment Management’s investment strategies, 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."
The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by operatingcertain subsidiaries for the holding companies.
Economic Environment
With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, the FOMC decided at its meeting in March 2022 to start again raising the target range for the federal funds rate and has continued to do so since then. In addition, the FOMC stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through December 2022, the FOMC raised the target range for the federal funds rate seven
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times, from 0% to 0.25% where it started the year to 4.25% to 4.50% at 3.5%. Payroll employment growthits mid-December 2022 meeting. Although acknowledging that a disinflationary process has begun, at the conclusion of its January 31-February 1, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 4.5% to 4.75%, its eighth consecutive increase, stating that it anticipates that ongoing increases will be appropriate in 2019 totaled 2.1 million jobs, compared withorder to attain a gainstance of 2.3 million jobsmonetary policy that is sufficiently restrictive to return inflation to 2% over time.
The level and direction of interest rates and credit spreads impact the Company in 2018. Gross domestic product increased 2.3% in 2019, compared with 2.9% in 2018 accordingnumerous ways. On the one hand, higher interest rates may present a more challenging environment for distressed RMBS the Company insures to the Bureauextent it causes housing prices to decline. Data released for the November 2022 S&P CoreLogic Case-Shiller Indices show the recent trend of Economic Analysis initial estimate.
On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it can charge for those products. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in December 2019the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.00% for 2022, higher than the 1.54% average of 2021. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 90 bps in 2022. This represented an increase from an average of 70 bps in 2021 but remained well below the 121 bps average in 2020, which included a period of instability following the onset of the COVID-19 pandemic. Despite the significant increase in MMD rate for 2022, the pace of credit spread widening was $331,400, an improvementmore modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat at 8.0% of the par amount of new issuances sold for 2022 versus 8.2% in 2021. The Company believes that a widening of credit spreads in 2023, should it occur, could permit it to increase its premium rates on new business. In addition, over 2018’s lower median sales prices, which hittime, higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.
Key Business Strategies
The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM, 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: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.
Insurance
The Company seeks to grow the insurance business through new business production, acquisitions of remaining other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (legacy monoline insurers) or reinsurance of their insured portfolios, 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 markets: public finance (including infrastructure) and structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic 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.
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The low interest rate environment and tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. After the onset of the COVID-19 pandemic in early 2020, credit spreads initially widened as a result of market concerns about the impact of the COVID-19 pandemic on some municipal credits, thereby improving demand for financial guaranty insurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that, if credit spreads widen in 2023, demand for bond insurance may improve. See Part I, Item 1, Business — Insurance – Competition.
In certain segments of $302,400the 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 November 2018.both 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. The timing of new business production in the infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.
U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (dollars in billions) | |||||||||||||||||
| Par: | |||||||||||||||||
| New municipal bonds issued | $ | 359.7 | $ | 456.7 | $ | 451.8 | |||||||||||
| Total insured | $ | 28.8 | $ | 37.5 | $ | 34.2 | |||||||||||
| Insured by Assured Guaranty | $ | 17.0 | $ | 22.6 | $ | 19.7 | |||||||||||
| Number of issues: | |||||||||||||||||
| New municipal bonds issued | 7,902 | 11,819 | 11,857 | ||||||||||||||
| Total insured | 1,420 | 2,198 | 2,140 | ||||||||||||||
| Insured by Assured Guaranty | 648 | 1,076 | 982 | ||||||||||||||
| Bond insurance market penetration based on: | |||||||||||||||||
| Par | 8.0 | % | 8.2 | % | 7.6 | % | |||||||||||
| Number of issues | 18.0 | % | 18.6 | % | 18.0 | % | |||||||||||
| Single A par sold | 30.2 | % | 26.6 | % | 28.3 | % | |||||||||||
| Single A transactions sold | 59.0 | % | 56.6 | % | 54.3 | % | |||||||||||
| $25 million and under par sold | 21.9 | % | 21.3 | % | 20.9 | % | |||||||||||
| $25 million and under transactions sold | 21.4 | % | 21.7 | % | 21.0 | % | |||||||||||
____________________
(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP 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, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, 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 and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights.
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For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations.
After over five years of negotiations, 2022 has been a turning point for resolving a substantial portion of the Company’s Puerto Rico exposure in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico) as discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.
As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In the twelve-month period ended December 31, 2022, the Company has reduced its total Puerto Rico exposure, all rated BIG, by $2.2 billion (from $3.6 billion as of December 31, 2021 to $1.4 billion as of December 31, 2022). The Company believes the consummations of the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts.
In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, New Recovery Bonds and CVIs.
Under the GO/PBA Plan and in connection with its direct exposure the Company received (including amounts received in connection with the second election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
•$605 million of New GO Bonds (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and
•$258 million of CVIs (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the original notional value, net of ceded reinsurance.
Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $47 million in cash and $98 million in notional amount of CVIs.
In connection with the resolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received (including amounts received in connection with the election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$251 million in cash,
•$807 million of Toll Bonds (see Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and
•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.
The Company has sold some of the New Recovery Bonds and CVIs it received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The fair value of such securities held by the Company as of December 31, 2022, is included in the line items “fixed-maturity securities, available-for-sale, at fair value”, “fixed-maturity securities, trading, at fair value”, and “financial guaranty variable interest entities’ assets, at fair value” on the consolidated balance sheets.
The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, Puerto Rico Electric Power Authority (PREPA). For information about PREPA developments, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure and the Insured Portfolio section below.
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The Company is and has for several years been working with the servicers of some of the RMBS transactions 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.
The Company also purchases attractively priced obligations, including BIG obligations, that it has insured and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The fair value of Loss Mitigation Securities as of December 31, 2022 (excluding the value of the Company’s insurance) was $508 million, with a par of $778 million.
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 and Alternative Investments
AssuredIM is a diversified asset manager that serves as investment adviser to CLOs, opportunity and liquid strategies, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of December 31, 2022, AssuredIM is a top 25 CLO manager by AUM, as published by Creditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending strategies. Over time, the Company seeks to broaden and diversify its Asset Management business through strategic combinations.
The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will result in any transaction. Please see Part I, Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in the benefits anticipated.”
The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussion of the AUM metric, see “— Results of Operations by Segment — Asset Management Segment.”
Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated $750 million of capital to invest in AssuredIM Funds plus $550 million aggregate of investment assets of the U.S. Insurance Subsidiaries’ to be managed by AssuredIM under an IMA. The Company has used these allocations to: (i) launch new products (CLOs and opportunity funds) on the AssuredIM platform; and (ii) enhance the returns of its own investment portfolio.
Adding distributed gains from inception through December 31, 2022 to the original $750 million allocation, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through their jointly owned investment subsidiary, AGAS. As of December 31, 2022, AGAS had committed $755 million to AssuredIM Funds, including $219 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, healthcare structured capital, and asset-based finance.
Under the IMA with AssuredIM, AGM and AGC have together invested $250 million in municipal obligation strategies and $300 million to CLO strategies. All of these strategies are consistent with the investment strengths of AssuredIM and the Company’s plans to continue to grow its investment strategies.
Capital Management
The Company has developed strategies to efficiently manage capital within the Assured Guaranty group.
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From 2013 through February 28, 2023, the Company has repurchased 141 million common shares for approximately $4.7 billion, representing approximately 73% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 23, 2022 and August 3, 2022, the Board authorized the repurchase of an additional $350 million and $250 million, respectively, of its common shares. As of February 28, 2023, the Company was authorized to purchase $201 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. 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 8, Financial Statements and Supplementary Data, Note 6, Expected Loss to be Paid,19, Shareholders’ Equity, for a discussionadditional information about the Company’s repurchases of its common shares.
Summary of Share Repurchases
| Amount | Number of Shares | Average price per share | |||||||||||||||
| (in millions, except per share data) | |||||||||||||||||
| 2013-2021 | $ | 4,158 | 132.027 | $ | 31.50 | ||||||||||||
| 2022 | 503 | 8.848 | 56.79 | ||||||||||||||
| 2023 (through February 28, 2023) | 2 | 0.036 | 62.23 | ||||||||||||||
| Cumulative repurchases since the beginning of 2013 | $ | 4,663 | 140.911 | 33.09 | |||||||||||||
As of December 31, 2022, the estimated accretive effect of the assumptions usedcumulative repurchases of common shares since the beginning of 2013 was approximately: $37.11 per share in determining expected losses for U.S. RMBS.shareholders’ equity attributable to AGL, $42.91 per share in adjusted operating shareholders’ equity, and $76.76 per share in adjusted book value.
The federal funds rate ended 2019 withCompany considers the appropriate mix of debt and equity in its capital structure. On May 26, 2021, the Company issued $500 million of 3.15% Senior Notes due in 2031 for net proceeds of $494 million. On July 9, 2021, a target rangeportion of 1.5%the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt as follows: all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and 1.75%, having started$100 million of the year at 2.25%$230 million of AGMH’s 6.25% Notes due in 2102. On August 20, 2021, the Company issued $400 million of 3.6% Senior Notes due in 2051 for net proceeds of $395 million. On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and 2.50%. AtAGUS debt as follows: all $100 million of AGMH’s 5.60% Notes due in 2103; the January 28-29, 2020 Federal Open Market Committee (FOMC) meeting,remaining $130 million of AGMH 6.25% Notes due in 2102; and $170 million of the FOMC maintained$500 million of AGUS 5% Senior Notes due in 2024. Proceeds from the target rangedebt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the federal funds rate atU.S. Holding Companies’ long-term debt.
In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between 1.5%the amount paid to redeem the debt and 1.75%. After that meeting, the FOMC released the following statement in regards to its decision to maintain the fed funds rate at its current level: “The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2% objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate pathcarrying value of the target range for the federal funds rate.”
Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to an averageredeem or make additional purchases of 53 bps in 2018 and 2017. The “AAA” 30-year MMD benchmark yields reached 1.83% on August 28th, the lowest yield since the benchmark was first published in June 1981. Following the reporting period, the benchmark yield hit a subsequent new low.
Executive Summary
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions, except per share amounts) | |||||||||||
| GAAP Highlights | |||||||||||
| Net income (loss) attributable to AGL | $ | 402 | $ | 521 | $ | 730 | |||||
| Net income (loss) attributable to AGL per diluted share | 4.00 | 4.68 | 5.96 | ||||||||
| Weighted Average Diluted shares | 100.2 | 111.3 | 122.3 | ||||||||
| Adjusted operating income (loss) (1) (2) | |||||||||||
| Insurance | $ | 512 | $ | 582 | $ | 732 | |||||
| Asset Management | (10 | ) | — | — | |||||||
| Corporate | (111 | ) | (96 | ) | (83 | ) | |||||
| Other | — | (4 | ) | 12 | |||||||
| Adjusted operating income (loss) | 391 | 482 | 661 | ||||||||
| Adjusted operating income per diluted share (2) | 3.91 | 4.34 | 5.41 | ||||||||
| Insurance Segment | |||||||||||
| Gross written premiums (GWP) | $ | 677 | $ | 612 | $ | 307 | |||||
| Present value of new business production (PVP) (1) | 463 | 663 | 289 | ||||||||
| Gross par written | 24,353 | 24,624 | 18,024 | ||||||||
| Asset Management Segment | |||||||||||
| CLO net inflows | $ | 885 | $ | — | $ | — | |||||
| Wind-down funds net outflows | (1,297 | ) | — | — | |||||||
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||
| Amount | Per Share | Amount | Per Share | |||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||
| Shareholders' equity attributable to AGL | $ | 6,639 | $ | 71.18 | $ | 6,555 | $ | 63.23 | ||||||||
| Adjusted operating shareholders' equity (1) (3) | 6,246 | 66.96 | 6,342 | 61.17 | ||||||||||||
| Adjusted book value (1) (4) | 9,035 | 96.86 | 8,922 | 86.06 | ||||||||||||
| Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity | 7 | 0.07 | 3 | 0.03 | ||||||||||||
| Gain (loss) related to VIE consolidation included in adjusted book value | (4 | ) | (0.05 | ) | (15 | ) | (0.15 | ) | ||||||||
| Common shares outstanding (5) | 93.3 | 103.7 | ||||||||||||||
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Financial Performance of Assured Guaranty
Financial Results
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||
| GAAP | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 124 | $ | 389 | $ | 362 | |||||||||||
| Net income (loss) attributable to AGL per diluted share | $ | 1.92 | $ | 5.23 | $ | 4.19 | |||||||||||
| Weighted average diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Non-GAAP | |||||||||||||||||
| Adjusted operating income (loss) (1) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
| Adjusted operating income per diluted share | $ | 4.14 | $ | 6.32 | $ | 2.97 | |||||||||||
| Weighted average diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (6) | $ | 30 | $ | (12) | |||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.10) | $ | 0.41 | $ | (0.14) | |||||||||||
| Components of total adjusted operating income (loss) | |||||||||||||||||
| Insurance segment | $ | 413 | $ | 722 | $ | 429 | |||||||||||
| Asset Management segment | (6) | (19) | (50) | ||||||||||||||
| Corporate division | (134) | (263) | (111) | ||||||||||||||
| Other (2) | (6) | 30 | (12) | ||||||||||||||
| Adjusted operating income (loss) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
| Insurance Segment | |||||||||||||||||
| Gross written premiums (GWP) | $ | 360 | $ | 377 | $ | 454 | |||||||||||
| Present value of new business production (PVP) (1) | 375 | 361 | 390 | ||||||||||||||
| Gross par written | 22,047 | 26,656 | 23,265 | ||||||||||||||
| Asset Management Segment | |||||||||||||||||
| AUM: | |||||||||||||||||
| Inflows - third party | $ | 1,385 | $ | 2,971 | $ | 1,618 | |||||||||||
| Inflows - intercompany | 270 | 243 | 1,257 | ||||||||||||||
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| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Amount | Per Share | Amount | Per Share | |||||||||||||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||||||||||||
| Shareholders’ equity attributable to AGL | $ | 5,064 | $ | 85.80 | $ | 6,292 | $ | 93.19 | ||||||||||||||||||
| Adjusted operating shareholders’ equity (1) | 5,543 | 93.92 | 5,991 | 88.73 | ||||||||||||||||||||||
| Adjusted book value (1) | 8,379 | 141.98 | 8,823 | 130.67 | ||||||||||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | 17 | 0.28 | 32 | 0.47 | ||||||||||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | 11 | 0.19 | 23 | 0.34 | ||||||||||||||||||||||
| Common shares outstanding (3) | 59.0 | 67.5 | ||||||||||||||||||||||||
____________________
(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), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details.
(2) Relates to the effect of consolidating FG VIEs and CIVs.
(3) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases.
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Key Business Strategies
The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM, 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: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.
Insurance
The Company seeks to grow the insurance business through new business production, acquisitions of remaining other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (legacy monoline insurers) or reinsurance of their insured portfolios, 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 markets: public finance (including infrastructure) and structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic 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.
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The low interest rate environment and tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. After the onset of the COVID-19 pandemic in early 2020, credit spreads initially widened as a result of market concerns about the impact of the COVID-19 pandemic on some municipal credits, thereby improving demand for financial guaranty insurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that, if credit spreads widen in 2023, demand for bond insurance may improve. See Part I, Item 1, Business — Insurance – Competition.
In certain segments of the 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 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. The timing of new business production in the infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.
U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (dollars in billions) | |||||||||||||||||
| Par: | |||||||||||||||||
| New municipal bonds issued | $ | 359.7 | $ | 456.7 | $ | 451.8 | |||||||||||
| Total insured | $ | 28.8 | $ | 37.5 | $ | 34.2 | |||||||||||
| Insured by Assured Guaranty | $ | 17.0 | $ | 22.6 | $ | 19.7 | |||||||||||
| Number of issues: | |||||||||||||||||
| New municipal bonds issued | 7,902 | 11,819 | 11,857 | ||||||||||||||
| Total insured | 1,420 | 2,198 | 2,140 | ||||||||||||||
| Insured by Assured Guaranty | 648 | 1,076 | 982 | ||||||||||||||
| Bond insurance market penetration based on: | |||||||||||||||||
| Par | 8.0 | % | 8.2 | % | 7.6 | % | |||||||||||
| Number of issues | 18.0 | % | 18.6 | % | 18.0 | % | |||||||||||
| Single A par sold | 30.2 | % | 26.6 | % | 28.3 | % | |||||||||||
| Single A transactions sold | 59.0 | % | 56.6 | % | 54.3 | % | |||||||||||
| $25 million and under par sold | 21.9 | % | 21.3 | % | 20.9 | % | |||||||||||
| $25 million and under transactions sold | 21.4 | % | 21.7 | % | 21.0 | % | |||||||||||
____________________
(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP 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, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, 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 and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights.
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For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations.
After over five years of negotiations, 2022 has been a turning point for resolving a substantial portion of the Company’s Puerto Rico exposure in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico) as discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.
As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In the twelve-month period ended December 31, 2022, the Company has reduced its total Puerto Rico exposure, all rated BIG, by $2.2 billion (from $3.6 billion as of December 31, 2021 to $1.4 billion as of December 31, 2022). The Company believes the consummations of the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts.
In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, New Recovery Bonds and CVIs.
Under the GO/PBA Plan and in connection with its direct exposure the Company received (including amounts received in connection with the second election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
•$605 million of New GO Bonds (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and
•$258 million of CVIs (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the original notional value, net of ceded reinsurance.
Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $47 million in cash and $98 million in notional amount of CVIs.
In connection with the resolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received (including amounts received in connection with the election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$251 million in cash,
•$807 million of Toll Bonds (see Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and
•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.
The Company has sold some of the New Recovery Bonds and CVIs it received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The fair value of such securities held by the Company as of December 31, 2022, is included in the line items “fixed-maturity securities, available-for-sale, at fair value”, “fixed-maturity securities, trading, at fair value”, and “financial guaranty variable interest entities’ assets, at fair value” on the consolidated balance sheets.
The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, Puerto Rico Electric Power Authority (PREPA). For information about PREPA developments, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure and the Insured Portfolio section below.
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The Company is and has for several years been working with the servicers of some of the RMBS transactions 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.
The Company also purchases attractively priced obligations, including BIG obligations, that it has insured and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The fair value of Loss Mitigation Securities as of December 31, 2022 (excluding the value of the Company’s insurance) was $508 million, with a par of $778 million.
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 and Alternative Investments
AssuredIM is a diversified asset manager that serves as investment adviser to CLOs, opportunity and liquid strategies, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of December 31, 2022, AssuredIM is a top 25 CLO manager by AUM, as published by Creditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending strategies. Over time, the Company seeks to broaden and diversify its Asset Management business through strategic combinations.
The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will result in any transaction. Please see Part I, Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in the benefits anticipated.”
The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussion of the AUM metric, see “— Results of Operations
Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of Operationsthe investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated $750 million of capital to invest in AssuredIM Funds plus $550 million aggregate of investment assets of the U.S. Insurance Subsidiaries’ to be managed by AssuredIM under an IMA. The Company has used these allocations to: (i) launch new products (CLOs and opportunity funds) on the AssuredIM platform; and (ii) enhance the returns of its own investment portfolio.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Revenues: | |||||||||||
| Net earned premiums | $ | 476 | $ | 548 | $ | 690 | |||||
| Net investment income | 378 | 395 | 417 | ||||||||
| Asset management fees | 22 | — | — | ||||||||
| Net realized investment gains (losses) | 22 | (32 | ) | 40 | |||||||
| Net change in fair value of credit derivatives | (6 | ) | 112 | 111 | |||||||
| Fair value gains (losses) on FG VIEs | 42 | 14 | 30 | ||||||||
| Foreign exchange gains (losses) on remeasurement | 24 | (37 | ) | 60 | |||||||
| Bargain purchase gain and settlement of pre-existing relationships | — | — | 58 | ||||||||
| Commutation gains (losses) | 1 | (16 | ) | 328 | |||||||
| Other income (loss) | 4 | 17 | 5 | ||||||||
| Total revenues | 963 | 1,001 | 1,739 | ||||||||
| Expenses: | |||||||||||
| Loss and LAE | 93 | 64 | 388 | ||||||||
| Interest expense | 89 | 94 | 97 | ||||||||
| Amortization of DAC | 18 | 16 | 19 | ||||||||
| Employee compensation and benefit expenses | 178 | 152 | 143 | ||||||||
| Other operating expenses | 125 | 96 | 101 | ||||||||
| Total expenses | 503 | 422 | 748 | ||||||||
| Income (loss) before provision for income taxes and equity in net earnings of investees | 460 | 579 | 991 | ||||||||
| Equity in net earnings of investees | 4 | 1 | — | ||||||||
| Income (loss) before income taxes | 464 | 580 | 991 | ||||||||
| Provision (benefit) for income taxes | 63 | 59 | 261 | ||||||||
| Net income (loss) | 401 | 521 | 730 | ||||||||
| Less: Redeemable noncontrolling interests | (1 | ) | — | — | |||||||
| Net income (loss) attributable to Assured Guaranty Ltd. | $ | 402 | $ | 521 | $ | 730 | |||||
| Effective tax rate | 13.7 | % | 10.2 | % | 26.3 | % | |||||
The Company’s effective tax rate reflectsCompany has developed strategies to efficiently manage capital within the proportion of income recognized by eachAssured Guaranty group.
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From 2013 through February 28, 2023, the Company has repurchased 141 million common shares for approximately $4.7 billion, representing approximately 73% of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxedtotal shares outstanding at the U.S. marginal corporate income tax ratebeginning of 21%the repurchase program in 20192013. On February 23, 2022 and 2018, U.K. subsidiaries taxed atAugust 3, 2022, 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 or as a U.S. controlled foreign corporation. The effective tax rate was lower in 2019 due to the impact of final BEAT regulations issued in fourth quarter 2019 that allow alternative minimum tax credits to be used in the calculation.
| Amount | Number of Shares | Average price per share | |||||||||||||||
| (in millions, except per share data) | |||||||||||||||||
| 2013-2021 | $ | 4,158 | 132.027 | $ | 31.50 | ||||||||||||
| 2022 | 503 | 8.848 | 56.79 | ||||||||||||||
| 2023 (through February 28, 2023) | 2 | 0.036 | 62.23 | ||||||||||||||
| Cumulative repurchases since the beginning of 2013 | $ | 4,663 | 140.911 | 33.09 | |||||||||||||
As of December 31, 2018 Compared with Year Ended December 31, 20172022, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $37.11 per share in shareholders’ equity attributable to AGL, $42.91 per share in adjusted operating shareholders’ equity, and $76.76 per share in adjusted book value.
The Company's comparisonCompany considers the appropriate mix of 2018 resultsdebt and equity in its capital structure. On May 26, 2021, the Company issued $500 million of 3.15% Senior Notes due in 2031 for net proceeds of $494 million. On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt as follows: all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and $100 million of the $230 million of AGMH’s 6.25% Notes due in 2102. On August 20, 2021, the Company issued $400 million of 3.6% Senior Notes due in 2051 for net proceeds of $395 million. On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows: all $100 million of AGMH’s 5.60% Notes due in 2103; the remaining $130 million of AGMH 6.25% Notes due in 2102; and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt.
In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.
Since the second quarter of 2017, results is includedAGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the Company's Annual Reportfuture. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies”, and Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.
Executive Summary
The primary drivers of volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs, and CCS, as well as loss and LAE, foreign exchange gains (losses), the level of refundings of insured obligations, changes in the value of the Company’s alternative investments, the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds and amount of AUM affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on Form 10-Kreported net income or loss in a given reporting period.
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Financial Performance of Assured Guaranty
Financial Results
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||
| GAAP | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 124 | $ | 389 | $ | 362 | |||||||||||
| Net income (loss) attributable to AGL per diluted share | $ | 1.92 | $ | 5.23 | $ | 4.19 | |||||||||||
| Weighted average diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Non-GAAP | |||||||||||||||||
| Adjusted operating income (loss) (1) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
| Adjusted operating income per diluted share | $ | 4.14 | $ | 6.32 | $ | 2.97 | |||||||||||
| Weighted average diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (6) | $ | 30 | $ | (12) | |||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.10) | $ | 0.41 | $ | (0.14) | |||||||||||
| Components of total adjusted operating income (loss) | |||||||||||||||||
| Insurance segment | $ | 413 | $ | 722 | $ | 429 | |||||||||||
| Asset Management segment | (6) | (19) | (50) | ||||||||||||||
| Corporate division | (134) | (263) | (111) | ||||||||||||||
| Other (2) | (6) | 30 | (12) | ||||||||||||||
| Adjusted operating income (loss) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
| Insurance Segment | |||||||||||||||||
| Gross written premiums (GWP) | $ | 360 | $ | 377 | $ | 454 | |||||||||||
| Present value of new business production (PVP) (1) | 375 | 361 | 390 | ||||||||||||||
| Gross par written | 22,047 | 26,656 | 23,265 | ||||||||||||||
| Asset Management Segment | |||||||||||||||||
| AUM: | |||||||||||||||||
| Inflows - third party | $ | 1,385 | $ | 2,971 | $ | 1,618 | |||||||||||
| Inflows - intercompany | 270 | 243 | 1,257 | ||||||||||||||
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| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Amount | Per Share | Amount | Per Share | |||||||||||||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||||||||||||
| Shareholders’ equity attributable to AGL | $ | 5,064 | $ | 85.80 | $ | 6,292 | $ | 93.19 | ||||||||||||||||||
| Adjusted operating shareholders’ equity (1) | 5,543 | 93.92 | 5,991 | 88.73 | ||||||||||||||||||||||
| Adjusted book value (1) | 8,379 | 141.98 | 8,823 | 130.67 | ||||||||||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | 17 | 0.28 | 32 | 0.47 | ||||||||||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | 11 | 0.19 | 23 | 0.34 | ||||||||||||||||||||||
| Common shares outstanding (3) | 59.0 | 67.5 | ||||||||||||||||||||||||
____________________
(1) See “—Non-GAAP Financial Measures” for a definition of the fiscal year ended December 31, 2018, under Part II, Item 7, Management's Discussionfinancial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and Analysisfor additional details.
(2) Relates to the effect of Financial Conditionconsolidating FG VIEs and Results of Operations, Executive Summary and Results of Operations.CIVs.
(3) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases.
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The Company significantly increased its participation in the asset management business with the completion, on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain and its associated entities, for a purchase price of $157 million. The Company used BlueMountain to establish AssuredIM and diversify the Company into the asset management industry, with the goal of utilizing the Company’s core competency in credit while diversifying its revenues and expanding its marketing reach through a fee-based platform.
The Company continually evaluatesis exploring alternative accretive growth strategies for its asset management 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:
Investment Managers
The following is a description of the Company’s principal investment management subsidiaries:
•AssuredIM LLC. AssuredIM LLC is a Delaware limited liability company established in 2003 and located in New York and is an investment adviser registered with the Securities and Exchange Commission (SEC). AssuredIM LLC serves as an investment adviser to pooled investment vehicles, special purpose vehicles for CLOs, and institutional accounts that are primarily U.S. and non-U.S. limited partnerships, U.S. limited liability companies, trusts and other non-U.S. companies. AssuredIM LLC generally provides investment management and supervisory services to its advisory clients on a discretionary basis. AssuredIM LLC was formerly known as BlueMountain Capital Management, LLC.
•Assured Investment Management (London) LLP. Assured Investment Management (London) LLP (AssuredIM London) is an affiliate of AssuredIM and serves as subadviser to AssuredIM, primarily with respect to issuers based in Europe, and is compensated by AssuredIM for its insuranceservices. AssuredIM London was formerly known as Blue Mountain Capital Partners (London) LLP. AssuredIM London is registered with the Financial Conduct Authority (FCA) and is a relying adviser in this market because, for those exposures thatAssuredIM LLC’s SEC registration.
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•Assured Healthcare Partners LLC. Assured Healthcare Partners LLC (AHP) is a Delaware limited liability company formed in September 2020 as a continuation of the private healthcare strategy established at AssuredIM in 2013 to provide investment advisory services primarily focused on private investments in the healthcare sector. AHP serves as an investment adviser to certain funds, pooled investment vehicles or accounts, which are its advisory clients. AHP is a relying adviser in AssuredIM LLC’s SEC registration.
Management of a Portion of Insurance Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. Capital
The Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns, improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance:insurance subsidiaries are permitted to pay under applicable regulations. The U.S. Insurance Subsidiaries, through their jointly-owned investment subsidiary, AG Asset Strategies LLC (AGAS), are authorized to invest up to $750 million in funds managed by AssuredIM (AssuredIM Funds). Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through AGAS. As of December 31, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, and healthcare structured capital. As of December 31, 2022 and December 31, 2021, the fair value of AGAS’ interest in AssuredIM Funds was $569 million and $543 million, respectively. In addition, the U.S. Insurance Subsidiaries invested $550 million in third-party separately managed accounts under an Investment Management Agreement (IMA) with AssuredIM. As of December 31, 2022, total capital managed by AssuredIM on behalf of the Company was $1.2 billion. These investments provide the Company with an opportunity to enhance its returns on a meaningful portion of its portfolio. They also have had the effect of facilitating the growth of AssuredIM’s CLO business and the launch on the AssuredIM platform of new products or funds in the asset-based and healthcare sectors. All of the AssuredIM Funds that were established since the BlueMountain Acquisition and in which the Company directly invested are consolidated as of December 31, 2022. Consolidated AssuredIM Funds are not included in the investment portfolio on the balance sheet, but instead as assets and liabilities of consolidated investment vehicles (CIVs). CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses.
CLOs
The Company’s CLO management business was established in 2005 and is the largest business by assets under management (AUM) in the Asset Management segment. As of December 31, 2022, CLOs consisted of $15.2 billion in AUM. The Company is among the top 25 global managers of CLOs when measured by AUM, according to Creditflux Ltd., issuing CLOs in both the U.S. and Europe. The CLOs managed by the Company are backed predominantly by non-investment grade first-lien senior secured loans. The CLOs typically have fewer resources thanreinvestment periods ranging from three to five years with a stated maturity of 12 to 13 years. The Company employs an active portfolio management strategy focused on seeking relative value and maximizing absolute return of the loan portfolio.
The Company also manages a fund that invests in the equity of U.S. and European CLOs as well as the first loss equity of CLO warehouses managed by AssuredIM. (A CLO warehouse is a special purpose vehicle that invests in a diverse portfolio of loans until such time as sufficient loans have been acquired and the market conditions are opportune to securitize and issue a new CLO.) The CLO fund has the ability to, and may at times, invest in the mezzanine securities of a CLO managed by AssuredIM. The Company has committed capital to, and invests in, the CLO fund through AGAS. The Company has committed $380 million to the CLO Fund, and as of December 31, 2022, $276 million has been funded.
In addition to CLO management, the Company offers CLO investing capabilities, deploying managed capital across the entire CLO capital structure. The Company’s CLO investment management team manages funds for analyzingthe Company’s Insurance segment under an IMA in a separately managed account. This account invests in investment grade CLO tranches managed by unaffiliated managers.
Opportunity Funds
Opportunity funds invest in strategies that may have higher concentrations in less liquid investments. Typically, opportunity funds have limited redemption rights and instead offer contractual cash flow distributions based on the legal agreement of each respective opportunity fund. The Company manages opportunity funds that focus on healthcare investments, and asset-based investments.
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Healthcare Investing. AssuredIM established its private healthcare strategy in 2013. Through its healthcare opportunity funds, the Company offers to the healthcare services industry flexible capital solutions supporting mergers and acquisitions, acceleration of organic growth, consolidation, repositioning, shareholder liquidity, and restructuring opportunities. The Company focuses investments in post-acute and long-term care, behavioral and mental health, physician practice management, regional health systems, and payer and provider services (non-clinical).
The Company typically earns management fees on the total committed capital of a healthcare opportunity fund during the investment period, and on remaining invested capital during the harvest period (the period post reinvestment period where capital is returned to investors upon the disposition of investments). A portion of fees are paid without regard to performance and a portion is performance-based. The Company receives performance-based fees if and to the extent one or more contractual thresholds, such as certain rate of return or a multiple on invested capital (each a “hurdle”), is exceeded. Performance-based fees are typically not recognized until near the end of the fund life. Generally, the Company’s healthcare funds have expected fund lives of between 5 and 10 years at close.
The Company manages two healthcare opportunity funds. The Company has committed capital to this strategy through AGAS.
Asset-Based Investing. The Company’s asset-based investment management business was founded in 2008. It seeks to generate returns by investing in specialty finance companies that originate and service a broad array of consumer and commercial assets, as well as by investing in discrete pools of such assets through either privately negotiated transactions or publicly issued securitizations. The asset classes of focus include auto loans, student loans, unsecured consumer loans, equipment loans, leases and dealer floor plan loans.
The Company manages a fund that is invested in a consumer finance company focused on auto loans and also manages an asset-based fund. The Company has committed capital to this strategy through AGAS.
Legacy Opportunity Funds. The Company manages two opportunity funds that are multi-strategy funds and were established prior to the BlueMountain Acquisition. These funds are in the harvest periods and returning capital to investors. The Company does not have any capital commitments to these funds.
Liquid Strategies
The municipal bonds,investment management team currently invests in investment grade municipal securities as an income generation strategy for the Company’s Insurance segment in a separately managed account under an IMA. This strategy seeks to purchase such bonds;maximize after-tax income and total return across a broad portfolio of both taxable and tax-exempt municipal bonds. It also seeks to generate returns through a combination of investment yield and price return due to credit spread changes and duration impact.
Wind-Down Funds
The Company manages several funds that were established prior to operate more efficiently;the BlueMountain Acquisition and are currently returning capital to investors. These funds are structured as co-mingled hedge funds and single investor funds not otherwise described above. The Company does not have any capital commitments to these funds.
Asset Management Revenues
Fees in respect of investment advisory services are the largest components of revenues for the Asset Management segment. The Company is compensated for its investment advisory services generally through management fees charged to gain market accessits advisory clients that are typically based on a percentage of value of a client’s net AUM. The Company believes that AUM was impacted by a range of factors in 2022, including the condition of the global economy and financial markets, the widening of CLO spreads following Russia’s invasion of Ukraine, the runoff of legacy funds, and certain strategic limitations during the year. AUM may also be impacted by the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions.
With respect to the CLOs, the Company earns management fees on the total adjusted par outstanding of a CLO. A portion of fees are paid senior (senior investment management fees) in the structure and a portion is paid after all notes have received current interest (subordinated investment management fees). Existing CLOs have total fees of between 25 basis points (bps) and 50 bps per annum that are paid on a quarterly basis. In the typical structure, downgrades of underlying loans and defaults of underlying loans may cause the CLO to fail one or more cost-effective basis.performance tests. If such test failure occurs, subordinated
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investment management fees are not paid in that quarter and are deferred until the CLO resumes passing these tests. In addition, the subordinated notes or more commonly referred to as CLO equity (CLO Equity) of the CLO do not receive distributions when such tests are failing. Funds that would have been used to pay the CLO Equity are required to be used to buy new loans or pay down the senior notes of the CLO. Over time, the CLO may come back into compliance with these performance tests by reinvesting excess spread in new loans, improvements in the underlying loans and through active trading. If and when the CLO comes back into compliance, the deferred subordinated investment management fees are paid and the CLO Equity resumes its quarterly distributions.
When a market dislocation or negative credit cycle causes the deferral of subordinated investment management fees and suspension of CLO Equity distributions, the Company may be impacted in two ways. First, the subordinated fees are deferred and not currently paid to AssuredIM, as occurred in 2020 (all such deferred subordinated fees have since been collected). Second, the investments in the CLO Equity made by an AssuredIM Fund held by the Company through AGAS will typically see a decline in market value, reducing insurance segment adjusted operating income. The fair value of the Insurance segment’s investment in AssuredIM-managed CLO funds at December 31, 2022 was $272 million.
With respect to opportunity funds, the Company typically receives monthly or quarterly management fees. In certain opportunity funds the Company receives management fees expressed as a percentage of the committed amount and funded amount while in other opportunity, liquid strategy and wind-down funds, fees are expressed as a percentage of their net assets values.
In addition, the Company may receive performance-based fees (performance fees, incentive allocations, and carried interest are collectively referred to as performance fees) with respect to a performance period, typically expressed as a percentage of net profits. For certain opportunity funds, and wind-down funds, performance-based fees are typically allocated to each investor on an annual basis, payable at the end of each year or performance period. For these funds, performance-based fees are typically reduced by the amount of management fees paid over a specified period and/or subject to a “high-water mark” or “loss carryforward provision”. (A “high-water mark” provision typically requires that, once a performance fee is paid based on net asset value (NAV) or other measure during a period, any subsequent performance fee be measured from that value, or high-water mark; and a “loss carryforward” provision similarly ensures that losses must be recouped before the fund manager receives any incentive compensation. With respect to certain opportunity funds, the Company receives performance-based fees if and to the extent one or more contractual thresholds, such as a certain rate of return or a multiple on invested capital (each a “hurdle”), is exceeded.
Depending on the characteristics of a fund, fees may be higher or lower. The Company reserves the right to credit, reduce or waive some or all fees for certain investors, including investors affiliated with the Company. Further, to the extent that the Company’s wind-down and/or opportunity funds are invested in the Company’s managed/serviced CLOs, the Company may rebate any management fees and/or performance-based fees earned from the CLOs to the extent that such fees are attributable to the funds’ holdings of CLOs also managed or serviced by the Company.
Competition
The asset management industry is a highly competitive market. AssuredIM competes with many other firms in every aspect of the asset management business, including raising funds, seeking investments, and hiring and retaining talented professionals. Some of AssuredIM’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by AssuredIM. Some of these competitors also may have a lower cost of capital and access to funding sources that are not available to AssuredIM and/or the Company, which may create further competitive challenges with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships than those available to AssuredIM and/or the Company. On the other hand, the persistently lowCompany believes being part of a financial services company the size of the Company gives AssuredIM a number of key advantages as compared with many of its competitors, especially those that are smaller. For example, the Company is able to provide AssuredIM with access to capital to help initiate its strategies and to share its institutional experience in a number of asset classes. In addition, the Company believes that AssuredIM has built a platform that is scalable for future strategies.
Investment Portfolio
The Company’s investment portfolio primarily consists of fixed-maturity securities supporting its Insurance segment. The Corporate division primarily includes short-term investments used to support business operations and corporate initiatives.
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Investment income from the Company’s investment portfolio is one of the primary sources of cash flow supporting its operations and insurance claim payments.
The Company’s principal objectives in managing its investment portfolio are to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio; to maximize after tax book income; to manage investment risk within the context of the underlying portfolio of insurance risk; and to preserve the highest possible ratings for each Assured Guaranty subsidiaries. If the Company’s calculations with respect to its insurance subsidiaries liabilities are incorrect or other unanticipated payment obligations arise, or if the Company improperly structures its investments to meet these and other corporate liabilities, it could have unexpected losses, including losses resulting from forced liquidation of investments. The investment policies of the Company’s insurance subsidiaries are subject to insurance law requirements, and may change depending upon regulatory, economic, rating agency and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the businesses. The performance of invested assets is subject to the ability of the Company and its internal and external investment managers to select and manage appropriate investments.
On the consolidated balance sheet, approximately 98% of the reported total investments, which were $8.4 billion as of December 31, 2022 and $9.6 billion as of December 31, 2021, represent fixed-maturity securities and short-term investments consisting primarily of the following.
Assets Managed by External Investment Managers: The Company’s three external asset managers are Goldman Sachs Asset Management, L.P., Wellington Management Company, LLP, and MacKay Shields LLC, each of which has discretionary authority over the portion of the investment portfolio it manages, within the limits of the investment guidelines approved by the Company’s Board of Directors. Each manager is compensated based upon a fixed percentage of the market value of the portion of the portfolio being managed by such manager. Wellington Management Company LLP owns or manages funds that own more than 5% of the Company’s common shares. As of December 31, 2022, 67% of the investment portfolio, with a fair value of $5.6 billion, compared with 72% or $7.0 billion as of December 31, 2021, is externally managed.
Puerto Rico New Recovery Bonds and Contingent Value Instruments (CVIs): After over five years of negotiations, in 2022 a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico):
• On January 18, 2022, the Federal District Court of Puerto Rico, acting under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority (GO/PBA Plan).
• On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of the Puerto Rico Convention Center District Authority (PRCCDA).
• On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered another order under Title VI of PROMESA (PRIFA Modification) modifying certain debt of the Puerto Rico Infrastructure Financing Authority (PRIFA).
• On October 12, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the Modified Fifth Amended Title III Plan of Adjustment (HTA Plan) of the Puerto Rico Highways and Transportation Authority (PRHTA).
As a result of the consummation on March 15, 2022 of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash and CVIs, as well as new general obligation bonds (under the GO/PBA Plan) (New GO Bonds) and new bonds backed by toll revenues (under the HTA Plan) (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds). See Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. As of December 31, 2022, 7.9% of the investment portfolio, with a fair value of $661 million, represents New Recovery Bonds and CVIs obtained as part of the 2022 Puerto Rico Resolutions (excluding amounts held in the consolidated
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Puerto Rico Trusts). The Company has continued to sell New Recovery Bonds received as salvage, and had $486 million fair value of New Recover Bonds and CVIs remaining as of February 24, 2023.
Loss Mitigation Securities: As of December 31, 2022, Loss Mitigation Securities represent 6.1% of the investment portfolio or $508 million at fair value (excluding the benefit of any insurance provided by the Company). As of December 31, 2021, the Company had $581 million of such securities, at fair value, representing 6.1% of its reported investment portfolio.
Fixed-Maturity Securities Managed by AssuredIM: The Company also has a portfolio of investment grade municipal bonds and investment grade tranches of CLOs, which represents approximately 6% of the investment portfolio with a fair value $537 million, and $541 million as of December 31, 2022 and December 31, 2021, respectively, that are managed by AssuredIM under an IMA.
In addition to its fixed-maturity and short-term investments portfolio, the Company also invests in non-AssuredIM alternative investments. As of December 31, 2022 and December 31, 2021, the Company had $123 million and $169 million, respectively, in other non-AssuredIM alternative investments.
In addition to assets reported in the total investment line item on the consolidated financial statements, the Company has other invested capital that is reported on the consolidated balance sheets as part of financial guaranty variable interest rate environmententities (FG VIEs) assets or as CIVs with other investors’ ownership interest reported as noncontrolling interests. See Part II, Item 8, Financial Statements and relatively tightSupplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
AssuredIM Funds and CLOs: The Company considers leveraging the knowledge and experience of AssuredIM to manage its assets to be a value-added opportunity, and has authorized up to $750 million of Insurance segment assets to be invested in AssuredIM Funds. The portion of the Insurance segment’s assets that is invested in AssuredIM Funds is excluded from the amounts reported in investments if, under accounting principles generally accepted in the U.S. municipal(GAAP), the entity is consolidated. In instances where consolidation of these entities is required, the assets and liabilities of consolidated AssuredIM Funds and CLOs are reported in the line items captioned “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles,” resulting in a gross-up of the Company’s consolidated assets and liabilities.
As of December 31, 2022 and December 31, 2021, all AssuredIM Funds in which the Insurance segment invests were consolidated, and the U.S. Insurance Subsidiaries had investments in AssuredIM Funds with a fair value of $569 million and $543 million on those dates, respectively. These are reported as a component of CIVs in the Company's consolidated financial statements. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Investment Portfolio — Other Investments.
Puerto Rico Trust Assets: In addition to New Recovery Bonds and CVIs described above, for bondholders that elected to receive custody receipts that represent an interest in the legacy insurance policy plus any cash, New Recovery Bonds and CVIs under the 2022 Puerto Rico Resolutions, such assets reside in consolidated trusts. As of December 31, 2022, the Company reported $212 million in Puerto Rico Trusts’ assets in FG VIEs assets on the consolidated balance sheets. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts.
Risk Management
Organizational Structure
The Company’s Board of Directors (the Board or AGL’s Board) oversees the risk management process. The Board employs an enterprise-wide approach to risk management that supports the Company’s business plans within a reasonable level of risk. Risk assessment and risk management are not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for that company. The Board annually approves the Company’s business plan, factoring risk management into account. It also approves the Company’s risk appetite statement, which articulates the Company’s tolerance for risk and describes the general types of risk that the Company accepts or attempts to avoid. The involvement of the Board in setting the Company’s business strategy is a key part of its assessment of management’s risk tolerance and a determinant of what constitutes an appropriate level of risk for the Company.
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While the Board has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk assessment and risk management. The Risk Oversight Committee of the Board oversees the standards, controls, limits, underwriting guidelines and policies that the Company establishes and implements in respect of credit spreadsunderwriting and risk management. It focuses on management's assessment and management of credit risks as well as other risks, including, but not limited to, market, financial, legal, and operational risks (including cybersecurity and data privacy risks), and risks relating to the Company's reputation and ethical standards. In addition, the Audit Committee of the Board is responsible for, among other matters, reviewing policies and processes related to risk assessment and risk management, including the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures. It also oversees cybersecurity and data privacy and reviews compliance with related legal and regulatory requirements. The Compensation Committee of the Board reviews compensation-related risks to the Company. The Finance Committee of the Board oversees the investment of the Company’s investment portfolio (including alternative investments) and the Company’s capital structure, liquidity, financing arrangements, rating agency matters, and any corporate development activities in support of the Company’s financial plan. The Nominating and Governance Committee of the Board oversees risk at the Company by developing appropriate corporate governance guidelines and identifying qualified individuals to become board members. The Environmental and Social Responsibility Committee oversees the Company’s risk and opportunities related to environmental issues, such as climate change, as well as aspects of human capital management, including diversity and inclusion.
The board of directors of each of the Company’s insurance subsidiaries has overall responsibility for the system of governance, oversight of the business and affairs and establishment of the key strategic direction and key financial objectives, including risk management, of its respective company. The AGUK Board and the AGE Board have dampened demandeach delegated, pursuant to written terms of reference, responsibility for bondrisk matters to their respective Risk Oversight Committees. The AGUK Board and the AGE Board have delegated the day-to-day management of their companies to their Chief Executive Officer and Managing Director respectively, who is in each case supported by a number of management committees.
The Company has established several management committees to develop enterprise level risk management guidelines, policies and procedures for the Company’s insurance, reinsurance and provisionsasset management subsidiaries that are tailored to their respective businesses, providing multiple levels of review, analysis and control.
The Company’s management committees responsible for risk management in legislation knownits Insurance segment include:
•Portfolio Risk Management Committee—The Portfolio Risk Management Committee is responsible for enterprise risk management for the Company’s Insurance segment and focuses on measuring and managing credit, market and liquidity risk for the Company’s Insurance segment. This committee establishes company-wide credit policy for the Company’s direct and assumed insured business. It implements specific underwriting procedures and limits for the Company and allocates underwriting capacity among the Company’s subsidiaries. All transactions in new asset classes or new jurisdictions, or otherwise outside the Company’s Board-approved risk appetite statement, must be approved by this committee.
•Risk Management Committees—The U.S., AG Re and AGRO risk management committees and the European Insurance Subsidiaries Surveillance Committees conduct an in-depth review of the insured portfolios of the relevant subsidiaries, focusing on varying portions of the portfolio at each meeting. They review and may revise internal ratings assigned to the insured transactions and review sector reports, monthly product line surveillance reports and compliance reports. The European Insurance Subsidiaries Executive Risk Committees are responsible for assisting the risk oversight committees of their respective board of directors in the management of risk and oversight of their respective company’s risk management framework and processes. This includes monitoring their respective company’s compliance with risk strategy, risk appetite, risk limits, as well as overseeing and challenging their respective company’s risk management and compliance functions. In carrying out its responsibilities, each of the risk management committees considers numerous factors that could impact their insured portfolios, including macroeconomic factors, long term trends and climate change.
•U.S. Workout Committee—This committee receives reports from surveillance and workout personnel on insurance transactions at AGM and/or AGC that might benefit from active loss mitigation or risk reduction and approves loss mitigation or risk reduction strategies for such transactions.
•Reserve Committees—Oversight of reserving risk is vested in the U.S. Reserve Committee, the European Insurance Subsidiaries Executive Risk Committees, the AG Re Reserve Committee and the AGRO Reserve Committee. The committees review the reserve methodology and assumptions for each major asset class or significant below-investment-grade (BIG) transaction, as well as the Tax Act,loss projection scenarios used and the
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probability weights assigned to those scenarios. The reserve committees establish reserves for the relevant subsidiaries, taking into consideration supporting information provided by surveillance personnel, and are responsible for changes to assumptions that that have a significant impact on expected losses.
The Company’s committees responsible for risk management in its Asset Management segment include:
•AssuredIM Investment Committees—These committees focus on application of investment evaluation criteria for the Asset Management segment’s investing activity within each investment strategy. Each Asset Management segment investment committee consists of the Chief Investment Officer and two or more senior investment professionals with deep expertise in the markets relevant to each investment.
•AssuredIM Risk Committee—This committee focuses on avoiding inappropriate risk of loss, legal or reputational damage to AssuredIM’s investors arising from the Asset Management segment’s investment and business processes. Moreover, the committee reviews risk matters that need to be addressed by the broader group rather than the regular oversight and escalation designees, which would include, but is not limited to, fund limit breaches, investment mandate compliance, allocations, trade execution, counterparty agreements, legal and regulatory compliance and business continuity. Within such responsibilities, the committee reviews principal transactions and cross transactions among clients within the Asset Management segment. Compliance and other operational sub-committees report to this committee on the full range of compliance and other operational risk matters applicable to the Asset Management segment including policies, risks and controls, audits, personal trading activity, compliance testing results, operational diligence and regulatory filings.
•AssuredIM and AssuredIM Healthcare Partners Valuation Committees—These committees focus on oversight of the Asset Management segment’s valuation policies and procedures. The respective committees meet to review the period-end valuations prior to the release of net asset valuations to fund investors (either monthly or quarterly depending on the investor reporting cycle). The period-end package includes details of estimated versus final NAV differences, securitized products price verification, valuation model reviews, price back testing, derivative valuation verification, administrator valuation reconciliation and latent price analysis. In addition, these committees convene to review and decide on material changes to fund valuation methodology, material valuation changes on an Accounting Standards Codification (ASC) 820 Level 3 asset, pricing or valuation exceptions, valuation approach to new products, new model approval, guidelines and policies for classification of assets and changes to policies and procedures.
Enterprise Risk Management
The business units and functional areas are responsible for identifying, assessing, monitoring, reporting and managing their own risks. The Chief Risk Officer and other risk management personnel are separate from the business units and are responsible for developing the risk management framework, ensuring applicable risk management policies and procedures are followed consistently across business units, and for providing objective oversight and aggregated risk analysis.
The internal audit function (Internal Audit) provides independent assurance around effective risk management design and control execution. On a quarterly basis, or more frequently when required, Internal Audit reports its findings directly to the Audit Committee of the Board of Directors and informs the Chief Executive Officer of any material issues.
The Company has established an enterprise level risk appetite statement, approved by the Board, and risk limits, that govern the Company’s risk-taking activities, with similar documents governing the activities of each operating subsidiary. Risk management personnel monitor a variety of key risk indicators on an ongoing basis and work with the business units to take the appropriate steps to manage the Company’s established risk appetites and tolerances. Risk management also uses an internally developed economic capital model to project potential credit losses in the insured portfolio as well as potential ultimate losses on investments, and analyze the related capital implications for the Company, and performs stress and scenario testing to both validate model results and assess the potential financial impact of emerging risks and major strategic initiatives such as acquisitions or releases of capital.
Quarterly risk reporting keeps management and the terminationBoard and its Risk Oversight Committee, senior management, the business units and functional areas informed about material risk-related developments. At least once each year, risk management personnel prepare an Own Risk and Solvency Assessment for the Company as a whole and each of the tax-exemptoperating companies (Commercial Insurer Solvency Self-Assessment for AG Re and AGRO) which reports the results of capital modeling, the status of advance refunding bondskey risk indicators and any emerging risks. In addition, the Company performs in-depth reviews annually of risk topics of interest to management and the reductionBoard. To the extent potentially significant business activities or
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operational initiatives are considered, the Chief Risk Officer analyzes the possible impact on the Company’s risk profile and capital adequacy.
Surveillance of Insured Transactions
The Company’s surveillance personnel are responsible for monitoring and reporting on the performance of each risk in corporate tax rates,its insured portfolio, including exposures in both the financial guaranty direct and assumed businesses, and tracking aggregation of risk. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, change or affirm ratings during reviews, and recommend remedial actions to management. The Company assigns internal credit ratings at closing to all transactions in the insured portfolio, and surveillance personnel recommend rating affirmations or adjustments to those ratings via the Risk Management Committees to reflect changes in transaction credit quality. The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual review cycles based on the Company’s view of the exposure’s 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.
The review cycle and scope vary based upon transaction type and credit quality. In general, the review process includes the collection and analysis of information from various sources, including trustee and servicer reports, performance reports from Intex (a commercially available structured finance reporting system), financial statements, general industry or sector news and analyses, and rating agency reports. For public finance risks, the surveillance process includes monitoring general economic trends, developments with respect to state and municipal finances, regulatory changes, environmental trends, and the financial situation of the issuers. For structured finance transactions, the surveillance process can include monitoring transaction performance data and cash flows, compliance with transaction terms and conditions, and evaluation of servicer or collateral manager performance and their financial condition. Additionally, the Company uses various quantitative tools, scorecards and models to assess transaction performance and identify situations where there may have resultedbeen a change in credit quality. Surveillance activities may include discussions with or site visits to issuers, servicers, collateral managers or other parties to a transaction. Surveillance may adopt augmented procedures in response to various events, as it has done in response to the COVID-19 pandemic, major hurricanes or floods, and the transition away from the London Interbank Offered Rate (LIBOR) as a reference rate.
For transactions that the Company has assumed, the ceding insurers are responsible for conducting ongoing surveillance of the exposures that have been ceded to the Company, except that the Company provides surveillance for exposures assumed from SGI in a reductionmanner consistent with its own direct portfolio. The Company’s surveillance personnel monitor the ceding insurer’s surveillance activities on exposures ceded to the Company through a variety of supplymeans, including reviews of surveillance reports provided by the ceding insurers, and made municipal obligations less attractivemeetings and discussions with their analysts. For public finance risks, the Company’s surveillance personnel independently review assumed exposure utilizing the same procedures as applied to the Company’s direct exposures. The Company’s surveillance personnel also monitor transaction performance (for structured finance and infrastructure transactions), general news and information, industry trends and rating agency reports to help focus surveillance activities on sectors or exposures of particular concern. For certain institutional investors.
Workouts
The Company’s workout and structured finance marketssurveillance personnel are responsible for managing workout, loss mitigation and risk reduction situations. They work to develop and implement strategies on transactions that are experiencing loss or could possibly experience loss. They, along with the Workout Committee, develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies and mitigate potential losses. The Company’s workout and surveillance personnel also engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the Company’s litigation proceedings. They may also make open market or negotiated purchases of securities that the Company has insured, or negotiate or otherwise implement consensual terminations of insurance coverage prior to contractual maturity. The Company’s surveillance personnel work with servicers of RMBS transactions to enhance their performance.
Asset Management
The Company’s Asset Management segment risk personnel are responsible for quantifying, analyzing and reporting the risks of each asset management fund and ensuring adherence to agreed investor mandates, independent from Asset Management segment investment personnel. The Asset Management segment applies investment and risk management
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processes across all managed funds and investments. Investment professionals are responsible for sourcing, evaluating, structuring, executing, managing, and exiting existing investments. After the evaluation and diligence processes, and as appropriate thereafter, investment team members submit recommended actions to the relevant Asset Management segment investment committee in accordance with each strategy’s required investment procedures. The relevant Asset Management segment investment committee carefully considers the alignment of each investment with the unique objectives and constraints of the vehicle(s) to which it is allocated. Asset Management segment risk professionals further independently monitor and ensure alignment of risk taking with the objectives and constraints of each investment mandate at inception and thereafter, using both proprietary and third-party quantitative data, analytic tools, and reports.
Cybersecurity
The Company relies upon information technology and systems, including technology and systems provided by or interfacing with those third parties, to conduct its businesses and interact with market participants and vendors. With this reliance on technology comes the associated security risks from using today’s communication technology and networks. To defend the Company’s computer systems from cyberattacks, the Company uses tools such as firewalls, anti-malware software, multifactor authentication, e-mail security services, virtual private networks, and timely applied software patches, among others. In addition, the Company evaluates the adequacy of the cybersecurity controls of applicable third-party service providers, including through a rigorous vendor selection and management process. The Company has also engaged third-party consultants to conduct penetration tests to identify any potential security vulnerabilities. The Company trains personnel on how to identify potential cybersecurity risks and protect Company information and resources. This training is mandatory for all employees globally upon hire and on an annual basis. Although the Company believes its defenses against cyber intrusions are sufficient, it continually monitors its computer networks for new types of threats.
Data Protection
The Company is subject to local, state, and national laws and regulations in the U.S., U.K., the European Union (EU), the other EEA countries that comply with data protection laws in the EU, and other non-U.S. jurisdictions that require financial institutions and other businesses to protect personal and other sensitive information and provide notice of their privacy and security practices relating to the collection, disclosure and other processing of personal information. The Company is also subject to local, state, and national laws and regulations in the U.S., U.K., EEA, and other non-U.S. jurisdictions that require notification to affected individuals and regulators regarding data security breaches. To address these requirements, the Company has established and implemented policies and procedures that are intended to protect the privacy and security of personal information that comes into the Company’s possession or control, and to comply with applicable laws and regulations. Company policies and procedures include, but are not limited to, specific technical, administrative, and physical safeguards for personal information, periodic risk assessments on privacy and security measures, monitoring and testing, an incident response plan that requires Company personnel to promptly report suspected and actual data breach incidents to designated management representatives, an enterprise-wide data governance program, and regularly maintained records that demonstrate the Company’s accountability for compliance with the core privacy principles, relating to the processing of personal information and applicable data protection laws. The Company has imposed similar requirements, as applicable, on third parties with whom it shares personal information including through a rigorous vendor selection and management process. The Company engages its personnel and enhances data privacy and security awareness through training, which is mandatory for all employees globally on an annual basis.
Climate Change Risk
The Company has long considered environmental impacts as part of its underwriting process, in particular with regard to U.S. public finance transactions. Global awareness of climate change has drawn greater attention to the potential financial implications and long-term consequences of increasing frequency or severity of natural disaster events (e.g., storms and wildfires). As a financial guarantor of municipal and structured finance transactions, the Company does not take direct insurance exposure to climate change but does face the risk that its obligors’ ability to pay debt service will be impaired by the impact of climate related perils.
The Company continues to enhance its approach to the consideration of climate risk in the origination, underwriting, credit approval, and surveillance of its insured exposures and has integrated climate risk into its risk management and control functions. Credit underwriting submissions are required to include an assessment of environmental and/or transitional risk factors as part of the underwriting analysis. Specifically, the vulnerability of obligors is evaluated with respect to climatic changes (e.g., sea level rise, droughts), extreme weather events (e.g., hurricanes, tornadoes, floods) or geological events (e.g., earthquakes, volcanoes) as well as resilience factors (e.g., mitigation capabilities, adaptation capacity) to determine if such environmental issues could materially impact an obligor’s expected performance.
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The Company’s assessment of how climate change-driven risks may impact a prospective obligor’s ability to pay debt service is informed by its extensive experience in municipal finance coupled with proprietary analytics and third-party data and insights. To improve the Company’s understanding of climate change and to develop the analytical tools needed to measure and manage the related financial risks, the Company has been investing in both talent and technology. The Company’s risk management resources include climate science expertise. In addition, a dedicated internal team is currently working with a geospatial data analytics company specializing in climate change/risk analysis and its effect on cities, counties, and states, to develop analytical capabilities to evaluate climate risk and assess potential negative impacts that climate change could have on the proposed obligor’s ability to pay debt service.
The Company is also exposed indirectly to climate change trends and events that might impair the performance of securities in its investment portfolio. The portfolio consists predominantly of fixed-income assets. Nevertheless, environmental issues, including regulatory changes, changes in supply or demand characteristics of fuels, and extreme weather events, may impact the value of certain securities. In 2016, the Company determined not to make any new investments in thermal coal enterprises. In fourth quarter of 2019, the Company revised its investment guidelines to incorporate material environmental factors into its investment analysis to enhance the quality of investment decisions. On an annual basis, the Company instructs its primary external portfolio managers to conduct an environmental, social and governance (ESG) analysis of their respective portion of the Company’s investment portfolio, for which ESG data is readily available. The Company conducts the ESG review to analyze if there are any material ESG risks in the portfolio that may adversely impact return expectations or are otherwise not in keeping with the Company’s risk appetite statement.
Regulatory Reporting. As the global community moves to address and mitigate the effects of climate change, regulators across jurisdictions have taken steps to require climate change risk management and related reporting. Several of the Company’s subsidiaries are, or are anticipated to be, subject to regulatory reporting with respect to managing and disclosing the impact of climate change and the related financial risks. In November 2021, the NYDFS, which is the regulator for AGM, issued its “Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change” In the U.K., the PRA, which regulates AGUK, has established certain requirements in relation to understanding the financial impact of climate change, as part of its ongoing supervisory approach. In August 2022, the Bermuda Monetary Authority issued, for consultation, its “Guidance Note on the Management of Climate Change Risks for Commercial Insurers”, detailing its expectations regarding the management of climate risk by commercial insurers. The Company continues to monitor regulatory developments and meet requirements applicable to its subsidiaries. To date, the costs associated with complying with regulatory reporting obligations have not had a material impact on the Company’s business, financial condition, and results of operations.
Managing Greenhouse Gas Emissions. As a financial services firm with approximately 400 employees, the direct impact of Assured Guaranty’s operations on the environment is relatively small. The Company contributes to the global effort to combat climate change by monitoring its greenhouse gas emissions (GHG). In 2019, the Company instituted a program to measure, manage and report its GHG emissions on an enterprise-wide basis and set targets for reducing such emissions. Pursuant to the Greenhouse Gas Protocol, the Company collects and analyzes internal data annually for its Scope 1, Scope 2 and certain key Scope 3 GHG emissions (business travel and data hosting). In 2021, the most recent year for which data is available, the Company’s total GHG emissions (using location-based Scope 2) equaled approximately 2,220 total tonnes of carbon dioxide. The Company’s methodology and results are reviewed by an independent third party, which conducts a reasonable assurance review for Scope 1 and Scope 2 emissions and a limited assurance review for Scope 3 emissions, in accordance with ISO 14064-3 International Standards.
The Company believes that the physical effects of climate change on the Company’s business operations are not likely to be material and the Company does not anticipate capital expenditures for climate related projects.
Governance. The Environmental and Social Responsibility Committee and the Risk Oversight Committee of AGL’s Board of Directors, each consisting solely of independent directors, provide oversight of the Company's approach to addressing climate change risk in accordance with their respective charters. The Environmental and Social Responsibility Committee reviews updates on the consideration of environmental risks in the Company’s insurance risk management and its investment portfolio, as well as legislative and regulatory developments of significance to the Company’s environmental initiatives and related oversight. The Risk Oversight Committee reviews the establishment and implementation of enterprise risk management policies and practices.
At the operating company level, the AGM and AGC boards of directors review environmental risk reports at each of their quarterly meetings. The Chief Risk Officer is designated as the AGM and AGC board member and member of senior management responsible for overseeing the management of climate risks. The Company has also formed an environmental risk working group composed of senior members of the Company’s credit, underwriting, surveillance, and risk management departments, to review the impact of environmental risk on the Company, including the development of objective risk
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measures, metrics and methodologies needed to evaluate the financial impact of climate change on obligors in its insured portfolio on both aggregate and individual risk levels.
Regulation
Overview
The Company’s operations are regulated by many different regulatory authorities, including insurance, securities, derivatives and investment advisory. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision since the financial crisis that began in 2008.
The Company and its subsidiaries are subject to insurance-related and asset management-related statutes, regulations and supervision by the U.S. states and territories and the non-U.S. jurisdictions in which they do business. The degree and type of regulation varies from one jurisdiction to another. We expect that the U.S. and non-U.S. regulations applicable to the Company and its regulated entities will continue to evolve for the foreseeable future.
United States Regulation
Insurance and Financial Services Regulation
AGL has two operating insurance subsidiaries domiciled in the U.S., which the Company refers to collectively as the U.S. Insurance Subsidiaries.
•AGM is a New York domiciled insurance company licensed to write financial guaranty productinsurance and reinsurance in 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.
•AGC is competitivea Maryland domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia and Puerto Rico.
Insurance Holding Company Regulation
The U.S. Insurance Subsidiaries are subject to the insurance holding company laws of their respective jurisdictions of domicile, as well as other jurisdictions where these insurers are licensed to do insurance business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and annually to furnish financial and other information about the operations of companies within its holding company system. Generally, all transactions among companies in the holding company system to which any of the U.S. Insurance Subsidiaries is a party (including sales, loans, reinsurance agreements and service agreements) must be fair, reasonable and equitable, and, if material or of a specified category, such as reinsurance or service agreements, require prior notice to and approval or non-disapproval by the insurance department where the applicable subsidiary is domiciled.
Change of Control
Before a person can acquire control of a U.S.-domiciled insurance company, prior written approval must be obtained from the insurance commissioner of the state where the insurer is domiciled or deemed commercially domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of such insurer. Because a person acquiring 10% or more of AGL’s common shares would indirectly control the same percentage of the stock of our U.S. Insurance Subsidiaries, the insurance change of control laws of Maryland and New York would likely apply to such acquisition. Accordingly, a person acquiring 10% or more of AGL’s common shares must either file disclaimers of control of our U.S. Insurance Subsidiaries with the insurance commissioners of the States of Maryland and New York or apply to acquire control of such subsidiaries with such insurance commissioners. However, this presumption does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a control determination. Significantly, an acquirer of less than 10% of an insurer’s voting securities may still be deemed to control the insurer based on all the facts and circumstances, including the terms and conditions of the proposed transaction. Moreover, a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer. Prior to approving an application to acquire control of a domestic insurer, each state insurance commissioner will consider factors such as the financial strength of the applicant, the integrity and management of the applicant’s board of directors and executive officers, the applicant's plans for the management of the board of directors and executive officers of the insurer, the applicant’s plans for the future operations of the insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. These laws may
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discourage potential acquisition proposals and may delay, deter or prevent a change of control involving AGL that some or all of AGL’s shareholders might consider to be desirable, including, in particular, unsolicited transactions.
Other State Insurance Regulations
State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including licensing these companies to transact business, “accrediting” reinsurers, determining whether assets are “admitted” and counted in statutory surplus, prohibiting unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends and, in certain instances, approving policy forms and related materials and approving premium rates. State insurance laws and regulations require the U.S. Insurance Subsidiaries to file financial statements with insurance departments in every U.S. state or jurisdiction where they are licensed, authorized or accredited to conduct insurance business, and their operations are subject to examination by those departments at any time. The U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with Statutory Accounting Principles, or SAP, and procedures prescribed or permitted by these departments. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years.
The NYDFS, the regulatory authority of the domiciliary jurisdiction of AGM, and the Maryland Insurance Administration (the MIA), the regulatory authority of the domiciliary jurisdiction of AGC, each conducts a periodic examination of insurance companies domiciled in New York and Maryland, respectively, usually at five-year intervals. In 2018, NYDFS last completed an examination of AGM, and the MIA last completed an examination of AGC. The examinations for AGM and AGC were for the five-year period ending December 31, 2016. The examination reports from the NYDFS and the MIA did not note any significant regulatory issues.
The NYDFS and the MIA formally commenced their current ongoing joint examination of AGM and AGC in the second quarter of 2022 for the five-year period ending December 31, 2021.
State Dividend Limitations
New York. One of the primary sources of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGM. Under the New York Insurance Law, AGM may only pay dividends out of “earned surplus,” which is the portion of an insurer’s surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to the insurer’s shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the NYDFS in an amount that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the NYDFS) or 100% of its adjusted net investment income during that period. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
Maryland. Another primary source of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGC. Under Maryland’s insurance law, AGC may, with prior notice to the MIA, pay an ordinary dividend in an amount that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders’ surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. A dividend or distribution to a shareholder of AGC in excess of this limitation would constitute an “extraordinary dividend,” which must be paid out of AGC’s “earned surplus” and reported to, and approved by, the MIA prior to payment. "Earned surplus" is that portion of AGC's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to its shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized capital gains and appreciation of assets. AGC may not pay any dividend or make any distribution, including ordinary dividends, unless it notifies the MIA Insurance Commissioner (the Maryland Commissioner) of the proposed payment within five business days following declaration and at least ten days before payment. The Maryland Commissioner may declare that such dividend not be paid if it finds that AGC’s policyholders’ surplus would be inadequate after payment of the dividend or the dividend could lead AGC to a hazardous financial condition. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
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Contingency Reserves
Each of AGM, under the New York Insurance Law, and AGC, under Maryland insurance law and regulations, must establish a contingency reserve, as reported on its statutory financial statements, to protect policyholders. The New York Insurance Law and Maryland insurance laws and regulations, as applicable, determine the calculation of the contingency reserve and the period of time over which it must be established and, subsequently, can be released.
In both New York and Maryland, releases from the insurer’s contingency reserve may be permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.
From time to time, the U.S. Insurance Subsidiaries have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer’s outstanding insured obligations. In 2022, the U.S. Insurance Subsidiaries each requested a release of accumulated contingency reserve which were deemed excessive in relation to the Company’s outstanding insured obligations. AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $87.3 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $1.3 million, which represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $87.3 million release. Both AGM’s and AGC’s release were recorded in 2022. In 2021 AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $104 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $246 million, of which approximately $1.5 million represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $104 million release.
Applicable New York and Maryland laws and regulations require regular, quarterly contributions to contingency reserves, but such laws and regulations permit the discontinuation of such quarterly contributions to an insurer's contingency reserves when such insurer’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the insurer’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category. In accordance with such laws and regulations, and with the approval of the NYDFS and the MIA, respectively, AGM ceased making quarterly contributions to its contingency reserves for non-municipal business and AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business, in each case beginning in the fourth quarter of 2014. Such cessations are expected to continue for as long as AGM and AGC satisfy the foregoing condition for their applicable line(s) of business.
Single and Aggregate Risk Limits
The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty insurers applicable to all obligations insured by a financial guaranty insurer that are issued by a single entity and backed by a single revenue source. For example, under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. In addition, the insured unpaid principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and collateral, is limited to 75% of the insurer’s policyholders’ surplus and contingency reserves.
Under the limit applicable to qualifying asset-backed securities, the lesser of:
•the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or
•the insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral,
may not exceed 10% of the sum of the insurer’s policyholders’ surplus and contingency reserves, subject to certain conditions.
Single-risk limits are also specified for other categories of insured obligations, and generally are more restrictive than those described above for municipal and asset-backed obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to a catch-all or “other” limit under which the unpaid principal of the single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. For example, “triple-X” and “future flow” securitizations, as well as unsecured corporate obligations and unsecured investor-owned utility obligations, are generally subject to this catch-all or “other” single-risk limit.
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The New York Insurance Law and the Code of Maryland Regulations also establish an aggregate risk limit on the basis of the aggregate net liability insured by a financial guaranty insurer as compared with its statutory capital. “Aggregate net liability” is defined for this purpose as the outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under this limit, an insurer’s combined policyholders’ surplus and contingency reserves must not be less than the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment-grade obligations. As of December 31, 2022, the aggregate net liability of each of AGM and AGC utilized approximately 26% and 9% of their respective policyholders’ surplus and contingency reserves.
The NYDFS Superintendent (New York Superintendent) and the Maryland Commissioner each have broad discretion to order a financial guaranty insurer to cease new business originations if the insurer fails to comply with single or aggregate risk limits. In the Company’s experience in New York, the New York Superintendent has shown a willingness to work with insurers to address these concerns.
Investments
The U.S. Insurance Subsidiaries are subject to laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain asset categories, such as BIG fixed-maturity securities, real estate, equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. In addition, any investment by a U.S. Insurance Subsidiary must be authorized or approved by that insurance company’s board of directors or a committee thereof that is responsible for supervising or making such investment.
Group Regulation
In connection with AGL’s establishment of tax residence in the U.K., as discussed in greater detail under “Tax Matters” below, the NYDFS has been designated as group-wide supervisor for the Assured Guaranty group. Group-wide supervision by the NYDFS results in additional regulatory oversight over Assured Guaranty, particularly with respect to group-wide enterprise risk, and may subject Assured Guaranty to new regulatory requirements and constraints.
U.S. Credit for Reinsurance Requirements for Non-U.S. Reinsurance Subsidiaries
The Company’s Bermuda reinsurance subsidiaries, AG Re and AGRO, are affected by regulatory requirements in various U.S. states governing the ability of a ceding company domiciled in the state to receive credit on its statutory financial statements for reinsurance provided by a reinsurer. In general, under such requirements, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the ceding company’s state of domicile is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), and loss and LAE reserves ceded to the reinsurer. The substantial majority of states, however, also permit a credit on the statutory financial statements of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer secures its reinsurance obligations to the ceding insurer by providing collateral in the form of a letter of credit, trust fund or other acceptable security arrangement. Certain of those states also permit such non-licensed/non-accredited reinsurers that meet certain specified requirements to apply for “certified reinsurer” status. If granted, such status allows the certified reinsurer to post less than 100% collateral (the exact percentage depends on the certifying state's view of the reinsurer's financial strength) and the applicable ceding company will still qualify, on the basis of such reduced collateral, for full credit for reinsurance on its statutory financial statements with respect to reinsurance contracts renewed or entered into with the certified reinsurer on or after the date the reinsurer becomes certified. Certain states have eliminated the reinsurance collateral requirements for unauthorized reinsurers in certain qualifying jurisdictions that (i) meet specified requirements, such as minimum capital and surplus amounts and minimum solvency or capital ratios, and (ii) provide certain commitments to the ceding insurer’s domiciliary state, such as submission to such state’s jurisdiction and the filing of annual audited financial statements with the state. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.
AG Re and AGRO are not licensed, accredited or approved in any state and have established trusts to secure their reinsurance obligations. In 2017, AGRO obtained certified reinsurer status in Missouri, which allows AGRO to post 10% collateral in respect of any reinsurance assumed from a Missouri-domiciled ceding company on or after the date of AGRO’s certification (although, currently, AGRO does not assume any such reinsurance). See “International Regulation —Bermuda—Bermuda Insurance Regulation” for Bermuda regulations applicable to AG Re and AGRO.
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Regulation of Swap Transactions Under Dodd-Frank
The Company’s U.S. insurance businesses are subject to direct and indirect regulation under U.S. federal law. In particular, their derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd- Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Based on the size of its U.S. Insurance Subsidiaries’ remaining legacy derivatives portfolios, AGL does not believe any of its U.S. subsidiaries are required to register with the Commodity Futures Trading Commission (CFTC) as a “major swap participant” or with the SEC as a “major securities-based swap participant.” Certain of the Company's subsidiaries may be subject to Dodd-Frank Act requirements to post margin for, or to clear on a regulated execution facility, future swap transactions or with respect to certain amendments to legacy swap transactions, if they enter into such transactions.
Regulation of U.S. Asset Management Business
AGL has two principal operating asset management subsidiaries domiciled in the U.S.: AssuredIM LLC and AHP. AssuredIM LLC is registered as an investment adviser with the SEC and AHP is a relying adviser of AssuredIM LLC. Registered investment advisers, including their relying advisers, are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). As registered investment advisers, AssuredIM must submit periodic filings with the SEC on Forms ADV, which are publicly available. AssuredIM LLC’s SEC filings include information regarding AHP as a relying advisor. The Advisers Act also imposes additional requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. AssuredIM is also registered with the CFTC as a commodity pool operator and is a member of the National Futures Association (NFA), therefore subject to their respective periodic filing and other requirements. BlueMountain CLO Management, LLC (BMCLO), a third asset management subsidiary, has limited activity with a relatively small AUM and, accordingly, ceased to be registered with the SEC in 2022.
In addition, private funds advised by AssuredIM LLC, AHP and BMCLO rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. These exemptions are complex and may in certain circumstances depend on compliance by third parties which are not controlled by the Company.
International Regulation
General
A portion of the Company’s business is conducted in foreign countries. Generally, the Company’s subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Certain of these jurisdictions require registration and periodic reporting by insurance and reinsurance companies that are licensed or authorized in such jurisdictions and are controlled by other entities. Applicable legislation also typically requires periodic disclosure concerning the entity that controls the insurer and reinsurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including, in some instances, payment of dividends by the insurance and reinsurance subsidiary within the holding company system.
In addition to these licensing, disclosure and asset transfer requirements, the Company’s foreign operations are also regulated in various jurisdictions with respect to, among other matters, policy language and terms, amount and type of reserves, amount and type of capital to be held, amount and type of local investment, local tax requirements, and restrictions on changes in control. AGL, as a Bermuda-domiciled holding company, is also subject to shareholding restrictions. Such shareholding restrictions of AGL and restrictions on changes in control of our foreign operations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and, in particular, unsolicited transactions, that some or all of its shareholders might consider to be desirable. See Item 1A. Risk Factors, Risks Related to GAAP, Applicable Law and Regulations captioned “Applicable insurance laws may make it difficult to effect a change of control of AGL.”
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Bermuda
The Bermuda Monetary Authority (the Authority) regulates the Company’s operating insurance and reinsurance subsidiaries in Bermuda. AG Re and AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations (collectively, the Insurance Act). AG Re is registered and licensed as a Class 3B insurer and is authorized to carry on general insurance business (as understood under the Insurance Act), subject to any conditions attached to its license and to compliance with the requirements imposed by the Insurance Act.
AGRO is registered and licensed as both a Class 3A insurer and a Class C long-term insurer, and therefore carries on both general and long-term business (as understood under the Insurance Act), subject to any conditions attached to its license. In particular, AGRO must keep its accounts in respect of its general business and its long-term business separate in respect of any other business. AGRO is required to maintain both a general business fund and a long-term business fund (as defined in the Insurance Act.)
Bermuda Insurance Regulation
The Insurance Act, as enforced by the Authority, imposes on AG Re and AGRO a variety of requirements and restrictions, including the filing of annual GAAP financial statements and audited statutory financial statements; compliance with minimum enhanced capital requirements; compliance with the Authority’s Insurance Code of Conduct; compliance with the Authority’s Insurance Sector Operational Cyber Risk Management Code of Conduct; compliance with minimum solvency and liquidity standards; restrictions on the declaration and payment of dividends and distributions; preparation and publication of an annual Financial Condition Report providing details on measures governing the business operations, corporate governance framework, solvency and financial performance of the insurer and reinsurer; restrictions on changes in control of regulated insurers and reinsurers; restrictions on the reduction of statutory capital; and the need to have a principal representative and a principal office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Authority the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance and reinsurance companies and in certain circumstances share information with foreign regulators.
Shareholder Controllers
Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or more or 50% or more of the Company’s common shares must notify the Authority in writing within 45 days of becoming such a holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may direct, among other things, that the voting rights attached to their common shares are not exercisable.
Minimum Solvency Margin and Enhanced Capital Requirements
Under the Insurance Act, AG Re and AGRO must each ensure that the value of its general business statutory assets exceeds the amount of its general business statutory liabilities by an amount greater than a prescribed minimum solvency margin and each company’s applicable enhanced capital requirement, which is established by reference to either its Bermuda Solvency Capital Requirement (BSCR) model or an approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an insurer’s capital requirements (statutory economic capital and surplus) by establishing capital requirements for ten categories of risk in the insurer’s business: fixed income investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentration risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk.
Restrictions on Dividends and Distributions
The Insurance Act limits the declaration and payment of dividends by AG Re and AGRO, including by prohibiting each company from declaring or paying any dividends during any financial year if it is in breach of its prescribed minimum solvency margin, minimum liquidity ratio or enhanced capital requirement, or if the declaration or payment of such dividends would cause such a breach. Dividends are paid out of each insurer's statutory surplus and, therefore, dividends cannot exceed such surplus. See “Minimum Solvency Margin and Enhanced Capital Requirements” above and “Minimum Liquidity Ratio” below.
The Companies Act 1981 of Bermuda (Companies Act) also limits the declaration and payment of dividends and other distributions by Bermuda companies such as AGL and its Bermuda subsidiaries, which, in addition to AG Re and AGRO,
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also include Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries). Such companies may only declare and pay a dividend or make a distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing that the company is, and after the payment will be, able to meet and pay its liabilities as they become due and the realizable value of the company’s assets will not be less than its liabilities.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding insurers and any other assets which the Authority accepts on application. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit, corporate guaranties and other instruments.
Certain Other Bermuda Law Considerations
Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.
AGL is not currently subject to taxes computed on profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual government fees, business fees, payroll tax and other taxes and duties. See “— Tax Matters—Taxation of AGL and Subsidiaries—Bermuda.”
United Kingdom Insurance and Financial Services Regulation
Each of AGUK and Assured Guaranty Finance Overseas Ltd. (AGFOL) are subject to the FSMA, which covers financial services relating to deposits, insurance, investments and certain other financial products. Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K. each constitutes a “regulated activity” requiring authorization by the appropriate regulator.
The PRA and the FCA are the main regulatory authorities responsible for insurance regulation in the U.K. These two regulatory bodies cover the following areas:
•the PRA, a part of the Bank of England, is responsible for prudential regulation of certain classes of financial services firms, including insurance companies, and
•the FCA is responsible for the prudential regulation of all non-PRA firms and the regulation of market conduct by all firms.
AGUK, as an insurance company, is regulated by both the PRA and the FCA. They impose on AGUK a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; intervention and enforcement; and fees and levies. AGFOL, as an insurance intermediary, is regulated by the FCA. AGFOL’s permissions from the FCA allow it to introduce business to the U.S. Insurance Subsidiaries, so that AGFOL can arrange financial guaranties underwritten by the U.S. Insurance Subsidiaries. AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or places.
AGUK also is the principal of Assured Guaranty Credit Protection Ltd. (AGCPL). Prior to 2009, AGCPL entered into a limited number of derivative contracts, some of which are still outstanding, that provide credit protection on certain referenced obligations. AGUK guarantees AGCPL’s obligations under such derivative contracts. AGCPL is not authorized by the PRA or FCA, but is an appointed representative of AGUK. This means that AGCPL can carry on insurance distribution activities without a license because AGUK has regulatory responsibility for it.
PRA Supervision and Enforcement
The PRA has extensive powers to intervene in the affairs of an authorized firm, including the power in certain circumstances to withdraw the firm’s authorization to carry on a regulated activity. The PRA carries out the prudential
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supervision of insurance companies like AGUK through a variety of methods, including the collection of information from statistical returns, the review of accountants’ reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of insurance companies.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The PRA weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its regulatory objectives. It is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
AGUK calculates its minimum required capital according to the Solvency II criteria and is in compliance.
Other U.K. Regulatory Requirements
In 2010 it was agreed between AGUK’s management and its then regulator, the Financial Services Authority (now the PRA), that new business written by AGUK would be guaranteed using a co-insurance structure pursuant to which AGUK would co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGUK's financial guaranty for each transaction covers a proportionate share (currently fixed from 2018 at 15%) of the total exposure, and AGM or AGC, as the case may be, guarantees the remaining exposure under the transaction. AGM or AGC, as the case may be, will also provide a second-to-pay guaranty to cover AGUK’s financial guaranty.
Solvency II and Solvency Requirements
Solvency II took effect from January 1, 2016, in the U.K. and remains in effect as part of the U.K.’s retained EU law after the withdrawal of the U.K. from the EU (Brexit). The reform of Solvency II as it applies in the U.K. is currently under consideration by the U.K. government. Solvency II provides rules on capital adequacy, governance and risk management and regulatory reporting and public disclosure. Under Solvency II, AGUK is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the PRA may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGUK calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
U.K. company law prohibits each of AGUK and AGFOL from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s capital requirements may in practice act as a restriction on dividends for AGUK.
Change of Control
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an insurance company) they must give the PRA (if regulated by the PRA and FCA) or the FCA (if regulated solely by the FCA) notice in writing before making the acquisition. The PRA and the FCA have up to 60 working days (without including any period of interruption) in which to assess a change of control case. Any person (a company or individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power, of a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and Markets in Financial Instruments Directive (MiFID)
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investment firms, and the 20% threshold to insurance brokers and certain other firms that are Non-Directive firms for the purposes of the Solvency II Directive.
U.K. Withdrawal from the European Union
Through 2019, AGUK wrote business in the U.K. and various countries throughout the EU as well as certain other non-EU countries. In mid-2019, to address the impact of the withdrawal of the U.K. from the EU, AGL established AGE as a French incorporated company. AGE was authorized by the French insurance and banking supervisory authority, the ACPR, to conduct financial guarantee business from January 2, 2020, and from that date AGUK ceased the underwriting of new business within the EEA. In October 2020, in preparation for Brexit, AGUK transferred to AGE certain existing AGUK policies relating to risks in the EEA under the Part VII Transfer.
AGUK will continue to write new business in the U.K. and certain other non-EEA countries.
Regulation of U.K. Asset Management Business
AssuredIM London is domiciled in the U.K. and is authorized by the FCA as an investment manager in the U.K. with certain permissions. The FSMA and rules promulgated thereunder, together with certain additional legislation, govern all aspects of the U.K. investment business, including sales, research and trading practices, the provision of investment advice, and discretionary management services, the use and safekeeping of client funds and securities, regulatory capital, margin practices and procedures, the approval standards for individuals, anti-money laundering, periodic reporting and settlement procedures.
AssuredIM London acts as a subadvisor to AssuredIM LLC, is a relying adviser of AssuredIM LLC for US regulatory purposes and its information is incorporated into AssuredIM LLC’s periodic filings on Forms ADV, which are publicly available. As a result of its FCA registration and being a relying adviser of AssuredIM LLC, AssuredIM London is subject to both U.K. and U.S. requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. In 2022, AssuredIM London ceased to be registered as a commodity trading adviser with the CFTC and is no longer a member of the NFA due to its limited role as a subadvisor to AssuredIM LLC.
In addition, AssuredIM London relies on complex exemptions from the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. Such exemptions may in certain circumstances depend on compliance by third parties not controlled by the Company.
France
As an insurance company licensed in France, AGE is regulated by the ACPR and is subject to the provisions of Solvency II as well as related EU delegated regulations as implemented in France, and by the French Insurance Code and the Monetary and Financial Code, both of which set out the primary rules governing the insurance industry in France. In accordance with French insurance regulation and Solvency II, AGE is permitted to carry on its activities in the countries of the EEA where it is authorized to operate under the freedom to provide services regime.
French regulation of insurance companies imposes on AGE a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; and intervention and enforcement.
ACPR Supervision and Enforcement
The ACPR has extensive powers to intervene in the affairs of an insurance company, including the power in certain circumstances to withdraw the company’s authorization to carry on a regulated activity. The ACPR carries out the prudential supervision of insurance companies like AGE through a variety of methods, including the collection of information from statistical returns, the review of accountants' reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews.
The ACPR assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The ACPR is forward-looking, assessing its objectives not just against current risks, but also against those that
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could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
Solvency II and Solvency Requirements
Solvency II came into effect in France on January 1, 2016, and is the legal and regulatory basis for the supervision of insurance firms in France. It provides rules on capital adequacy, governance, risk management, and regulatory reporting and public disclosure. Under Solvency II, AGE is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the ACPR may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGE calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
French company law prohibits AGE from declaring a dividend to its shareholders unless it has “profits and/or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While French law imposes no statutory restrictions on an insurer's ability to declare a dividend, the ACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE.
Change of Control
The French insurance code has requirements regarding acquisitions, disposals, and increases or decreases in ownership of a French-licensed insurance company.
Any transaction enabling a person (a company or individual), acting alone or in concert with other financing options.persons, to acquire, increase, dispose of or reduce its ownership in an insurance company licensed in France requires express or implied approval from the ACPR: (i) where such transaction results directly or indirectly in the proportion of shares or voting rights held by that person or those persons rising above 10%, 20%, one-third or 50% of all shares or voting rights; (ii) where the insurance or reinsurance company becomes a subsidiary of that person or those persons; and (iii) where the transaction allows this person or persons to exercise a significant influence over the management of this company.
As a matter of principle, the ACPR has 60 business days from the date on which it acknowledges receipt of the notification of the transaction to notify the reporting entity and the insurance company whose ownership change is contemplated of its refusal or approval of the transaction. In approving or refusing the transaction, the ACPR takes into account various factors, including the reputation of the acquirer, the effect of the transaction on the business and the management of the company, the impact of the transaction on the financial strength of the company, or the ability of the company to continue to comply with applicable regulation.
Human Capital Management
The Company recognizes that its workforce, as a key driver of long-term performance, is among its most valued assets. Accordingly, the Company’s key human capital management objectives are to attract, retain, develop and support a diverse group of the highest quality employees, including talented and experienced business leaders who drive its corporate strategies and build long-term shareholder value. To promote these objectives, the Company’s human capital management programs are designed to reward and support employees with competitive compensation and benefit packages in each of its locations around the globe, and with professional development opportunities to cultivate talented employees and prepare them for critical roles and future leadership positions.
As of December 31, 2022, the Company employed 411 people worldwide; approximately 89% of employees are based in the U.S. and Bermuda and approximately 11% are based in the U.K. and France. Approximately 36% of the Company’s
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workforce is female and 64% is male. The average tenure is 11.9 years. Other than in France, none of the Company’s employees are subject to collective bargaining agreements. The Company believes its employee relations are satisfactory.
Learning and Development; Mentoring. The Company invests in the professional development of its workforce. To support the advancement of its employees, the Company endeavors to strengthen their knowledge and skills by providing equitable access to training, including in leadership, management and effective communication skills, mentoring opportunities, as well as tuition reimbursement assistance. Employee evaluations and performance reviews are conducted annually, during which managers and employees are encouraged to discuss employee goals and opportunities for development, including, as appropriate, training and coaching.
The Company also provides opportunities for qualified employees to work abroad in another of the Company’s offices as part of its international rotation program.
The Company’s collegial and collaborative culture fosters informal mentoring and learning. The Company also has a formal one-on-one mentoring program to provide an additional learning resource for its employees, facilitate the onboarding of new recruits and reinforce connectedness. The mentoring program is offered to all employees across the Company’s offices. The Company utilizes an outside consultant to provide workshops for both mentors and mentees. In addition, the Company sponsors memberships for its employees in external organizations to provide further opportunities for professional development, mentoring and networking.
Compensation and Benefits. The compensation program is designed to attract, retain and motivate talented individuals and to recognize and reward outstanding achievement. The components of the program consist of base salary and may include incentive compensation in the form of an annual cash incentive and deferred compensation in the form of cash and/or equity (including, in the case of certain AssuredIM professionals, an entitlement to a portion of carried interest allocated to the general partners of certain AssuredIM Funds). The Company believes that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns the interests of employees and investors. To maintain the wellness of its employees, the Company offers a benefits package designed to promote and support physical and mental health as well as financial security. Benefits include life and health (medical, dental and vision) insurance, retirement savings plans, an employee stock purchase plan, paid time off, paid family leave, an employee assistance program, commuter benefits, tuition reimbursement, fertility and family planning resources, emergency backup child, elder and pet care, reimbursement of health club fees, online classes for children, and corporate matches of an employee’s charitable contributions.
Culture. The Company seeks to foster and maintain strong ethical standards and a reputation as a business that conducts itself professionally and with a high degree of integrity. In addition, the Company works to provide and support a respectful and inclusive environment that values the abilities of each employee, leading to enhanced engagement and improved retention. Education and awareness are critical components in promoting the Company’s cultural values across the organization. Upon onboarding and annually, all employees are required to complete training in the Company’s Global Code of Ethics as well as its policies on the prevention of sexual harassment and discrimination. The Company also provides additional targeted training and guidance to specific personnel regarding anti-fraud, anti-bribery and anti-corruption related matters. Transparency towards stakeholders, including shareholders, policyholders, investors and employees, is another hallmark of the Company’s culture. Each quarter after the Company issues its financial results, in addition to meeting with shareholders and policyholders, the AGL Chief Executive Officer and Chief Financial Officer hold a town-hall style meeting for all employees where they provide an update on the Company’s performance and strategy, acknowledge contributions made by employees to the continued success of its business and answer questions.
Employee Engagement. In 2022, the Company launched its inaugural employee engagement survey. While the Company encourages open dialogue, the engagement survey provided a confidential forum for employees to provide more candid feedback. The Company engaged a third-party provider to foster confidentiality; the vendor conducted the survey, collected and aggregated feedback and benchmarked results relative to other similar-size financial services companies. The survey was sent to the total global workforce; 88% of all employees participated in the survey. The overall engagement score exceeded the benchmark.
Diversity and Inclusion. Diversity and inclusion are ingrained within Assured Guaranty’s policies and practices, including its Diversity and Inclusion Policy, and integrated throughout the Company. Assured Guaranty is committed to building and sustaining at all levels of the organization a diverse workforce that is representative of its communities, in a manner consistent with its business needs, scale and resources, and fostering an inclusive culture and workplace that embrace the differences within its staff and effectively utilize the many and varied talents of its employees. Responsibility for implementing the goals of diversity and inclusion is shared by board members, who participate in forums, senior management, who serve as mentors and executive sponsors of employee resource groups (ERGs) (described below) and the global workforce,
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who serve on the Diversity and Inclusion Committee (D&I Committee) (described below). To incentivize and hold senior leadership accountable, the Company incorporates environmental and social responsibility considerations (including with respect to diversity and inclusion) in its executive compensation program.
The Company has taken a number of steps to demonstrate its organizational commitment to diversity and inclusion.
Training. In 2021, the Company provided bias awareness training for all of its employees on how to identify and interrupt unconscious bias and the role each employee can play to promote diversity, equity and inclusion. In 2022, the Company provided workshops on inclusive interviewing for managers and others with hiring responsibilities.
Recruiting. The Company added a number of talent acquisition strategies to its recruiting practices in order to deliberately reach and attract a diverse and qualified applicant pool. To cast a wider net, positions are posted on Assured Guaranty’s websites and other public job and recruiting websites. For positions which require the use of a search firm, the Company has instructed its executive recruiters and search firms to present more diverse and qualified applicant pools. The Company’s internal recruiting team also works with organizations that promote the development and advancement of women and underrepresented minorities to help source more diverse applicant pools. The Company does not use artificial intelligence or other software to screen applicants.
Employee-led Diversity and Inclusion Committee. The Company’s employee-led D&I Committee is a critical ally in the Company’s commitment to promoting diversity, fostering inclusion, and addressing racial inequity. The D&I Committee is composed of dedicated employees with different backgrounds, points of view, levels of seniority and tenure with the Company, who provide input into policies and strategies for achieving a diverse workforce and an inclusive culture. The D&I Committee has played a key role in recommending and working to implement strategies and initiatives to achieve its diversity and inclusion goals, such as the mentoring program, ERGs, hosting firm-wide events designed to provide education and facilitate discussion around topics such as bias, gender and race, and investing in organizations that work to create a pipeline of diverse and qualified candidates.
Employee Resource Groups. Based on employee feedback, the Company launched employee resource groups for African Americans, women and working parents to create community and awareness and encourage employees to engage with and support one another. The ERGs also provide mentorship and career development opportunities to members and assist the Company in its efforts to retain, develop and promote diverse professionals and to foster a more inclusive culture. The ERGs are employee-led with the support of executive sponsors; membership in the ERGs is voluntary and open to all employees. Throughout the year, the ERGs sponsored various events, firm-wide as well as focused for group members, including a panel discussion on women in the workforce, a workshop for parents on helping children cope with the stress resulting from the COVID-19 pandemic, and discussions on the business case for, and importance of, diversity and inclusion.
Conversations Around Gender and Race. In 2022, the ERGs and the D&I Committee sponsored several firm-wide presentations and panel discussions designed to facilitate difficult conversations around race, gender, and bias. The chair of the AGL Board and the chair of the Environmental and Social Responsibility Committee each visited the New York office, on separate occasions, to participate in a question and answer discussion about the business case for diversity and inclusion, balancing the goals of diversity and meritocracy, and the Board’s support for the Company’s diversity and inclusion initiatives. Women directors from AGL’s Board as well as AGUK’s Board participated in a panel discussion where they shared insights and advice about careers and balancing professional and personal goals.
The women’s ERG is currently planning Assured Guaranty’s first international women’s conference. Women employees and allies are invited to gather in New York in March 2023 (coinciding with International Women’s Day) to network in person with women colleagues, hear inspiring speakers, participate in round table educational sessions on key professional issues, and to celebrate collective and individual accomplishments.
COVID-19 Response and Hybrid Work. At the start of the global COVID-19 pandemic in 2020, Assured Guaranty initiated its business continuity protocols and instructed its employees to work from home, placing an emphasis on the well-being of its employees and their families. The Company’s investments in technology and the regular testing of its business continuity plan allowed it to quickly shift to remote work. The success of remote work, both at the Company and across the broader labor market, sparked a collective re-evaluation of the nature of office work. The Company surveyed its employees for their feedback while also observing industry trends and peer practices to craft a viable and sustainable remote work policy. Currently, the Company offers employees the option to work remotely for a portion of their time– both as a convenience to employees and to remain competitive as an employer.
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Governance. The AGL Board’s Environmental and Social Responsibility Committee and Compensation Committee, pursuant to their respective charters, provide oversight of the Company’s human capital management strategies, policies, and initiatives, including the attraction, development and retention of personnel, the promotion of diversity, and the fostering of an inclusive culture. The Environmental and Social Responsibility Committee is periodically updated on workforce demographics and tenure, culture and workplace safety, and initiatives of the employee-led D&I Committee and the Corporate Philanthropy Committee. The Compensation Committee, which is advised by an independent compensation consultant, is responsible for the oversight of management development and evaluation of succession planning for senior management, and a review of the Company’s senior management compensation benchmarked against a comparison group.
Board members also support the Company’s D&I Committee programming by participating in panel discussion and presentations sponsored by the Company’s ERGs and D&I Committee, as described above.
Tax Matters
United States Tax Reform
The 2017 Tax Cuts and Jobs Act of 2017 (the TCJA) lowered the corporate U.S. tax rate to 21%, eliminated the alternative minimum tax, limited the deductibility of interest expense and required a one-time tax on a deemed repatriation of untaxed earnings of non-U.S. subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies such as the Company, the TCJA also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. In addition, the TCJA included certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections and U.S. persons investing in such companies. For example, the TCJA includes a base erosion and anti-abuse tax (BEAT) that could make affiliate reinsurance between U.S. and non-U.S. members of the Company’s group economically unfeasible. In addition, the TCJA introduced a current tax on global intangible low-taxed income that may result in an increase in U.S. corporate income tax imposed on the Company’s U.S. group members with respect to earnings of their non-U.S. subsidiaries. As discussed in more detail below, the TCJA also revised the rules applicable to passive foreign investment companies (PFICs) and controlled foreign corporations (CFCs). Further, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company. Additionally, tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or a PFIC or has related person insurance income (RPII) are subject to change, possibly on a retroactive basis. The Treasury Department recently issued final and proposed regulations intended to clarify the application of the insurance income exception to the classification of a non-U.S. insurer as a PFIC and provide guidance on a range of issues relating to PFICs, and recently issued proposed regulations that would expand the scope of the RPII rules. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation and Note 14, Income Taxes.
Taxation of AGL and Subsidiaries
Bermuda
Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by AGL or its Bermuda Subsidiaries. AGL, AG Re and AGRO have each obtained from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to AGL, AG Re or AGRO or to any of their operations or their shares, debentures or other obligations, until March 31, 2035. This assurance is subject to the provision that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda, or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any land leased to AGL, AG Re or AGRO. AGL, AG Re and AGRO each pays annual Bermuda government fees, and AG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.
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United States
AGL has conducted and intends to continue to conduct substantially all of its operations outside the U.S. and to limit the U.S. contacts of AGL and its non-U.S. subsidiaries (except AGRO, which elected to be taxed as a U.S. corporation) so that they should not be engaged in a trade or business in the U.S. A non-U.S. corporation, such as AG Re, that is deemed to be engaged in a trade or business in the U.S. would be subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business, unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a non-U.S. corporation would generally be entitled to deductions and credits only if it timely files a U.S. federal income tax return. AGL, AG Re and certain of the other non-U.S. subsidiaries have and will continue to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax. The highest marginal federal income tax rates currently are 21% for a corporation’s effectively connected income and 30% for the “branch profits” tax.
Under the income tax treaty between Bermuda and the U.S. (the Bermuda Treaty), a Bermuda insurance company would not be subject to U.S. income tax on income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the U.S. AG Re currently intends to conduct its activities so that it does not have a permanent establishment in the U.S.
An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if: (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the U.S. or Bermuda or U.S. citizens; and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities of, persons who are neither residents of either the U.S. or Bermuda nor U.S. citizens.
Non-U.S. insurance companies carrying on an insurance business within the U.S. have a certain minimum amount of effectively connected net investment income determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If AG Re or another of the Company’s Bermuda subsidiaries is considered to be engaged in the conduct of an insurance business in the U.S. and is not entitled to the benefits of the Bermuda Treaty in general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Internal Revenue Code of 1986, as amended (the Code), could subject a significant portion of AG Re’s or another of the Company’s Bermuda subsidiary’s investment income to U.S. income tax.
AGL, as a U.K. tax resident, would not be subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business under the income tax treaty between the U.S. and the U.K. (the U.K. Treaty), unless that trade or business is conducted through a permanent establishment in the U.S. AGL intends to conduct its activities so that it does not have a permanent establishment in the U.S.
Non-U.S. corporations not engaged in a trade or business in the U.S., and those that are engaged in a U.S. trade or business with respect to their non-effectively connected income are nonetheless subject to U.S. withholding tax on certain “fixed or determinable annual or periodic gains, profits and income” derived from sources within the U.S. (such as dividends and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The standard non-treaty rate of U.S. withholding tax is currently 30%. The Bermuda Treaty does not reduce the U.S. withholding rate on U.S.-sourced investment income. The U.K. Treaty reduces or eliminates U.S. withholding tax on certain U.S.-sourced investment income, including dividends from U.S. companies to U.K. resident persons entitled to the benefit of the U.K. Treaty.
The U.S. also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers with respect to risks of a U.S. person located wholly or partly within the U.S. or risks of a foreign person engaged in a trade or business in the U.S. which are located within the U.S. The rates of tax applicable to premiums paid are 4% for direct casualty insurance premiums and 1% for reinsurance premiums.
AGRO has elected to be treated as a U.S. corporation for all U.S. federal tax purposes and, as such, AGRO, together with AGL’s U.S. subsidiaries, is subject to taxation in the U.S. at regular corporate rates.
If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.
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United Kingdom
In November 2013, AGL became tax resident in the U.K. AGL remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. The AGL common shares have not changed and continue to be listed on the New York Stock Exchange (NYSE).
As a company that is not incorporated in the U.K., AGL will be considered tax resident in the U.K. only if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. From November 6, 2013, the AGL Board began to manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K.
As a U.K. tax resident company, AGL is subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties.
As a U.K. tax resident, AGL is required to file a corporation tax return with His Majesty’s Revenue & Customs (HMRC). AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The rate of corporation tax is currently 19% (which is due to increase to 25% from April 1, 2023). AGL has also registered in the U.K. to report its value-added tax (VAT) liability. The current standard rate of VAT is 20%.
The dividends AGL receives from its direct subsidiaries should be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The non-U.K. resident subsidiaries intend to operate in such a manner that their profits are outside the scope of the charge under the “controlled foreign companies” regime. Accordingly, Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be attributed to AGL and taxed in the U.K. under the CFC regime. In 2013, Assured Guaranty obtained clearance from HMRC confirming this on the basis of the facts and intentions as they were at the time.
Taxation of Shareholders
Bermuda Taxation
Currently, there is no Bermuda capital gains tax, or withholding or other tax payable on principal, interest or dividends paid to the holders of the AGL common shares.
United States Taxation
This discussion is based upon the Code, the regulations promulgated thereunder and any relevant administrative rulings or pronouncements or judicial decisions, all as in effect on the date of filing and as currently interpreted, and does not take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively. This discussion does not include any description of the tax laws of any state or local governments within the U.S. or any foreign government.
The following summary sets forth the material U.S. federal income tax considerations related to the purchase, ownership and disposition of AGL’s shares. Unless otherwise stated, this summary deals only with holders that are U.S. Persons (as defined below) who purchase and hold their shares and who hold their shares as capital assets within the meaning of section 1221 of the Code. The following discussion is only a discussion of the material U.S. federal income tax matters as described herein and does not purport to address all of the U.S. federal income tax consequences that may be relevant to a particular shareholder in light of such shareholder’s specific circumstances. For example, special rules apply to certain shareholders, such as partnerships, insurance companies, regulated investment companies, real estate investment trusts, dealers or traders in securities, tax exempt organizations, expatriates, persons liable for alternative minimum tax, U.S. accrual method taxpayers subject to special tax accounting rules as a result of any item of gross income with respect to AGL’s shares being taken into account in an applicable financial statement as described in 451(b) of the Code, persons that do not hold their securities in the U.S. dollar, persons who are considered with respect to AGL or any of its non-U.S. subsidiaries as “United States shareholders” for purposes of the CFC rules of the Code (generally, a U.S. Person, as defined below, who owns or is deemed to own 10% or more of the total combined voting power or value of all classes of AGL shares or the shares of any of AGL’s non-U.S. subsidiaries (i.e., 10% U.S. Shareholders)), or persons who hold the common shares as part of a hedging or conversion transaction or as part of a short-sale or straddle. Any such shareholder should consult their tax adviser.
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If a partnership holds AGL’s shares, the tax treatment of the partners will generally depend on the status of the partner and the activities of the partnership. Partners of a partnership owning AGL’s shares should consult their tax advisers.
For purposes of this discussion, the term “U.S. Person” means: (i) a citizen or resident of the U.S.; (ii) a partnership or corporation, created or organized in or under the laws of the U.S., or organized under any political subdivision thereof; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; (iv) a trust if either (x) a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes; or (v) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.
Taxation of Distributions. Subject to the discussions below relating to the potential application of the CFC, RPII and PFIC rules, cash distributions, if any, made with respect to AGL’s shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of AGL (as computed using U.S. tax principles). Dividends paid by AGL to corporate shareholders will not be eligible for the dividends received deduction. To the extent such distributions exceed AGL's earnings and profits, they will be treated first as a return of the shareholder’s basis in the common shares to the extent thereof, and then as gain from the sale of a capital asset.
AGL believes dividends paid by AGL on its common shares to non-corporate holders will be eligible for reduced rates of tax at the rates applicable to long-term capital gains as “qualified dividend income,” provided that AGL is not a PFIC and certain other requirements, including stock holding period requirements, are satisfied.
Classification of AGL or its Non-U.S. Subsidiaries as a CFC. Each 10% U.S. Shareholder (as defined below) of a non-U.S. corporation that is a CFC at any time during a taxable year that owns, directly or indirectly through non-U.S. entities, shares in the non-U.S. corporation on the last day of the non-U.S. corporation’s taxable year on which it is a CFC, must include in its gross income, for U.S. federal income tax purposes, its pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed. “Subpart F income” of a non-U.S. insurance corporation typically includes foreign personal holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income). A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e., constructively)) more than 50% of the total combined voting power of all classes of voting stock of such non-U.S. corporation, or more than 50% of the total value of all stock of such corporation on any day during the taxable year of such corporation. For purposes of taking into account insurance income, a CFC also includes a non-U.S. corporation in which more than 25% of the total combined voting power of all classes of stock or more than 25% of the total value of the stock is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation. A “10% U.S. Shareholder” is a U.S. Person who owns (directly, indirectly through non-U.S. entities or constructively) at least 10% of the total combined voting power or value of all classes of stock of the non-U.S. corporation. The TCJA expanded the definition of 10% U.S. Shareholder to include ownership by value (rather than just vote), so provisions in the Company’s organizational documents that cut back voting power to potentially avoid 10% U.S. Shareholder status will no longer mitigate the risk of 10% U.S. Shareholder status. AGL believes that because of the dispersion of AGL’s share ownership, no U.S. Person who owns shares of AGL directly or indirectly through one or more non-U.S. entities should be treated as owning (directly, indirectly through non-U.S. entities, or constructively), 10% or more of the total voting power or value of all classes of shares of AGL or any of its non-U.S. subsidiaries. However, AGL’s shares may not be as widely dispersed as the Company believes due to, for example, the application of certain ownership attribution rules, and no assurance may be given that a U.S. Person who owns the Company's shares will not be characterized as a 10% U.S. Shareholder. In addition, the direct and indirect subsidiaries of Assured Guaranty US Holdings Inc. (AGUS) are characterized as CFCs and any subpart F income generated will be included in the gross income of the applicable domestic subsidiaries in the AGL group.
The RPII CFC Provisions. The following discussion generally is applicable only if the gross RPII of AG Re or any other non-U.S. insurance subsidiary that either: (i) has not made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. federal tax purposes or (ii) is not a CFC owned directly or indirectly by AGUS (each a “Foreign Insurance Subsidiary” or collectively, with AG Re, the “Foreign Insurance Subsidiaries”) is 20% or more of the Foreign Insurance Subsidiary’s gross insurance income for the taxable year and the 20% Ownership Exception (as defined below) is not met. The following discussion generally would not apply for any taxable year in which the Foreign Insurance Subsidiary’s gross RPII falls below the 20% threshold or the 20% Ownership Exception is met. Although the Company cannot be certain, it believes that each Foreign Insurance Subsidiary has been, in prior years of operations, and will be, for the foreseeable future, either below the 20% threshold or in compliance with the requirements of 20% Ownership Exception for each tax year.
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RPII is any “insurance income” (as defined below) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a “RPII shareholder” (as defined below) or a “related person” (as defined below) to such RPII shareholder. In general, and subject to certain limitations, "insurance income" is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance company. For purposes of inclusion of the RPII of a Foreign Insurance Subsidiary in the income of RPII shareholders, unless an exception applies, the term "RPII shareholder" means any U.S. Person who owns (directly or indirectly through non-U.S. entities) any amount of AGL’s common shares. Generally, the term “related person” for this purpose means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying certain constructive ownership principles. A Foreign Insurance Subsidiary will be treated as a CFC under the RPII provisions if RPII shareholders are treated as owning (directly, indirectly through non-U.S. entities or constructively) 25% or more of the shares of AGL by vote or value.
RPII Exceptions. The special RPII rules do not apply if: (i) at all times during the taxable year less than 20% of the voting power and less than 20% of the value of the stock of AGL (the 20% Ownership Exception) is owned (directly or indirectly through entities) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by a Foreign Insurance Subsidiary or related persons to any such person; (ii) RPII, determined on a gross basis, is less than 20% of a Foreign Insurance Subsidiary’s gross insurance income for the taxable year (the 20% Gross Income Exception); (iii) a Foreign Insurance Subsidiary elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business, and to waive all treaty benefits with respect to RPII and meet certain other requirements; or (iv) a Foreign Insurance Subsidiary elects to be treated as a U.S. corporation and waive all treaty benefits and meet certain other requirements. The Foreign Insurance Subsidiaries do not intend to make either of these elections. Where none of these exceptions applies, each U.S. Person owning or treated as owning any shares in AGL (and therefore, indirectly, in a Foreign Insurance Subsidiary) on the last day of AGL’s taxable year will be required to include in its gross income for U.S. federal income tax purposes its share of the RPII for the portion of the taxable year during which a Foreign Insurance Subsidiary was a CFC under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at that date, but limited by each such U.S. Person’s share of a Foreign Insurance Subsidiary’s current-year earnings and profits as reduced by the U.S. Person’s share, if any, of certain prior-year deficits in earnings and profits. The Foreign Insurance Subsidiaries intend to operate in a manner that is intended to ensure that each qualifies for either the 20% Gross Income Exception or 20% Ownership Exception.
Computation of RPII. For any year in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception, AGL may also seek information from its shareholders as to whether beneficial owners of shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons; to the extent AGL is unable to determine whether a beneficial owner of shares is a U.S. Person, AGL may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses. If a Foreign Insurance Subsidiary meets the 20% Ownership Exception or the 20% Gross Income Exception, RPII shareholders will not be required to include RPII in their taxable income.
Apportionment of RPII to U.S. Holders. Every RPII shareholder who owns shares on the last day of any taxable year of AGL in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception should expect that for such year it will be required to include in gross income its share of a Foreign Insurance Subsidiary's RPII for the portion of the taxable year during which the Foreign Insurance Subsidiary was a CFC under the RPII provisions, whether or not distributed, even though it may not have owned the shares throughout such period. A RPII shareholder who owns shares during such taxable year but not on the last day of the taxable year is not required to include in gross income any part of the Foreign Insurance Subsidiary’s RPII.
Basis Adjustments. A RPII shareholder’s tax basis in its common shares will be increased by the amount of any RPII the shareholder includes in income. The RPII shareholder may exclude from income the amount of any distributions by AGL out of previously taxed RPII income. The RPII shareholder’s tax basis in its common shares will be reduced by the amount of such distributions that are excluded from income.
Uncertainty as to Application of RPII. The RPII provisions are complex and have never been interpreted by the courts or the Treasury Department in final regulations; regulations interpreting the RPII provisions of the Code exist only in proposed form. Further, recently proposed regulations could, if finalized in their current form, substantially expand the definition of RPII to include insurance income of our Foreign Insurance Subsidiaries related to affiliate reinsurance transactions. These regulations would apply to taxable years beginning after the date the regulations are finalized. Although we
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cannot predict whether, when or in what form the proposed regulations might be finalized, the proposed regulations, if finalized in their current form, could limit our ability to execute affiliate reinsurance transactions that would otherwise be undertaken for non-tax business reasons in the future and could increase the risk that gross RPII could constitute 20% or more of the gross insurance income of one or more of our Foreign Insurance Subsidiaries. in a particular taxable year, which could result in such RPII being taxable to U.S. Persons that own or are treated as owning shares of AGL. Accordingly, the meaning of the RPII provisions and the application thereof to the Foreign Insurance Subsidiaries is uncertain. In addition, the Company cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent Internal Revenue Service (IRS) examination. U.S. Persons owning or treated as owning shares of AGL should consult their tax advisors as to the effect of these uncertainties.
Information Reporting. Under certain circumstances, U.S. Persons owning shares (directly, indirectly or constructively) in a non-U.S. corporation are required to file IRS Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, with their U.S. federal income tax returns. Generally, information reporting on IRS Form 5471 is required by: (i) a person who is treated as a RPII shareholder; (ii) a 10% U.S. Shareholder of a non-U.S. corporation that is a CFC at any time during any tax year of the non-U.S. corporation and who owned the stock on the last day of that year; and (iii) under certain circumstances, a U.S. Person who acquires stock in a non-U.S. corporation and as a result thereof owns 10% or more of the voting power or value of such non-U.S. corporation, whether or not such non-U.S. corporation is a CFC. For any taxable year in which AGL determines that neither the 20% Gross Income Exception nor the 20% Ownership Exception applies, AGL will provide to all U.S. Persons registered as shareholders of its shares a completed IRS Form 5471 or the relevant information necessary to complete the form. Failure to file IRS Form 5471 may result in penalties. In addition, U.S. shareholders should consult their tax advisers with respect to other information reporting requirements that may be applicable to them.
U.S. Persons holding the Company’s shares should consider their possible obligation to file FinCEN Form 114, Foreign Bank and Financial Accounts Report, with respect to their shares. Additionally, such U.S. and non-U.S. persons should consider their possible obligations to annually report certain information with respect to the non-U.S. accounts with their U.S. federal income tax returns. Shareholders should consult their tax advisers with respect to these or any other reporting requirement which may apply with respect to their ownership of the Company’s shares.
Tax-Exempt Shareholders. Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includable in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are tax exempt entities are urged to consult their tax advisers as to the potential impact of the unrelated business taxable income provisions of the Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in certain circumstances.
Dispositions of AGL’s Shares. Subject to the discussions below relating to the potential application of the Code section 1248 and PFIC rules, holders of shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other disposition of shares in the same manner as on the sale, exchange or other disposition of any other shares held as capital assets. If the holding period for these shares exceeds one year, any gain will be subject to tax at the marginal tax rate applicable to long term capital gains.
Code section 1248 provides that if a U.S. Person sells or exchanges stock in a non-U.S. corporation and such person owned, directly, indirectly through non-U.S. entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of the CFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). The Company believes that because of the dispersion of AGL’s share ownership, no U.S. shareholder of AGL should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power of AGL; to the extent this is the case this application of Code Section 1248 under the regular CFC rules should not apply to dispositions of AGL’s shares. A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, AGL will provide a completed IRS Form 5471 or the relevant information necessary to complete the Form. Code section 1248 in conjunction with the RPII rules also applies to the sale or exchange of shares in a non-U.S. corporation if the non-U.S. corporation would be treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Ownership Exception or 20% Gross Income Exception applies. Existing proposed regulations do not address whether Code section 1248 would apply if a non-U.S. corporation is not a CFC but the non-U.S. corporation has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a U.S. domestic corporation. The Company believes, however, that this application of Code section 1248 under the RPII rules should not apply to dispositions of AGL’s shares because AGL will
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not be directly engaged in the insurance business. The Company cannot be certain, however, that the IRS will not interpret the proposed regulations in a contrary manner or that the Treasury Department will not amend the proposed regulations to provide that these rules will apply to dispositions of common shares. Prospective investors should consult their tax advisers regarding the effects of these rules on a disposition of common shares.
Passive Foreign Investment Companies. In general, a non-U.S. corporation will be a PFIC during a given year if: (i) 75% or more of its gross income constitutes “passive income” (the 75% test); or (ii) 50% or more of its assets produce passive income (the 50% test) and once characterized as a PFIC will generally retain PFIC status for future taxable years with respect to its U.S. shareholders in the taxable year of the initial PFIC characterization.
If AGL were characterized as a PFIC during a given year, each U.S. Person holding AGL’s shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an "excess distribution" with respect to, their shares, unless such person: (i) is a 10% U.S. Shareholder and AGL is a CFC; or (ii) made a “qualified electing fund election” or “mark-to-market” election. It is uncertain that AGL would be able to provide its shareholders with the information necessary for a U.S. Person to make a qualified electing fund election. In addition, if AGL were considered a PFIC, upon the death of any U.S. individual owning common shares, such individual’s heirs or estate would not be entitled to a “step-up” in the basis of the common shares that might otherwise be available under U.S. federal income tax laws. In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the common shares during the three preceding taxable years (or shorter period during which the taxpayer held common shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the common shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the common shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder's period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period. In addition, a distribution paid by AGL to U.S. shareholders that is characterized as a dividend and is not characterized as an excess distribution would not be eligible for reduced rates of tax as qualified dividend income. A U.S. Person that is a shareholder in a PFIC may also be subject to additional information reporting requirements, including the annual filing of IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC rules, as amended by the TCJA, provide that income derived in the active conduct of an insurance business by a qualifying insurance corporation is not treated as passive income. The PFIC provisions also contain a look-through rule under which a non-U.S. corporation shall be treated as if it “received directly its proportionate share of the income...” and as if it “held its proportionate share of the assets...” of any other corporation in which it owns at least 25% of the value of the stock. A second PFIC look-through rule would treat stock of a U.S. corporation owned by another U.S. corporation which is at least 25% owned (by value) by a non-U.S. corporation as a non-passive asset that generates non-passive income for purposes of determining whether the non-U.S. corporation is a PFIC.
The insurance income exception originally was intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. The Company expects, for purposes of the PFIC rules, that each of AGL’s insurance subsidiaries is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of operations. However, the TCJA limits the insurance income exception to a non-U.S. insurance company that is a qualifying insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or exceed 10% of its assets, is predominantly engaged in an insurance business and satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25% threshold is due to runoff-related or rating-related circumstances) (the Reserve Test). Further, the U.S. Treasury Department and the IRS recently issued final and proposed regulations (the 2020 Regulations) intended to clarify the application of the PFIC provisions to a non-U.S. insurance company and provide guidance on a range of issues relating to PFICs, including the application of the look-through rule, the treatment of income and assets of certain U.S. insurance subsidiaries for purposes of the look-through rule and the extension of the look-through rule to 25% or more owned partnerships. The 2020 Regulations define insurance liabilities for purposes of the Reserve Test, tighten the Reserve Test and the statutory cap on insurance liabilities, and provide guidance on the runoff-related and rating-related circumstances for purposes of the 10% test (including a provision that deems certain financial guaranty insurers that fail the 25% test to meet the rating-related circumstances test). The 2020 Regulations also propose that a non-U.S. insurance company will qualify for the insurance company exception only if a factual requirements test or an active conduct percentage test is satisfied. The factual requirements test will be met if the non-U.S. insurance company’s officers and employees perform its substantial managerial and operational activities on a regular and continuous basis with respect to its core functions and virtually all of the active decision-making functions relevant to underwriting on a contract-by-contract basis (taking into account activities of officers and employees of certain related entities in certain cases). The active conduct percentage test will
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be satisfied if: (1) the total costs incurred by the non-U.S. insurance company with respect to its officers and employees (including officers and employees of certain related entities) for services related to core functions (other than investment activities) equal at least 50% of the total costs incurred for all such services; and (2) the non-U.S. insurer’s officers and employees oversee any part of the non-U.S. insurance company’s core functions, including investment management, that are outsourced to an unrelated party. Services provided by officers and employees of certain related entities are only taken into account in the numerator of the active conduct percentage if the non-U.S. insurance company exercises regular oversight and supervision over such services and compensation arrangements meet certain requirements. The 2020 Regulations also propose that a non-U.S. insurance company with no or a nominal number of employees that relies exclusively or almost exclusively upon independent contractors (other than certain related entities) to perform its core functions will not be treated as engaged in the active conduct of an insurance business. The Company believes that, based on the application of the PFIC look-through rules described above and the Company's plan of operations for the current and future years, AGL should not be characterized as a PFIC. However, as the Company cannot predict the likelihood of finalization of the proposed 2020 Regulations or the scope, nature or impact of the 2020 Regulations on us, or whether the Company’s non-U.S. insurance subsidiaries will be able to satisfy the Reserve Test in future years and the interaction of the PFIC look-through rules is not clear, no assurance may be given that the Company will not be characterized as a PFIC. Prospective investors should consult their tax adviser as to the effects of the PFIC rules.
Foreign tax credit. If U.S. Persons own a majority of AGL’s common shares, only a portion of the current income inclusions, if any, under the CFC, RPII and PFIC rules and of dividends paid by AGL (including any gain from the sale of common shares that is treated as a dividend under section 1248 of the Code) will be treated as foreign source income for purposes of computing a shareholder’s U.S. foreign tax credit limitations. The Company will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the “subpart F income,” RPII and dividends that are foreign source income will constitute either “passive” or “general” income. Thus, it may not be possible for most shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income.
Information Reporting and Backup Withholding on Distributions and Disposition Proceeds. Information returns may be filed with the IRS in connection with distributions on AGL’s common shares and the proceeds from a sale or other disposition of AGL’s common shares unless the holder of AGL’s common shares establishes an exemption from the information reporting rules. A holder of common shares that does not establish such an exemption may be subject to U.S. backup withholding tax on these payments if the holder is not a corporation or non-U.S. Person or fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person’s U.S. federal income tax liability and may entitle the U.S. Person to a refund, provided that the required information is furnished to the IRS.
United Kingdom
The following discussion is intended to be only a general guide to certain U.K. tax consequences of holding AGL common shares, under current law and the current practice of HMRC, either of which is subject to change at any time, possibly with retrospective effect. Except where otherwise stated, this discussion applies only to shareholders who are not (and have not recently been) resident or (in the case of individuals) domiciled for tax purposes in the U.K. who hold their AGL common shares as an investment and who are the absolute beneficial owners of their common shares. This discussion may not apply to certain shareholders, such as dealers in securities, life insurance companies, collective investment schemes, shareholders who are exempt from tax and shareholders who have (or are deemed to have) acquired their shares by virtue of an office or employment. Such shareholders may be subject to special rules.
The following statements do not purport to be a comprehensive description of all the U.K. considerations that may be relevant to any particular shareholder. Any person who is in any doubt as to their tax position should consult an appropriate professional tax adviser.
AGL’s Tax Residency. AGL is not incorporated in the U.K., but from November 6, 2013, the AGL Board has managed its affairs with the intent to maintain its status as a company that is tax resident in the U.K.
Dividends. Under current U.K. tax law, AGL is not required to withhold tax at source from dividends paid to the holders of the AGL common shares.
Capital gains. U.K. tax is not normally charged on any capital gains realized by non-U.K. shareholders in AGL unless, in the case of a corporate shareholder, at or before the time the gain accrues, the shareholding is used in or for the purposes of a trade carried on by the non-resident shareholder through a permanent establishment in the U.K. or for the purposes of that
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permanent establishment. Similarly, an individual shareholder who carries on a trade, profession or vocation in the U.K. through a branch or agency may be liable for U.K. tax on the gain if such shareholder disposes of shares that are, or have been, used, held or acquired for the purposes of such trade, profession or vocation or for the purposes of such branch or agency. This treatment applies regardless of the U.K. tax residence status of AGL.
Stamp Taxes. On the basis that AGL does not currently intend to maintain a share register in the U.K., there should be no U.K. stamp duty reserve tax on a purchase of common shares in AGL. A conveyance or transfer on sale of common shares in AGL will not be subject to U.K. stamp duty, provided that the instrument of transfer is not executed in the U.K. and does not relate to any property situated, or any matter or thing done, or to be done, in the U.K.
Description of Share Capital
The following summary of AGL’s share capital is qualified in its entirety by the provisions of Bermuda law, AGL’s memorandum of association and its Bye-Laws, copies of which are incorporated by reference as exhibits to this Annual Report on Form 10-K.
AGL’s authorized share capital of $5,000,000 is divided into 500,000,000 shares, par value U.S. $0.01 per share, of which 59,019,864 common shares were issued and outstanding as of February 24, 2023. Except as described below, AGL’s common shares have no preemptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL’s common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL's assets, if any remain after the payment of all AGL’s debts and liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a shareholder. See “Acquisition of Common Shares by AGL” below.
Voting Rights and Adjustments
In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL’s shares) of a shareholder are treated as “controlled shares” (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL’s issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL’s Bye-Laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a CFC as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL’s Bye-Laws as a 9.5% U.S. Shareholder). In addition, AGL’s Board may determine that shares held carry different voting rights when it deems it appropriate to do so to: (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. “Controlled shares” includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL’s Bye-Laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.
AGL’s Board is authorized to require any shareholder to provide information for purposes of determining whether any holder’s voting rights are to be adjusted, which may be information on beneficial share ownership, the names of persons having beneficial ownership of the shareholder’s shares, relationships with other shareholders or any other facts AGL’s Board may deem relevant. If any holder fails to respond to this request or submits incomplete or inaccurate information, AGL’s Board may eliminate the shareholder’s voting rights. All information provided by the shareholder will be treated by AGL as confidential information and shall be used by AGL solely for the purpose of establishing whether any 9.5% U.S. Shareholder exists and applying the adjustments to voting power (except as otherwise required by applicable law or regulation).
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Restrictions on Transfer of Common Shares
AGL’s Board may decline to register a transfer of any common shares under certain circumstances, including if they have reason to believe that any adverse tax, regulatory or legal consequences to the Company, any of its subsidiaries or any of its shareholders or indirect holders of shares or its affiliates may occur as a result of such transfer (other than such as AGL’s Board considers de minimis). Transfers must be by instrument unless otherwise permitted by the Companies Act.
The restrictions on transfer and voting restrictions described above may have the effect of delaying, deferring or preventing a change in control of Assured Guaranty.
Acquisition of Common Shares by AGL
Under AGL’s Bye-Laws and subject to Bermuda law, if AGL’s Board determines that any ownership of AGL’s shares may result in adverse tax, legal or regulatory consequences to the Company, any of the Company’s subsidiaries or any of AGL’s shareholders or indirect holders of shares or its affiliates (other than such as AGL’s Board considers de minimis), the Company has the option, but not the obligation, to require such shareholder to sell to AGL or to a third party to whom AGL assigns the repurchase right the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board to represent the shares’ fair market value (as defined in AGL’s Bye-Laws).
Other Provisions of AGL’s Bye-Laws
AGL’s Board and Corporate Action
AGL’s Bye-Laws provide that AGL’s Board shall consist of not less than three and not more than 21 directors, the exact number as determined by the Board. AGL’s Board currently consists of 12 persons who are elected for annual terms.
Shareholders may only remove a director for cause (as defined in AGL’s Bye-Laws) at a general meeting, provided that the notice of any such meeting convened for the purpose of removing a director shall contain a statement of the intention to do so and shall be provided to that director at least two weeks before the meeting. Vacancies on the Board can be filled by the Board if the vacancy occurs in those events set out in AGL’s Bye-Laws as a result of death, disability, disqualification or resignation of a director, or from an increase in the size of the Board.
Generally under AGL’s Bye-Laws, the affirmative votes of a majority of the votes cast at any meeting at which a quorum is present is required to authorize a resolution put to vote at a meeting of the Board, including one relating to a merger, acquisition or business combination. Corporate action may also be taken by a unanimous written resolution of the Board without a meeting. A quorum shall be at least one-half of directors then in office present in person or represented by a duly authorized representative, provided that at least two directors are present in person.
Shareholder Action
At the commencement of any general meeting, two or more persons present in person and representing, in person or by proxy, more than 50% of the issued and outstanding shares entitled to vote at the meeting shall constitute a quorum for the transaction of business. In general, any questions proposed for the consideration of the shareholders at any general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the Bye-Laws.
The Bye-Laws contain advance notice requirements for shareholder proposals and nominations for directors, including when proposals and nominations must be received and the information to be included.
Amendment
The Bye-Laws may be amended only by both a resolution adopted by the Board and by a resolution adopted by the shareholders.
Voting of Non-U.S. Subsidiary Shares
When AGL is required or entitled to vote at a general meeting (for example, an annual meeting) of any of AG Re, AGFOL or any other of its directly held non-U.S. subsidiaries, AGL’s Board is required to refer the subject matter of the vote to AGL’s shareholders and seek direction from such shareholders as to how they should vote on the resolution proposed by the non-U.S. subsidiary. AGL’s Board in its discretion shall require that substantially similar provisions are or will be contained in
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the Bye-Laws (or equivalent governing documents) of any direct or indirect non-U.S. subsidiaries other than AGRO and subsidiaries incorporated in the U.K.
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 Global Code of Ethics, AGL's Bye-Laws and the charters for its Board committees, as well as certain of the Company's environmental and social policies and statements. 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 also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses its web site and may use its social media account 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 as well as the Company’s social media account on LinkedIn, 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.
ITEM 1A. RISK FACTORS
You should carefully consider the following information, together with the information contained in AGL’s other filings with the SEC. The risks and uncertainties discussed below are not the only ones the Company faces. However, these are the risks that the Company’s management believes are material. The Company may face additional risks or uncertainties that are not presently known to the Company or that management currently deems immaterial, and such risks or uncertainties also may impair its business or results of operations. The risks discussed below could result in a significant or material adverse effect on the Company’s financial condition, results of operations, liquidity, or business prospects.
Summary of Risk Factors
The following summarizes some of the risks and uncertainties that may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects or share price. It is provided for convenience and should be read together with the more expansive explanations below this summary.
Risks Related to Economic, Market and Political Conditions and Natural Phenomena
•Developments in the U.S. and global financial markets and economy generally.
•Significant budget deficits and pension funding and revenue shortfalls of certain state and local governments and entities that issue obligations the Company insures.
•Significant risks from large individual or correlated exposures.
•Losses on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations insured by the Company significantly in excess of those currently expected by the Company or recoveries significantly below those currently expected by the Company.
•Downgrades to the U.S. government’s sovereign credit ratings, or to the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities.
•The COVID-19 pandemic, and the governmental and private actions taken in response to the pandemic.
•Changes in attitudes toward debt repayment negatively impacting the Company’s insurance portfolio.
•Persistently low interest rate levels and credit spreads adversely affecting demand for financial guaranty insurance.
•Global climate change adversely affecting the Company’s insurance portfolio and investments.
•Credit losses and interest rate changes adversely affecting the Company’s investments and AUM.
•Expansion of the categories and types of the Company’s investments exposing it to increased credit, interest rate, liquidity and other risks.
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Risks Related to Estimates, Assumptions and Valuations
•Estimates of expected insurance losses to be paid (recovered), including losses with respect to related legal proceedings, are subject to uncertainties and actual amounts may be different, causing the Company to reserve either too little or too much for future losses.
•The valuation of many of the Company’s assets and liabilities and AUM includes methodologies, estimates and assumptions that are subject to differing interpretations and could result in changes to valuations of the Company’s assets and liabilities that may materially adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
Strategic Risks
•Competition in the Company’s industries.
•Strategic transactions not resulting in the benefits anticipated.
•Risks related to the asset management business.
•Alternative investments not resulting in the benefits anticipated.
•A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries.
Operational Risks
•Fluctuations in foreign exchange rates.
•Less predictable, political, credit or legal risks associated with the some of the Company’s non-U.S. operations.
•The loss of the Company’s key executives or its inability to retain other key personnel.
•A cyberattack, security breach or failure in the Company’s or a vendor's information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system.
•Errors in, overreliance on, or misuse of, models.
•Significant claim payments may reduce the Company’s liquidity.
•A sudden need to raise additional capital as a result of insurance losses, whether related to Puerto Rico or otherwise, or as a result of changes in regulatory or rating agency capital requirements applicable to its insurance companies, at a time when additional capital may not be available or may be available only on unfavorable terms.
•Large insurance losses, whether related to Puerto Rico or otherwise, substantially increasing the Company’s insurance subsidiaries’ leverage ratios, and preventing them from writing new insurance.
•The Company’s holding companies' ability to meet their obligations may be constrained.
•The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Risks Related to Taxation
•Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company’s investments.
•Certain of the Company’s non-U.S. subsidiaries may be subject to U.S. tax.
•AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035.
•In certain circumstances, U.S. Persons holding AGL’s shares may be subject to taxation under the U.S. CFC rules, additional U.S. income taxation on their proportionate share of the Company's RPII or unrelated business taxable income rules, and may be subject to adverse tax consequences if AGL is considered to be a PFIC for U.S. federal income tax purposes.
•Changes in U.S. federal income tax law adversely affecting an investment in AGL’s common shares.
•An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
•A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
•Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
•An adverse adjustment under U.K. transfer pricing legislation could adversely impact Assured Guaranty’s tax liability.
•An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their non-U.K. subsidiaries adversely affecting Assured Guaranty's tax liability.
•Assured Guaranty’s financial results may be affected by measures taken in response to the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.
Risks Related to GAAP, Applicable Law and Litigation
•Changes in the fair value of the Company’s insured credit derivatives portfolio, its committed capital securities (CCS), its FG VIEs, its CIVs, and/or the Company’s decision to consolidate or deconsolidate one or more FG VIEs and/or CIVs during a financial reporting period, subjecting its financial condition and results of operations to volatility.
•Changes in industry and other accounting practices.
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•Changes in or inability to comply with applicable law and regulations.
•Legislation, regulation or litigation arising out of the struggles of distressed obligors.
•Certain insurance regulatory requirements and restrictions constraining AGL’s ability to pay dividends and fund share repurchases and other activities.
•Applicable insurance laws may make it difficult to effect a change of control of AGL.
Risks Related to AGL’s Common Shares
•Volatility in the market price of AGL’s common shares.
•Provisions in the Code and AGL’s Bye-Laws reducing or increasing the voting rights of its common shares.
•Provisions in AGL’s Bye-Laws potentially restricting the ability to transfer common share or requiring shareholders to sell their common shares.
Risks Related to Economic, Market and Political Conditions and Natural Phenomena
Developments in the U.S. and global financial markets and economy generally may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
In recent years, the global financial markets and economy generally have been impacted by changes in inflation and interest rates, the COVID-19 pandemic, political events such as trade confrontations between the U.S. and traditional allies and between the U.S. and China as well as the withdrawal of the U.K. from the EU (commonly known as “Brexit”). The global economic and political systems also have been impacted by events in the Middle East and Eastern Europe (including events in the Ukraine), as well as Africa and Southeast Asia, and could be impacted by other events in the future, including natural and man-made events and disasters.
These and other risks could materially and negatively affect the Company’s ability to access the capital markets, the cost of the Company’s debt, the demand for its credit enhancement and asset management products, the amount of losses incurred on transactions it guarantees, the value and performance of its investments (including those that are accounted for as CIVs), the value of its AUM and amount of its related asset management fees (including performance fees), the capital and liquidity position and financial strength and enhancement ratings of its insurance subsidiaries, and the price of its common shares.
Some of the state and local governments and entities that issue obligations the Company insures are experiencing significant budget deficits and pension funding and revenue shortfalls that could result in increased credit losses or impairments and increased rating agency capital charges on those insured obligations.
Some of the state, territorial, and local governments that issue the obligations the Company insures are experiencing significant budget deficits and pension funding and revenue collection shortfalls. Certain territorial or local governments, including ones that have issued obligations insured by the Company, have sought protection from creditors under Chapter 9 of the U.S. Bankruptcy Code, or, in the case of Puerto Rico, the similar provisions of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), as a means of restructuring their outstanding debt. In some instances where local governments were seeking to restructure their outstanding debt, pension and other obligations owed to workers were treated more favorably than senior bond debt owed to the capital markets. If the issuers of the obligations in the Company’s public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive advantageousfederal assistance, the Company may experience increased levels of losses or impairments on its insured public finance obligations.
In addition, obligations supported by revenue streams, which may include both revenue and non-revenue bonds, such as those issued by toll road authorities, municipal utilities, airport authorities or mass transit, may be adversely affected by revenue declines resulting from reduced demand, changing demographics, evolving business practices that began during the COVID-19 pandemic including hybrid work models, telecommuting, video conferencing and other alternative work arrangements, or other causes. These obligations, which may not necessarily benefit from financial support from other tax revenues or governmental authorities, may also experience increased losses if the revenue streams are insufficient to pay scheduled interest and principal payments.
The Company may be subjected to significant risks from large individual or correlated insurance exposures.
The Company is exposed to the risk that issuers of obligations that it insures or other counterparties may default on their financial obligations, whether as a result of insolvency, lack of liquidity, operational failure or other reasons, and the amount of insurance exposure the Company has to some the risks is quite large. The Company seeks to reduce this risk by
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managing exposure to large single risks, as well as concentrations of correlated risks, through tracking its aggregate exposure to single risks in its various lines of insurance business and establishing underwriting criteria to manage risk aggregations. Should the Company's risk assessments prove inaccurate and should the applicable limits prove inadequate, the Company could be exposed to larger than anticipated losses, and could be required by the rating agencies to hold additional capital requirement treatmentagainst insured exposures whether or not downgraded by the rating agencies. The Company’s ultimate exposure to a single risk may exceed its underwriting guidelines (caused by, for example, acquisitions, reassumptions, or amortization of the portfolio faster than the single risk).
The Company is exposed to correlation risk across the various assets the Company insures and in which it invests. During periods of strong macroeconomic performance, stress in an individual transaction generally occurs for idiosyncratic reasons or as a result of issues in a single asset class (so impacting only transactions in that sector). During a broad economic downturn or in the face of a significant natural or man-made event or disaster (such as the COVID-19 pandemic or events in Ukraine), a wider range of the Company’s insurance and investments could be exposed to stress at the same time. This stress may manifest itself in any or all of the following: ratings downgrades of insured risks, which may require more capital in the Company’s insurance subsidiaries; a reduction in the value of the Company’s investments and /or AUM; and actual defaults and losses in its insurance portfolio and / or investments.
Losses on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations insured by the Company significantly in excess of those currently expected by the Company or recoveries significantly below those currently expected by the Company could have a negative effect on the Company’s financial condition, results of operations, capital, business prospects and share price.
The Company has an aggregate $1.4 billion net par exposure as of December 31, 2022 to the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations, and losses on such insured exposures significantly in excess of those currently expected by the Company could have a negative effect on the Company’s financial condition, results of operations, capital, business prospects and share price. Most of the Puerto Rican entities with obligations insured by the Company have defaulted on their debt service payments, and the Company has paid claims on them. The total net expected loss the Company calculates related to such exposures is net of a significant credit for estimated recoveries on claims already paid, and recoveries significantly below those expected by the Company could also have a negative effect on the Company’s financial condition, results of operations, capital, liquidity, business prospects and share prices. Additional information about the Company’s exposure to Puerto Rico and legal actions related to that exposure may be found in, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, Exposure to Puerto Rico.
Downgrades to the U.S. government’s sovereign credit ratings, or to the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in a deterioration in general economic conditions, increased credit losses in the Company’s insured portfolio, impairments or losses in its investment portfolio, and other risks to the Company and its credit ratings that the Company is not able to predict.
In the U.S., debt ceiling and budget deficit concerns, which have increased the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings, could weaken the U.S. dollar, global economy and banking system, cause market volatility, raise the cost of credit, negatively impact the Company’s insured and investment portfolios, and disrupt general economic conditions in ways that the Company is not able to predict, which could materially and adversely affect the Company’s business, financial condition and results of operations. While rating agencies currently permit sub-sovereign and corporate credits in the U.S. to be rated higher than sovereign credits, in the event that the U.S. government is downgraded and if the rating agencies no longer permit sub-sovereign and/or corporate credit ratings to be higher than the U.S. government, the resulting downgrades could result in a material adverse impact to the Company’s credit ratings and its insurance and investment portfolios.
The Company may be exposed to a higher risk of default of U.S. public finance obligations in connection with a U.S. government default. While the Company historically has experienced low levels of defaults in its U.S. public finance insured portfolio, from time-to-time state and local governments that issue some of the obligations the Company insures have reported budget shortfalls that have required them to raise taxes and/or cut spending in order to satisfy their obligations. While there has been support provided by the U.S. federal government designed to provide aid to state and local governments, including during the COVID-19 pandemic, certain state and local governments remain under financial stress. If the issuers of the obligations in the Company’s U.S. public finance insurance portfolio are reliant on financial assistance from the U.S. government in order to meet their obligations, and the U.S. government does not provide such assistance, the Company may experience credit losses or impairments on those obligations.
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A downgrade of the U.S. government may also result in higher interest rates, which could adversely affect the distressed RMBS that are in the Company’s insured portfolio, reduce the market value of the fixed-maturity securities held in the Company’s investment portfolio and dampen municipal bond issuance.
The development, course and duration of the COVID-19 pandemic, and the governmental and private actions taken in response to the pandemic may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
In addition to its human toll, the COVID-19 pandemic and the governmental and private actions taken in response have caused economic and financial disruption on a global scale and may continue to do so. While vaccines and therapeutics have been developed and approved and deployed by governments, the remaining course and duration of the pandemic, and future governmental and private responses to its course, remain unknown. While there has been approximately three years of experience with the pandemic, not all of the direct and indirect consequences of COVID-19 are known yet. The Company believes the most material of these risks include the following, all of which are discussed in more detail in this Risk Factors section:
•Impact on its insurance business, including potential:
◦Increased insurance claims and loss reserves;
◦Increased correlation of risks;
◦Difficulty in meeting applicable capital requirements as well as other regulatory requirements;
◦Reduction in one or more of the financial strength and enhancement ratings of the Company’s insurance subsidiaries;
•Impact on the Company’s asset management business, including potential:
◦Difficulty in attracting third-party funds to manage;
◦Reduction and/or deferral of asset management fees (including performance fees) as occurred with respect to the deferral of CLO management fees in 2020 (although such deferred performance fees have since been received);
◦Impairment of goodwill and other intangible assets associated with the BlueMountain Acquisition;
•Impact of legislative or regulatory responses to the pandemic;
•Losses in the Company’s investments; and
•Operational disruptions and security risks from remote working arrangements.
The Company believes that state, territorial 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 various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims from the impact of the COVID-19 pandemic and the governmental and private actions taken in response. Moreover, state and local governments under financial stress and dependent on U.S. federal government assistance provided in connection with the COVID-19 pandemic may be at risk of experiencing credit losses or impairment on their obligations as a result of cessation of the U.S. federal government’s support. In addition to obligations already internally rated in the low investment grade or BIG categories, the Company believes that its sectors most at risk include: (i) Mass Transit - Domestic; (ii) Toll Roads and Transportation - International; (iii) Hotel / Motel Occupancy Tax; (iv) Stadiums; (v) UK University Housing - International; (vi) Privatized Student Housing: Domestic; and (vii) Commercial Receivables.
The Company continues to provide the services and communications it did prior to the COVID-19 pandemic, and to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades, establish new funds and attract third-party funds to manage. 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.
The COVID-19 pandemic and governmental and private actions taken in response may also exacerbate many of the risks applicable to the Company in ways or to an extent not yet identified by the Company.
Changes in attitudes toward debt repayment could negatively impact the Company’s insurance portfolio.
The likelihood of debt repayment is impacted by both the ability and the willingness of the obligor to repay their debt. Debtors generally understand that debt repayment is not only a legal obligation but is also appropriate, and that a failure to repay their debt will impede their access to debt in the future. To the extent societal attitudes toward the repayment of debt by struggling obligors softens and such obligors believe there to be less of a penalty for nonpayment, some struggling debtors may be more likely to default and, if they default, less likely to agree to repayment plans they view as burdensome. If the issuers of
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the obligations in the Company’s public finance insurance portfolio become unwilling to raise taxes, decrease spending or receive federal assistance in order to repay their debt, the Company may experience increased levels of losses on its public finance obligations, which could adversely affect its financial condition, results of operations, capital, liquidity, business prospects and share price.
Persistently low interest rate levels and credit spreads could adversely affect demand for financial guaranty insurance.
Demand for financial guaranty insurance generally fluctuates with changes in market credit spreads. Credit spreads, which are based on the difference between interest rates on high-quality or “risk free” securities versus those on lower-rated securities, fluctuate due to a number of factors, and are sensitive to the absolute level of interest rates, current credit experience and investors’ risk appetite. When interest rates are low, or when the market is relatively less risk averse, the credit spread between high-quality or insured obligations versus lower-rated obligations typically narrows. As a result, financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively wider credit spreads. Issuers are less likely to use financial guaranties on their new issues when credit spreads are narrow, so (absent other factors) this results in decreased demand or premiums obtainable for financial guaranty insurance.
Global climate change may adversely impact the Company’s insurance portfolio and investments.
Global climate change and climate change regulations may impact asset prices and general economic conditions and may disproportionately impact particular sectors, industries or locations. Due to the significant uncertainty of forecasted data related to the impact of climate change, the Company cannot predict the long-term consequences to the Company resulting from the physical, transition, legal, regulatory and reputational risks associated with climate change. The Company considers environmental risk in its insurance underwriting and surveillance process and its investment process and manages its insurance and investment risks by maintaining a well-diversified portfolio of insurance and investments both geographically and by sector and monitors these measures continuously. While the Company can adjust its investment exposure to sectors and/or geographical areas that face severe risks due to climate change or climate change regulation, the Company has less flexibility in adjusting the existing exposure in its insurance portfolio because the majority of the financial guaranties issued by the Company’s insurance subsidiaries 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 insurance.
Credit losses and changes in interest rates could adversely affect the Company’s investments and AUM.
The Company’s results of operations are affected by the performance of its investments, which primarily consist of fixed-income securities and short-term investments. As of December 31, 2022, fixed-maturity securities and short-term investments held by the Company had a fair value of approximately $8.2 billion. Credit losses on the Company’s investments adversely affect the Company’s financial condition and results of operations by reducing net income and shareholders’ equity. In recent years the Company has increased the amount it invests in alternative investments. In addition, the Company received a significant amount of New Recovery Bonds and CVIs as a result of the 2022 Puerto Rico Resolutions. Alternative investments, Loss Mitigation Securities, Puerto Rico New Recovery Bonds and CVIs may be more susceptible to credit losses than most of the rest of the Company’s fixed-income portfolio.
The impact of changes in interest rates may also adversely affect both the Company’s financial condition and results of operations. For example, if interest rates decline, funds reinvested will have a lower yield than expected, reducing the Company’s future investment income compared to the amount it would earn if interest rates had not declined. However, the value of the Company’s fixed-rate investments would generally increase, resulting in an unrealized gain on investments and improving the Company’s financial condition. Conversely, if interest rates increase, the Company’s results of operations would improve as a result of higher future reinvestment income, but its financial condition would be adversely affected, since value of the fixed-rate investments generally would be reduced.
Credit losses and changes in interest rates could also have an adverse impact on the amount of the Company’s AUM, which could impact results of operations. For example, if there are credit losses in the portfolios managed by AssuredIM or, to a lesser extent, if interest rates increase, AUM will decrease, reducing the amount of management fees earned by the Company.
Interest rates are highly sensitive to many factors, including monetary policies, U.S. and non-U.S. economic and political conditions and other factors beyond the Company’s control. The Company does not engage in active management, or hedging, of interest rate risk in its investment portfolio, and may not be able to mitigate interest rate sensitivity effectively.
Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs) may expose it to increased credit, interest rate, liquidity and other risks.
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The Company is using AssuredIM’s investment knowledge and experience to expand the categories and types of its investments (including those accounted for as CIVs) by both: (a) allocating $750 million of capital in AssuredIM Funds; and (b) expanding the categories and types of its alternative investments not managed by AssuredIM. This expansion of categories and types of investments may increase the credit, interest rate and liquidity risk in the Company’s investments (including those accounted for as CIVs). In addition, the fair value of some of these assets may be more volatile than other investments made by the Company. As a result of the Company’s expansion of the categories and types of its investments, as of December 31, 2022, the U.S. Insurance Subsidiaries had investments in AssuredIM Funds with a fair value of $569 million, which are reported as CIVs, in the Company’s consolidated financial statements. In addition, the Company had $123 million of other non-AssuredIM alternative investments reported in the consolidated financial statements. This expansion also has resulted in the Company investing a portion of its portfolio in assets that are less liquid than some of its other investments, and so may increase the risks described below under “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited”. Expanding the categories and types of Company investments (including those accounted for as CIVs) may also expose the Company to other types of risks, including reputational risks.
Risks Related to Estimates, Assumptions and Valuations
Estimates of expected insurance losses to be paid (recovered), including losses with respect to related legal proceedings, are subject to uncertainties and actual amounts may be different, causing the Company to reserve either too little or too much for future losses.
The financial guaranties issued by the Company’s insurance subsidiaries 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 losses to be paid (recovered) on a policy is subject to significant uncertainty over the life of the insured transaction. Additionally, even after the Company pays a claim on its financial guaranties (or determines no claim is owing), subsequent related litigation may result in additional losses. If the Company’s actual losses exceed its current estimate, the Company’s financial condition, results of operations, capital, liquidity, business prospects, financial strength ratings and ability to raise additional capital may all be adversely affected.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses to be paid (recovered). The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, probability weightings, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, future interest rates, the perceived strength of legal protections, the perceived strength of the Company’s position in any ongoing legal proceedings, governmental actions, negotiations, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. Actual losses will ultimately depend on future events, legal rulings, and/or transaction performance and may be influenced by many interrelated factors that are difficult to predict. As a result, the Company’s current estimates of losses to be paid (recovered), including losses with respect to related legal proceedings, may be subject to considerable volatility and may not reflect the Company’s future ultimate losses paid (recovered).
The Company’s expected loss models and reserve assumptions take into account current and expected future trends, which contemplate the impact of current and possible developments in the performance of the exposure and any related legal proceedings. These factors, which are integral elements of the Company's reserve estimation methodology, are updated on a quarterly basis based on current information. Also, in some instances, the Company may not be able to reasonably estimate the amount or range of loss that could result from an unfavorable outcome of a legal proceeding based on the information available at the stage of the legal proceeding or its estimate may prove to be materially different than the actual results. Loss models and reserve assumptions may be impacted by changes to interest rates due both to discounting and transaction structures that include floating rates, which could impact the calculation of expected losses. Because such information changes over time, sometimes materially, the Company’s projection of losses and its related reserves may also change materially. Much of the recent development in the Company’s loss projections and reserves relate to the Company’s insured Puerto Rico exposures.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, for additional information.
The valuation of many of the Company’s assets and liabilities and AUM includes methodologies, estimates and assumptions that are subject to differing interpretations and could result in changes to valuations of the Company’s assets and liabilities that may materially adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
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The Company carries a significant portion of its assets and liabilities and reports a significant portion of its AUM at fair value. The approaches used by the Company to calculate the fair value of those assets and liabilities it carries at fair value are described under, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement. The determination of fair values is made at a specific point in time, based on available market information and judgments about the assets and liabilities being valued, including estimates of timing and amounts of cash flows and the credit rating of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on estimated fair value amounts.
During periods of market disruption, including periods of rapidly changing credit spreads or illiquidity, it may be difficult to value certain of the Company’s assets and liabilities and AUM, particularly if trading becomes less frequent or market data becomes less observable. An increase in the amount of the Company’s alternative investments in its investment portfolio and/or CIVs may increase the amount of the Company’s assets subject to this risk. During such periods, more assets and liabilities may fall to the Level 3 valuation level, which describes model derived valuations in which one or more significant inputs or significant value drivers are unobservable, thereby resulting in values that may not be indicative of net realizable value or reflective of future fair values. Rapidly changing credit and equity market conditions could materially impact the valuation of assets and liabilities as reported within the financial statements, and period-to-period changes in value could vary significantly.
Strategic Risks
Competition in the Company’s industries may adversely affect its results of operations, business prospects and share price.
As described in greater detail under Item 1, Business — Insurance Segment — Competition, the Company can face competition in its insurance business, either in the form of current or new providers of credit enhancement, such as nonpayment insurance, letters of credit or credit derivatives, or in terms of alternative structures, including uninsured offerings, or pricing competition. Increased competition could have an adverse effect on the Company’s insurance business.
The Company’s Asset Management segment operates in highly competitive markets. The Company competes with many other firms in every aspect of the asset management industry, including raising funds, seeking investments, and hiring and retaining professionals. The Company’s ability to 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. In addition, if the Company’s successful competitors charge lower fees for substantially similar products, the Company may face pressure to lower fees to attract and retain asset management clients, which may reduce the Company’s revenues and /or income.
Some of the Company’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by the Company. Some of these competitors also may have a lower cost of capital and access to funding sources that are not available to the Company, which may create further competitive disadvantages with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships than those available to AssuredIM and/or the Company.
Strategic transactions may not result in the benefits anticipated.
From time to time the Company evaluates strategic opportunities and conducts diligence activities with respect to transactions with other financial services companies including transactions involving asset managers, asset management contracts, legacy financial guaranty companies and financial guaranty portfolios, and other financial services companies, and has executed a number of such transactions in the past. For example, the Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. From time to time the Company also evaluates expanding its business by hiring teams of professionals engaged in activities it wishes to pursue and conducts due diligence with respect to such individuals and their current positions. Such strategic transactions related to entities, portfolios or teams may involve some or all of the various risks commonly associated with such strategic transactions, including, among other things: (a) failure to adequately identify and value potential exposures and liabilities associated with a new entity, portfolio or team; (b) difficulty in estimating the value of a new entity, portfolio or team; (c) potential diversion of management’s time and attention; (d) exposure to asset quality issues of a new entity or portfolio; (e) difficulty and expense of integrating the operations, systems and personnel of a new entity; (f) difficulty integrating the culture of a new entity or team; (g) failure to identify legal risks associated with the strategic transaction with an entity, portfolio or team, and (h) in the case of acquisitions of a financial guaranty company or portfolio, concentration of insurance exposures, including insurance exposures which may exceed single risk limits, aggregate risk limits, BIG limits and/or non-U.S. dollar exposure limits, due to the addition of the target insurance portfolio. Such strategic transactions related to entities, portfolios or
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teams may also have unintended consequences on ratings assigned by the rating agencies to the Company or its insurance subsidiaries or on the applicability of laws and regulations to the Company’s guaranty.existing businesses. These or other factors may cause any past or future strategic transactions relating to financial services entities, portfolios or teams not to result in the benefits to the Company that the Company anticipated when the transaction was agreed. Past or future transactions may also subject the Company to non-monetary consequences that may or may not have been anticipated or fully mitigated at the time of the transaction.
Additionally, if the Company enters into discussions regarding a strategic transaction and a transaction is not consummated, especially if such discussions become known, related portions of the Company’s business may be negatively impacted.
Asset Management may present risks that may adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
The expansion of the Company’s asset management business segment and the establishment of AssuredIM has exposed the Company’s financial condition, results of operations, business prospects and share price to some of the risks faced by asset managers generally and the risk of AssuredIM’s investment business more specifically. Asset management services are primarily a fee-based business, and the Company’s asset management and performance fees are based on the amount of its AUM as well as the performance of those assets. Volatility or declines in the markets in which the Company considersinvests as an asset manager, or poor performance of its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company's business opportunitiesinvestments, may negatively affect its AUM and its risk profile beyond U.S. public finance. Quarterly business activityasset management and performance fees, and may deter future investment by third parties in the international infrastructureCompany’s asset management products. The Company’s asset management business is also subject to legal, regulatory, compliance, accounting, valuation and structured finance sectorspolitical risks that differ from those involved in the Company’s insurance business. In addition, the asset management business is influenced by typically long lead times and therefore may vary from quarter to quarter.an intensely competitive business, creating new competitive risks.
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.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (dollars in billions, except number of issues and percent) | |||||||||||
| Par: | |||||||||||
| New municipal bonds issued | $ | 406.6 | $ | 320.3 | $ | 409.5 | |||||
| Total insured | $ | 23.9 | $ | 18.9 | $ | 23.0 | |||||
| Insured by Assured Guaranty | $ | 14.0 | $ | 10.5 | $ | 13.5 | |||||
| Number of issues: | |||||||||||
| New municipal bonds issued | 10,590 | 8,555 | 10,589 | ||||||||
| Total insured | 1,724 | 1,246 | 1,637 | ||||||||
| Insured by Assured Guaranty | 839 | 596 | 833 | ||||||||
| Bond insurance market penetration based on: | |||||||||||
| Par | 5.9 | % | 5.9 | % | 5.6 | % | |||||
| Number of issues | 16.3 | % | 14.6 | % | 15.5 | % | |||||
| Single A par sold | 21.4 | % | 17.8 | % | 23.3 | % | |||||
| Single A transactions sold | 54.9 | % | 52.8 | % | 57.3 | % | |||||
| $25 million and under par sold | 18.1 | % | 17.2 | % | 18.7 | % | |||||
| $25 million and under transactions sold | 19.7 | % | 17.1 | % | 18.3 | % | |||||
Alternative investments may not result in the benefits anticipated.
The Company and its CIVs have invested in alternative investments, and may over time increase the proportion of the Company’s assets invested in alternative investments. Alternative investments may be riskier than other investments the Company makes, and may not result in the benefits anticipated at the time of the investment. In addition, although the Company uses what it believes to be excess capital to make alternative investments, whether directly or through CIVs, measures of required capital can fluctuate and such assets may not be given much, or any, value under the various rating agency, regulatory and internal capital models to which the Company is or may be subject. Also, alternative investments may be less liquid than most of the Company’s other investments and so may be difficult to convert to cash or investments that do receive more favorable treatment under the capital models to which the Company is subject. See “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”
A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries may adversely affect its business prospects.
The financial strength and financial enhancement ratings assigned by S&P, Moody’s, KBRA and A.M. Best Company, Inc. to each of the Company’s insurance and reinsurance subsidiaries represent such rating agencies’ opinions of the insurer’s financial strength and ability to meet ongoing obligations to policyholders and cedants in accordance with the terms of the financial guaranties it insureshas issued or the reinsurance agreements it has executed. Issuers, investors, underwriters, ceding companies and others consider the Company’s financial strength or financial enhancement ratings an important factor when deciding whether or not to utilize a financial guaranty or purchase reinsurance from one of the Company’s insurance or reinsurance subsidiaries. A downgrade by a rating agency of the financial strength or financial enhancement ratings of one or more of the Company’s insurance subsidiaries could impair the Company’s financial condition, results of operation, capital, liquidity, business prospects and/or share price. The ratings assigned by the rating agencies to the Company’s insurance subsidiaries are subject to review and may be lowered by a rating agency at any time and without notice to the Company.
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The rating agencies have changed their methodologies and criteria from time to time. Factors influencing the rating agencies are beyond management's control and not always known to the Company. In the event of an actual or perceived deterioration in creditworthiness of large risks in the Company’s insurance portfolio, or other large increases in liabilities (including those related to legal proceedings), or a change in a rating agency’s capital model or rating methodology, a rating agency may require the Company to increase the amount of capital it holds to maintain its financial strength and financial enhancement ratings under the rating agencies’ capital adequacy models, or a rating agency may identify an issue that additional capital would not address. The amount of any capital required may be substantial, and may not be available to the Company on favorable terms and conditions or at all, especially if it were known that additional capital was necessary to preserve the Company’s financial strength or financial enhancement ratings. The failure to raise any additional required capital, or successfully address another issue or issues raised by a rating agency, could result in a downgrade of the ratings of the Company’s insurance subsidiaries and thus have an adverse impact on its business, results of operations and financial condition.
The Company periodically assesses the value of each rating assigned to each of its subsidiaries, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its subsidiaries. Rating agencies may choose not to honor the Company’s request, and continue to rate a subsidiary after the Company’s request to drop the rating, as Moody’s did with respect to AGC.
The insurance subsidiaries’ financial strength and financial enhancement ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of one or more of the Company’s insurance subsidiaries were reduced below current levels, the Company expects the number of transactions that would benefit from the Company’s insurance would be reduced; consequently, a downgrade by rating agencies could harm the Company’s new insurance business production.
In addition, a downgrade may have a negative impact on the Company’s insurance subsidiaries in respect of transactions that they have insured or that they have assumed through reinsurance. For example, beneficiaries of financial guaranties issued by the Company’s insurance subsidiaries may have the right to cancel the credit protection provided by them, which would result in the loss of future premium earnings and the reversal of any fair value gains recorded by the Company. In addition, a downgrade of AG Re, AGC or AGRO could result in certain ceding companies recapturing business that they had ceded to these reinsurers.
Operational Risks
Fluctuations in foreign exchange rates may adversely affect the Company’s financial position and results of operations.
The Company’s reporting currency is the U.S. dollar. The functional currency of the Company’s insurance and reinsurance subsidiaries is the U.S. dollar. The Company’s subsidiaries maintain both assets and liabilities in currencies different from their functional currencies, which exposes the Company to changes in currency exchange rates. The investment portfolios of non-U.S. subsidiaries are primarily invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.
The principal currencies creating foreign exchange risk to the Company are the pound sterling and the euro. The Company cannot accurately predict the nature or extent of future exchange rate variability between these currencies or relative to the U.S. dollar. Foreign exchange rates are sensitive to factors beyond the Company’s control.
The Company does not engage in active management, or hedging, of its foreign exchange rate risk. Therefore, fluctuation in exchange rates between the U.S. dollar and the pound sterling or the euro could adversely impact the Company’s financial position, results of operations and cash flows. See Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk — Sensitivity to Foreign Exchange Rate Risk.
Some of the Company’s non-U.S. operations expose it to less predictable political, credit and legal risks.
The Company pursues new business opportunities in non-U.S. markets. The underwriting of obligations of an issuer in a country other than the U.S. involves the same process as that for a U.S. issuer, but additional risks must be addressed, such as the evaluation of currency exchange rates, non-U.S. business and legal issues, and the economic and political environment of the country or countries in which an issuer does business. Changes in such factors could impede the Company’s ability to insure, or increase the risk of loss from insuring, obligations in the non-U.S. countries in which it currently does business and limit its ability to pursue business opportunities in other non-U.S. countries.
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The Company is dependent on key executives and the loss of any of these executives, or its inability to retain other key personnel, could adversely affect its business.
The Company’s success substantially depends upon its ability to attract, motivate and retain qualified employees and upon the ability of its senior management and other key employees to implement its business strategy. The Company believes there are only a limited number of available qualified executives in the insurance business lines in which the Company competes, and that there is strong competition for qualified asset management executives, including portfolio managers. The Company relies substantially upon the services of Dominic J. Frederico, President and Chief Executive Officer, and other executives.
Beginning in 2021, there has been a dramatic increase in U.S. workers leaving their positions generally in what has been referred to as the “great resignation,” and the market to build, retain and replace talent has become even more highly competitive. Although the Company has designed its executive compensation with the goal of retaining and creating incentives for its executive officers and other key employees, including portfolio managers, the Company may not be successful in retaining their services. The loss of the services of any of these individuals or other key members of the Company’s management team could adversely affect the implementation of its business strategy, including the Company’s development of its asset management business.
The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in the Company’s or a vendor’s information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system, could adversely affect the Company’s business.
The Company relies upon information technology and systems, including technology and systems provided by or interfacing with those of third parties, to support a variety of its business processes and activities. In addition, the Company receives and stores confidential information, including personally identifiable information, in connection with certain loss mitigation and due diligence activities related to its structured finance insurance and asset management businesses, along with information regarding employees and directors and asset management clients, among others. Information technology security threats and events are increasing in frequency and sophistication. The Company’s data systems and those of third parties on which it relies will continue to be vulnerable to security and data privacy breaches due to, and continue to be the target of, cyberattacks, viruses, malware, ransomware, other malicious codes, hackers, unauthorized access, or other computer-related penetrations, and other external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct. Over time, the frequency and sophistication of such threats continue to increase and often become further heightened in connection with geopolitical tensions. Like other global companies, the Company has an increasing challenge of attracting and retaining highly qualified security personnel to assist in combating these security threats. A breach of these systems could, for example, result in lost business, reputational harm, the disclosure or misuse of confidential or proprietary information, incorrect reporting, legal costs and regulatory penalties, including under the EU’s General Data Protection Regulation, the California Consumer Privacy Act and similar laws and regulations.
The Company’s business operations rely on the continuous availability of its computer systems as well as those of certain third parties. In addition to disruptions caused by cyberattacks or data privacy breaches, such systems may be adversely affected by natural and man-made catastrophes. The Company’s failure to maintain business continuity in the wake of such events, particularly if there were an interruption for an extended period, could prevent the timely completion of critical processes across its operations, including, for example, claims processing, treasury and investment operations and payroll. These failures could result in additional costs, loss of business, fines and litigation.
The Company began operating remotely in accordance with its business continuity plan, and instituted mandatory work-from-home policies at all of its global offices, in March 2020. The Company has shifted to a hybrid work-from-home and work-from-office paradigm. This shift to working from home at least part of the time has made the Company more dependent on internet and communications access and capabilities and has heightened the risk of cybersecurity attacks to its operations.
The Company and its subsidiaries are subject to numerous data privacy and protection laws and regulations in a number of jurisdictions, particularly with regard to personally identifiable information. The Company’s failure to comply with these requirements, even absent a security breach, could result in penalties, reputational harm or difficulty in obtaining desired consents from regulatory authorities.
The Board oversees the risk management process and engages with Company cybersecurity and data privacy risk issues, including reinforcing related policies, standards and practices, and the expectation that employees will comply with these policies. The Audit Committee of the Board of Directors has specific responsibility for overseeing information technology
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matters, including cybersecurity and data privacy risk, and the Risk Oversight Committee of the Board addresses cybersecurity and data privacy matters as part of its enterprise risk management responsibilities.
Errors in, overreliance on or misuse of models may result in financial loss, reputational harm or adverse regulatory action.
The Company uses models for numerous purposes in its business. For example, it uses models to project future cash flows associated with pricing models, calculating insurance expected losses to be paid (recoveries), evaluating risks in its insurance and investments, valuing assets and liabilities and projecting liquidity needs. It also uses models to determine and project capital requirements under its own risk model as well as under regulatory and rating agency requirements. While the Company has a model validation function and has adopted procedures to protect its models, the models may not operate properly (including as a result of errors or damage) and may rely on assumptions that are inherently uncertain and may prove to have been incorrect.
Significant claim payments may reduce the Company’s liquidity.
Claim payments and payments made in connection with related legal proceedings reduce the Company’s invested assets and result in reduced liquidity and net investment income, even if the Company is reimbursed in full over time and does not experience ultimate loss on the claim. In the years after the financial crisis that began in 2008, many of the larger claims paid by the Company were with respect to insured U.S. RMBS securities. More recently, the Company has been paying large claims related to certain insured Puerto Rico exposures, which it has been doing since 2016. The Company had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.4 billion and $3.6 billion, respectively, as of December 31, 2022 and December 31, 2021, all of which was an active participant in negotiatingrated BIG under the Company’s rating methodology. For a discussion of the Company’s 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,risks, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 5,3, Outstanding Exposure. For a discussion of the Company’s plans to fund large claim payments associated with the anticipated resolution of these exposures, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Exposure.Subsidiaries.
The Company plans for future claim payments. If the amount of future claim payments is significantly more than that projected by the Company, the Company’s ability to make other claim payments and its financial condition, financial strength ratings and business prospects and share price could be adversely affected.
The Company may face a sudden need to raise additional capital as a result of insurance losses, whether related to Puerto Rico or otherwise, substantially in excess of the stress scenarios for which it plans, or as a result of changes in regulatory or rating agency capital requirements applicable to its insurance companies, which additional capital may not be available or may be available only on unfavorable terms.
The Company’s capital requirements depend on many factors, primarily related to its in-force book of insurance business and rating agency capital requirements for its insurance companies. Failure to raise additional capital if and as needed may result in the Company being unable to write new insurance business and may result in the ratings of the Company and its insurance subsidiaries being downgraded by one or more rating agency. The Company’s access to external sources of financing, as well as the cost of such financing, is dependent on various factors, including the market supply of such financing, the Company’s long-term debt ratings and insurance financial strength and enhancement ratings and the perceptions of its financial strength and the financial strength of its insurance subsidiaries. The Company’s debt ratings are in turn influenced by numerous factors, such as financial leverage, balance sheet strength, capital structure and earnings trends. If the Company’s need for capital arises because of significant insurance losses substantially in excess of the stress scenarios for which it plans, the occurrence of such losses may make it more difficult for the Company to raise the necessary capital.
Future capital raises for equity or equity-linked securities could also result in dilution to the Company’s shareholders. In addition, some securities that the Company could issue, such as preferred stock or securities issued by the Company's operating subsidiaries, may have rights, preferences and privileges that are senior to those of its common shares.
Large insurance losses, whether related to Puerto Rico or otherwise, could increase substantially the Company’s insurance subsidiaries’ leverage ratios, which may prevent them from writing new insurance.
Insurance regulatory authorities impose capital requirements on the Company’s insurance subsidiaries. These capital requirements, which include leverage ratios and surplus requirements, may limit the amount of insurance that the subsidiaries may write. A material reduction in the statutory capital and surplus of an insurance subsidiary, whether resulting from underwriting or investment losses, a change in regulatory capital requirements or another event, or a disproportionate increase
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in the amount of risk in force, could increase a subsidiary’s leverage ratio. This in turn could require that subsidiary to obtain reinsurance for existing business or add to its capital base (neither of which may be available, or may be available only on terms that the Company considers unfavorable). Failure to maintain regulatory capital levels could limit that insurance subsidiary’s ability to write new business.
The Company’s holding companies’ ability to meet their obligations may be constrained.
Each of AGL, AGUS and AGMH is a holding company and, as such, has no direct operations of its own. None of the holding companies expect to have any significant operations or assets other than its ownership of the stock of its subsidiaries. The Company expects that while it is building its asset management business, dividends and other payments from the insurance companies will be the primary source of funds for AGL, AGUS and AGMH to meet ongoing cash requirements, including operating expenses, intercompany loan payments, any future debt service payments and other expenses, to pay dividends to their respective shareholders, to fund any acquisitions, and, in the case of AGL, to repurchase its common shares. The insurance subsidiaries’ ability to pay dividends and make other payments depends, among other things, upon their financial condition, results of operations, cash requirements, 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. Additionally, in recent years AGM and AGC have sought and been granted permission from their insurance regulators to make discretionary payments to their corporate parents in excess of the amounts permitted by right under the insurance laws and related regulations. There can be no assurance that such regulators will permit discretionary payments in the future. Accordingly, if the insurance subsidiaries are unable to pay sufficient dividends and other permitted payments at the times or in the amounts that are required, that would have an adverse effect on the ability of AGL, AGUS and AGMH to satisfy their ongoing cash requirements and on their ability to pay dividends to shareholders or repurchase common shares or fund other activities, including acquisitions.
The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Each of AGL, AGUS and AGMH requires liquidity, either in the form of cash or in the ability to easily sell investment assets for cash, in order to meet its payment obligations, including, without limitation, its operating expenses, interest and principal payments on debt and dividends on common shares, and to make capital investments in operating subsidiaries. Such cash is also used by AGL to repurchase its common shares. The Company’s operating subsidiaries require substantial liquidity to meet their respective payment and/or collateral posting obligations, including under financial guaranty insurance policies or reinsurance agreements. They also require liquidity to pay operating expenses, reinsurance premiums, dividends to AGUS or AGMH for debt service and dividends to AGL, as well as, where appropriate, to make capital investments in their own subsidiaries. In addition, the Company may require substantial liquidity to fund any future acquisitions. The Company cannot give any assurance that the liquidity of AGL and its subsidiaries will not be adversely affected by adverse market conditions, changes in insurance regulatory law, insurance claim payments and related litigation substantially in excess of those projected by the Company in its stress scenarios, or changes in general economic conditions.
AGL anticipates that its liquidity needs will be met by the ability of its operating subsidiaries to pay dividends or to make other payments; external financings; investment income from its invested assets; and current cash and short-term investments. The Company expects that its subsidiaries’ need for liquidity will be met by the operating cash flows of such subsidiaries; external financings; investment income from their invested assets; and proceeds derived from the sale of their investments, significant portions of which are in the form of cash or short-term investments. The value of the Company’s investments may be adversely affected by changes in interest rates, credit risk and capital market conditions that therefore may adversely affect the Company’s potential ability to sell investments quickly and the price which the Company might receive for those investments. Part of the Company’s investment strategy is to invest more of its excess capital in alternative investments, which may be particularly difficult to sell at adequate prices, or at all.
The Company’s sources of liquidity are subject to market, regulatory or other factors that may impact the Company’s liquidity position at any time. As discussed above, AGL’s insurance subsidiaries are subject to regulatory and rating agency restrictions limiting their ability to declare and to pay dividends and make other payments to AGL. As further noted above, external financing may or may not be available to AGL or its subsidiaries in the future on satisfactory terms.
Risks Related to Taxation
Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company’s investments.
The TCJA included provisions that could result in a reduction of supply, such as the termination of advance refunding bonds. Any such lower volume of municipal obligations could impact the amount of such obligations that could benefit from
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insurance. In addition, the reduction of the U.S. corporate income tax rate to 21% could make municipal obligations less attractive to certain institutional investors such as banks and property and casualty insurance companies, resulting in lower demand for municipal obligations.
Further, future changes in U.S. federal, state or local laws that materially adversely affect the tax treatment of municipal securities or the market for those securities may lower volume and demand for municipal obligations and also may adversely impact the value and liquidity of the Company’s investments, a significant portion of which is invested in tax-exempt instruments.
Certain of the Company’s non-U.S. subsidiaries may be subject to U.S. tax.
The Company manages its business so that AGL and its non-U.S. subsidiaries (other than AGRO) operate in such a manner that none of them should be subject to U.S. federal tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks, and U.S. withholding tax on certain U.S. source investment income). However the Company cannot be certain that the IRS will not contend successfully that AGL or any of its non-U.S. subsidiaries (other than AGRO) is/are engaged in a trade or business in the U.S., in which case each such company could be subject to U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such U.S. business. See Item 1. Business — Tax Matters — Taxation of AGL and Subsidiaries— United States.
AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035, which may adversely affect the Company’s future results of operations and on an investment in the Company.
The Bermuda Minister of Finance, under Bermuda’s Exempted Undertakings Tax Protection Act 1966, as amended, has given AGL, AG Re and AGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or AGRO, or any of AGL’s or its subsidiaries’ operations, stocks, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, the Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035.
U.S. Persons who hold 10% or more of AGL’s shares directly or through non-U.S. entities may be subject to taxation under the U.S. CFC rules.
If AGL and/or a non-U.S. subsidiary is considered a CFC, a U.S. Person that is treated as owning 10% or more of AGL’s shares may be required to include in income for U.S. federal income tax purposes its pro rata share of certain income of AGL and its non-U.S. subsidiaries for a taxable year, even if such income is not distributed and may be subject to U.S. federal income tax on a portion of any gain upon a sale or other disposition of its shares at ordinary income tax rates.
No assurance may be given that a U.S. Person who owns the Company’s shares will not be characterized as owning 10% or more of AGL and/or its non-U.S. subsidiaries under the CFC rules, in which case such U.S. Person may be subject to taxation under such rules. See Item 1. Business — Tax Matters, — Taxation of Shareholders ─ United States Taxation ─ Classification of AGL or its Non-U.S. Subsidiaries as a CFC.
U.S. Persons who hold shares may be subject to U.S. income taxation at ordinary income rates on their proportionate share of the Company’s RPII.
If any Foreign Insurance Subsidiary generates RPII (broadly defined as insurance and related investment income attributable to the insurance of a U.S. shareholder and certain related persons to such shareholder) and certain exceptions are not met, each U.S. Person owning AGL shares (directly or indirectly through foreign entities) may be required to include in income for U.S. federal income tax purposes its pro rata share of the Foreign Insurance Subsidiary’s RPII, regardless of whether such income is distributed and may be subject to U.S. federal income tax on a portion of any gain upon a sale or other disposition of its shares at ordinary tax rates (even if an exception to the RPII rules applies).
The Company believes that each of its Foreign Insurance Subsidiaries should qualify for an exception to the RPII rules and the rules that subject gain on sale or disposition of shares to ordinary tax rates would not apply to the disposition of AGL shares. However, the Company cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond its control and rules regarding the treatment of gain on disposition of shares have not been interpreted or finalized. Recently proposed regulations could, if finalized in their current form, substantially expand the definition of RPII to include insurance income of our Foreign Insurance Subsidiaries related to affiliate reinsurance
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transactions. If these proposed regulations are finalized in their current form, it could limit our ability to execute affiliate reinsurance transactions that would otherwise be undertaken for non-tax business reasons in the future and could increase the risk that gross RPII could constitute 20% or more of the gross insurance income of one or more of our Foreign Insurance Subsidiaries in a particular taxable year, which could result in such RPII being taxable to U.S. Persons that own or are treated as owning shares of AGL. U.S. Persons owning or treated as owning shares of AGL should consult their tax advisors as to the effect of these uncertainties. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — The RPII CFC Provisions; Disposition of AGL Shares.
U.S. tax-exempt shareholders may be subject to the unrelated business taxable income rules with respect to certain insurance income of the Foreign Insurance Subsidiaries.
U.S. tax-exempt shareholders may be required to treat insurance income includable under the CFC or RPII rules as unrelated business taxable income. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — Tax-Exempt Shareholders.
U.S. Persons who hold AGL’s shares will be subject to adverse tax consequences if AGL is considered to be PFIC for U.S. federal income tax purposes.
If AGL is considered a PFIC for U.S. federal income tax purposes, a U.S. Person who owns any shares of AGL will be subject to adverse tax consequences that could materially adversely affect its investment, including subjecting the investor to both a greater tax liability than might otherwise apply and an interest charge or other unfavorable rules (either a mark-to-market or current inclusion regime). The Company believes that AGL was not a PFIC for U.S. federal income tax purposes for taxable years through 2022 and, based on the application of certain PFIC look-through rules and the Company’s plan of operations for the current and future years, should not be a PFIC in the future. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — Passive Foreign Investment Companies.
Changes in U.S. federal income tax law may adversely affect an investment in AGL’s common shares.
Although the Company is currently unable to predict the ultimate impact of the TCJA on its business, shareholders and results of operations, it is possible that the TCJA may increase the U.S. federal income tax liability of the U.S. members of its group that cede risk to non-U.S. group members and may affect the timing and amount of U.S. federal income taxes imposed on certain U.S. shareholders. Furthermore, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company.
Further, U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the U.S. is a PFIC, or whether U.S. Persons would be required to include in their gross income the “subpart F income” of a CFC or RPII CFC are subject to change, possibly on a retroactive basis. The Company cannot be certain if, when, or in what form any future regulations or pronouncements may be implemented or made, or whether such guidance will have a retroactive effect. See Item 1. Business — Tax Matters — United States Tax Reform.
An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
If AGL were to issue equity securities in the future, including in connection with any strategic transaction, or if previously issued securities of AGL were to be sold by the current holders, AGL may experience an “ownership change” within the meaning of Section 382 of the Code. In general terms, an ownership change would result from transactions increasing the aggregate ownership of certain holders in AGL’s shares by more than 50 percentage points over a testing period (generally three years). If an ownership change occurred, the Company’s ability to use certain tax attributes, including certain built-in losses, credits, deductions or tax basis and/or the Company’s ability to continue to reflect the associated tax benefits as assets on AGL’s balance sheet, may be limited. The Company cannot give any assurance that AGL will not undergo an ownership change at a time when these limitations could materially adversely affect the Company’s financial condition.
A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
AGL is not incorporated in the U.K. and, accordingly, is only resident in the U.K. for U.K. tax purposes if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. AGL believes it is entitled to take advantage of the benefits of income tax treaties to which the U.K. is a party on the basis that it is has established central management and control in the U.K. In 2013, AGL obtained confirmation that there was a low risk of challenge to its residency status from HMRC on the facts as they were at that time. The Board intends to
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manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K. for U.K. tax purposes and to qualify for the benefits of income tax treaties to which the U.K. is a party. However, the concept of central management and control is a case-law concept that is not comprehensively defined in U.K. statute. In addition, it is a question of fact. Moreover, tax treaties may be revised in a way that causes AGL to fail to qualify for benefits thereunder. Accordingly, a change in relevant U.K. tax law or in tax treaties to which the U.K. is a party, or in AGL’s central management and control as a factual matter, or other events, could adversely affect the ability of Assured Guaranty to manage its capital in the efficient manner that it contemplated in establishing U.K. tax residence.
Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
As a U.K. tax resident, AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to applicable exemptions.
•With respect to income, the dividends that AGL receives from its subsidiaries should be exempt from U.K. corporation tax under the exemption contained in section 931D of the Corporation Tax Act 2009.
•With respect to capital gains, if AGL were to dispose of shares in its direct subsidiaries or if it were deemed to have done so, it may realize a chargeable gain for U.K. tax purposes. Any tax charge would be based on AGL’s original acquisition cost. It is anticipated that any such future gain should qualify for exemption under the substantial shareholding exemption in Schedule 7AC to the Taxation of Chargeable Gains Act 1992. However, the availability of such exemption would depend on facts at the time of disposal, in particular the “trading” nature of the relevant subsidiary. There is no statutory definition of what constitutes “trading” activities for this purpose and in practice reliance is placed on the published guidance of HMRC.
A change in U.K. tax law or its interpretation by HMRC, or any failure to meet all the qualifying conditions for relevant exemptions from U.K. corporation tax, could affect Assured Guaranty’s financial results of operations or its ability to provide returns to shareholders.
An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their non-U.K. subsidiaries could adversely impact Assured Guaranty’s tax liability.
Under the U.K. “controlled foreign company” regime, the income profits of non-U.K. resident companies may, in certain circumstances, be attributed to controlling U.K. resident shareholders for U.K. corporation tax purposes. The non-U.K. resident members of the Assured Guaranty group intend to operate and manage their levels of capital in such a manner that their profits would not be taxed on AGL under the U.K. CFC regime. In 2013, Assured Guaranty obtained clearance from HMRC that none of the profits of the non-U.K. resident members of the Assured Guaranty group should be subject to U.K. tax as a result of attribution under the CFC regime on the facts as they were at the time. However, a change in the way in which Assured Guaranty operates or any further change in the CFC regime, resulting in an attribution to AGL of any of the income profits of AGL’s non-U.K. resident subsidiaries for U.K. corporation tax purposes, could adversely affect Assured Guaranty’s financial results of operations.
An adverse adjustment under U.K. transfer pricing legislation or the imposition of diverted profits tax could adversely impact Assured Guaranty’s tax liability.
If any arrangements between U.K. resident companies in the Assured Guaranty group and other members of the Assured Guaranty group (whether resident in or outside the U.K.) are found not to be on arm's length terms and as a result a U.K. tax advantage is being obtained, an adjustment will be required to compute U.K. taxable profits as if such arrangement were on arm's length terms. Any transfer pricing adjustment could adversely affect Assured Guaranty’s results of operations.
Since January 1, 2016, the U.K. has implemented a country-by-country reporting (CBCR) regime whereby large multi-national enterprises are required to report details of their operations and intra-group transactions in each jurisdiction. The U.K. CBCR legislation includes power to introduce regulations requiring public disclosure of U.K. CBCR reports, although this power has not yet been exercised. It is possible that Assured Guaranty’s approach to transfer pricing may become subject to greater scrutiny from the tax authorities in the jurisdictions in which the group operates in consequence of the implementation of a CBCR regime in the U.K. (or other jurisdictions).
The diverted profits tax (DPT), which is currently levied at 25% (and due to increase to 31% from April 1, 2023), is an anti-avoidance measure, aimed at protecting the U.K. tax base against the diversion of profits away from the U.K., tax charge. In particular, DPT may apply to profits generated by economic activities carried out in the U.K., that are not taxed in the U.K.
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by reason of arrangements between companies in the same multinational group and involving a low-tax jurisdiction, including co-insurance and reinsurance. It is currently unclear whether DPT would constitute a creditable tax for U.S. foreign tax credit purposes. If any member of the Assured Guaranty group is liable for DPT, this could adversely affect the Company’s results of operations.
Assured Guaranty’s financial results may be affected by measures taken in response to the OECD BEPS project.
In May 2019, the OECD published a “Programme of Work” designed to address the tax challenges created by an increasingly digitalized economy. The Programme is divided into two pillars. The first pillar focuses on the allocation of group profits between jurisdictions based on a new nexus rule that looks to the jurisdiction of the customer or user (the so-called “market jurisdiction”) as a supplement to the traditional “permanent establishment” concept. The second pillar addresses the remaining BEPS risk of profit shifting to entities in low tax jurisdictions by introducing a global minimum tax rate. Possible measures to implement such rate include the imposition of source-based taxation (including withholding tax) on certain payments to low tax jurisdictions and an effective extension of a “controlled foreign company” regime whereby parent companies would be subject to a “top-up” tax on the profits of all their subsidiaries in low tax jurisdictions. The OECD published detailed blueprints of its proposals on October 14, 2020 and public consultations were held virtually in January 2021. Following agreement on the principles of the two pillar solution by the finance ministers of the G7 nations in June 2021 and by the OECD/G20 Inclusive Framework in July 2021, final political agreement on the two pillar framework was published on October 8, 2021 to which most of the member jurisdictions of the OECD/G20 Inclusive Framework have currently agreed. The agreement provided that regulated financial services are excluded from the application of Pillar One. The agreement also provided that the proposals under Pillar Two would apply to multinational groups with revenues exceeding EUR 750 million and would consist of a globally coordinated set of rules, including an Income Inclusion Rule and Undertaxed Payment Rule, which would operate with reference to a minimum tax rate of 15% (determined on a country-by-country basis). However, the ultimate impact of the proposals remains subject to agreement on certain design elements of the two pillars within the OECD/G20 Inclusive Framework. It is intended that Pillar Two will be implemented into law by participating jurisdictions before an intended effective date in 2023; to this end, model rules for Pillar Two were released on December 20, 2021, but further work on this aspect of the Programme of Work remains, including with respect to domestic implementation in participating jurisdictions, detailed guidance and administrative aspects of the rules. As such, the proposals, in particular in relation to Pillar Two, are broad in scope and remain subject to further work, and it is therefore not possible to determine their impact at this time. They could adversely affect Assured Guaranty’s tax liability.
Risks Related to GAAP, Applicable Law and Litigation
Changes in the fair value of the Company’s insured credit derivatives portfolio, its CCS, and its FG VIEs, CIVs and/or the Company’s decision to consolidate or deconsolidate one or more FG VIEs and/or CIVs during a financial reporting period, may subject its financial condition and results of operations to volatility.
The Company is required to mark-to-market certain derivatives that it insures, including CDS that are considered derivatives under GAAP as well as its CCS. Although there is no cash flow effect from this “marking-to-market,” net changes in the fair value of these derivatives are reported in the Company’s consolidated statements of operations and therefore affect its financial condition and results of operations. If a credit derivative is held to maturity and no credit loss is incurred, any unrealized gains or losses previously reported would be reversed as the transaction reaches maturity. The Company also expects fluctuations in the fair value of its put option under its CCS to reverse over time. For discussion of the Company’s fair value methodology for credit derivatives, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement.
The Company is required to consolidate certain variable interest entities (VIEs) with respect to which it has provided financial guaranties, certain AssuredIM Funds in which it invests, and certain AssuredIM-managed CLOs and CLO warehouses in which it invests, if it concludes that it is the primary beneficiary of that FG VIE, AssuredIM Fund, CLO or CLO warehouse, respectively. Substantially all of the assets and liabilities of the consolidated FG VIEs and CIVs are reported at fair value. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs and, if circumstances change, may consolidate a VIE that was not previously consolidated or deconsolidate a VIE that had previously been consolidated, and such consolidation or deconsolidation would impact its financial condition and results of operations in the period in which such action is taken. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
The required treatment under GAAP of the Company’s insured credit derivatives portfolio, its CCS and its VIEs causes its financial condition and results of operations as reported under GAAP to be more volatile than would be suggested by the actual performance of its business operations. Due to the complexity of fair value accounting and the application of GAAP
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requirements, future amendments or interpretations of relevant accounting standards may cause the Company to modify its accounting methodology in a manner which may have an adverse impact on its financial results.
Change in industry and other accounting practices could adversely affect the Company’s financial condition, results of operations, business prospects and share price.
Changes in or the issuance of new accounting standards, as well as any changes in the interpretation of current accounting guidance, could adversely affect the Company’s financial condition, results of operations, business prospects and share price. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for a discussion of the future application of accounting standards.
Changes in or inability to comply with applicable law and regulations could adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
The Company’s businesses are subject to detailed insurance, asset management and other financial services laws and government regulation in the jurisdictions in which it operates across the globe. In addition to the insurance, asset management and other regulations and laws specific to the industries in which it operates, regulatory agencies in jurisdictions in which the Company operates across the globe have broad administrative power over many aspects of the Company’s business, which may include ethical issues, money laundering, privacy, recordkeeping and marketing and sales practices. Future legislative, regulatory, judicial or other legal changes in the jurisdictions in which the Company does business may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price by, among other things, limiting the types of risks it may insure, lowering applicable single or aggregate risk limits related to its insurance business, increasing required reserves or capital for its insurance subsidiaries, providing insured obligors with additional avenues for avoiding or restructuring the repayment of their insured liabilities, increasing the level of supervision or regulation to which the Company’s operations may be subject, imposing restrictions that make the Company’s products less attractive to potential buyers and investors, lowering the profitability of the Company’s business activities, requiring the Company to change certain of its business practices and exposing it to additional costs (including increased compliance costs).
Compliance with applicable laws and regulations is time consuming and personnel-intensive. If the Company fails to comply with applicable insurance or investment advisory laws and regulations it could be exposed to fines, the loss of insurance or investment advisory licenses, limitations on the right to originate new business and restrictions on its ability to pay dividends. If an insurance subsidiary’s surplus declines below minimum required levels, the insurance regulator could impose additional restrictions on the insurance subsidiary or initiate insolvency proceedings.
Legislation, regulation or litigation arising out of the struggles of distressed obligors may adversely impact the Company’s legal rights as creditor as well as its investments and the investments it manages.
Borrower distress or default, whether or not the relevant obligation is insured by one of the Company’s insurance subsidiaries, may result in legislation, regulation or litigation that may impact the Company’s legal rights as creditor or its investments or the investments it manages. For example, the default by the Commonwealth of Puerto Rico on much of its debt has resulted in both legislation (including the enactment of PROMESA) and litigation that is continuing to impact the Company’s rights as creditor, most directly in Puerto Rico but also elsewhere in the U.S. municipal market.
The Company is, and may be in the future, involved in litigation, both as a defendant and as a plaintiff, in the ordinary course of its insurance and asset management business and other business operations. The outcome of such litigation could materially impact the Company’s loss reserves and results of operations and cash flows. For a discussion of material litigation, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure; Note 4, Expected Loss to be Paid (Recovered); and Note 18, Commitments and Contingencies.
AGL’s ability to pay dividends and fund share repurchases and other activities may be constrained by certain insurance regulatory requirements and restrictions.
AGL is subject to Bermuda regulatory requirements that affect its ability to pay dividends on common shares and to make other payments. Under the Bermuda Companies Act 1981, as amended, AGL may declare or pay a dividend only if it has reasonable grounds for believing that it is, and after the payment would be, able to pay its liabilities as they become due, and if the realizable value of its assets would not be less than its liabilities. While AGL currently intends to pay dividends on its common shares, investors who require dividend income should carefully consider these risks before investing in AGL.
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AGL is dependent on dividends from its subsidiaries, including dividends from its insurance subsidiaries, for resources to pay holders of its common shares, fund share repurchases and pursue other activities. The ordinary dividends that AGL’s insurance subsidiaries may pay without regulatory approval are subject to legal and regulatory limitations. See “– Regulatory – State Dividend Limitations”, “– International Regulation – Bermuda – Restrictions on Dividends and Distributions”, “– International Regulation – United Kingdom Insurance and Financial Services Regulation – Restrictions on Dividend Payments” and “– International Regulation – France – Restrictions on Dividend Payments”. As a result, absent relief from the relevant regulator(s), the Company’s insurance subsidiaries may be required to retain capital in the insurance companies that is substantially in excess of what the Company believes is necessary to support its insurance businesses, reducing the Company’s ability to productively use or return to shareholders such excess capital. In addition, if, pursuant to insurance laws and regulations, AGL’s insurance subsidiaries are not permitted to pay ordinary dividends or make other permitted payments to AGL at the times or in sufficient amounts AGL requires to fund its activities, and if AGL’s other operating subsidiaries were unable to provide such funds, AGL’s ability to pay dividends to shareholders or fund share repurchases or pursue other activities could be adversely affected. See “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”
Applicable insurance laws may make it difficult to effect a change of control of AGL.
Before a person can acquire control of a U.S., U.K. or French insurance company, prior written approval must be obtained from the relevant regulator commissioner of the state or country where the insurer is domiciled. In addition, once a person controls a Bermuda insurance company, the Authority may object to such a person who is not, or is no longer, a fit and proper person to exercise such control. Because a person acquiring 10% or more of AGL’s common shares would indirectly control the same percentage of the stock of its insurance subsidiaries, the insurance change of control laws of Maryland, New York, the U.K., France and Bermuda would likely apply to such a transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and in particular unsolicited transactions, that some or all of its shareholders might consider to be desirable. While AGL’s Bye-Laws limit the voting power of any shareholder to less than 10%, the Company cannot provide assurances that the applicable regulatory bodies would agree that a shareholder who owned 10% or more of its common shares did not control the applicable insurance subsidiaries, notwithstanding the limitation on the voting power of such shares.
Risks Related to AGL’s Common Shares
The market price of AGL’s common shares may be volatile, and the value of an investment in the Company may decline.
The market price of AGL��s common shares has experienced, and may continue to experience, significant volatility. Numerous factors, including many over which the Company has no control, may have a significant impact on the market price of its common shares. These risks include those described or referred to in this “Risk Factors” section as well as, among other things: (a) investor perceptions of the Company, its prospects and that of the financial guaranty and asset management industries and the markets in which the Company operates; (b) the Company’s operating and financial performance; (c) the Company’s access to financial and capital markets to raise additional capital, refinance its debt or obtain other financing; (d) the Company’s ability to repay debt; (e) the Company’s dividend policy; (f) the amount of share repurchases authorized by the Company; (g) future sales of equity or equity-related securities; (h) changes in earnings estimates or buy/sell recommendations by analysts; and (i) general financial, economic and other market conditions.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of AGL’s common shares, regardless of AGL-specific factors.
Furthermore, future sales or other issuances of AGL equity may adversely affect the market price of its common shares.
Provisions in the Code and AGL’s Bye-Laws may reduce or increase the voting rights of its common shares.
Under the Code, AGL’s Bye-Laws and contractual arrangements, certain shareholders have their voting rights limited to less than one vote per share, resulting in other shareholders having voting rights in excess of one vote per share. Moreover, the relevant provisions of the Code and AGL’s Bye-Laws may have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership.
More specifically, pursuant to the relevant provisions of the Code, if, and so long as, the common shares of a shareholder are treated as “controlled shares” (as determined under section 958 of the Code) of any U.S. Person and such
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controlled shares constitute 9.5% or more of the votes conferred by AGL’s issued shares, the voting rights with respect to the controlled shares of such U.S. Person (a 9.5% U.S. Shareholder) are limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in AGL’s Bye-Laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. For these purposes, “controlled shares” include, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code).
In addition, the Board may limit a shareholder’s voting rights where it deems appropriate to do so to: (1) avoid the existence of any 9.5% U.S. Shareholders; and (2) avoid certain material adverse tax, legal or regulatory consequences to the Company or any of the Company’s subsidiaries or any shareholder or its affiliates. AGL’s Bye-Laws provide that shareholders will be notified of their voting interests prior to any vote taken by them.
As a result of any such reallocation of votes, the voting rights of a holder of AGL common shares might increase above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting in such holder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934. In addition, the reallocation of votes could result in such holder becoming subject to the short swing profit recovery and filing requirements under Section 16 of the Exchange Act.
AGL also has the authority under its Bye-Laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the Bye-Laws. If a shareholder fails to respond to a request for information or submits incomplete or inaccurate information in response to a request, the Company may, in its sole discretion, eliminate such shareholder’s voting rights.
Provisions in AGL’s Bye-Laws may restrict the ability to transfer common shares, and may require shareholders to sell their common shares.
AGL’s Board may decline to approve or register a transfer of any common shares: (1) if it appears to the Board, after taking into account the limitations on voting rights contained in AGL’s Bye-Laws, that any adverse tax, regulatory or legal consequences to AGL, any of its subsidiaries or any of its shareholders may occur as a result of such transfer (other than such as the Board considers to be de minimis); or (2) subject to any applicable requirements of or commitments to the NYSE, if a written opinion from counsel supporting the legality of the transaction under U.S. securities laws has not been provided or if any required governmental approvals have not been obtained.
AGL’s Bye-Laws also provide that if the Board determines that share ownership by a person may result in adverse tax, legal or regulatory consequences to the Company, any of the subsidiaries or any of the shareholders (other than such as the Board considers to be de minimis), then AGL has the option, but not the obligation, to require that shareholder to sell to AGL or to third parties to whom AGL assigns the repurchase right for fair market value the minimum number of common shares held by such person which is necessary to eliminate such adverse tax, legal or regulatory consequences.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Management believes its office space is adequate for its current and anticipated needs. The Company’s properties include the following:
•Hamilton, Bermuda:
◦approximately 8,700 square feet of office space that serves as the principal executive offices of AGL and AG Re. The lease expires in April 2026 and is renewable at the option of the Company.
•New York, U.S.:
◦103,500 square feet of office space that serves as the primary offices of the U.S. Insurance Subsidiaries. The lease expires in February 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent;
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◦approximately 52,000 square feet of office space that serves as the primary offices of AssuredIM. This lease expires in December 2032; and
◦78,600 square feet of office space that previously served as the primary offices of AssuredIM. The lease expires in April 2024. As of December 31, 2022, this space is subleased to other tenants for a substantial portion of its remaining lease term.
•London, U.K.:
◦approximately 7,000 square feet of office space that serves as the primary office of AGUK. The lease expires in September 2029, with an option, subject to certain conditions, to renew for five years at a fair market rent; and
◦approximately 8,000 square feet of office space that previously served as the primary office of AssuredIM LLC. The lease expires in March 2024. As of December 31, 2022, this space is subleased to another tenant for its remaining term.
•Other: The Company leases other office space in San Francisco, California; London, England; and Paris, France.
ITEM 3. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is provided in the “Legal Proceedings” and “Litigation” sections of Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, the “Recovery Litigation” section of Note 4, Expected Loss to be Paid (Recovered), and the “Puerto Rico Litigation” section of Note 3, Outstanding Exposure, and is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Information About Our Executive Officers
The table below sets forth the names, ages, positions and business experience of the executive officers of AGL.
| Name | Age | Position(s) | ||||||||||||
| Dominic J. Frederico | 70 | President and Chief Executive Officer; Deputy Chairman | ||||||||||||
| Robert A. Bailenson | 56 | Chief Financial Officer | ||||||||||||
| Ling Chow | 52 | General Counsel and Secretary | ||||||||||||
| David A. Buzen | 63 | Chief Investment Officer and Head of Asset Management | ||||||||||||
| Stephen Donnarumma | 60 | Chief Credit Officer | ||||||||||||
| Jorge A. Gana | 52 | Chief Risk Officer | ||||||||||||
| Holly Horn | 62 | Chief Surveillance Officer | ||||||||||||
Dominic J. Frederico has been a director of AGL since the Company’s 2004 initial public offering and the President and Chief Executive Officer of AGL since December 2003. Mr. Frederico served as Vice Chairman of ACE Limited from 2003 until 2004 and served as President and Chief Operating Officer of ACE Limited and Chairman of ACE INA Holdings, Inc. from 1999 to 2003. Mr. Frederico was a director of ACE Limited from 2001 through May 2005. From 1995 to 1999 Mr. Frederico served in a number of executive positions with ACE Limited. Prior to joining ACE Limited, Mr. Frederico spent 13 years working for various subsidiaries of American International Group, Inc.
Robert A. Bailenson has been Chief Financial Officer of AGL since June 2011. Mr. Bailenson has been with Assured Guaranty and its predecessor companies since 1990. Mr. Bailenson became Chief Accounting Officer of AGC in 2003, of AGL in May 2005, and of AGM in July 2009, and served in such capacities until 2019. He was Chief Financial Officer and Treasurer of AG Re from 1999 until 2003 and was previously the Assistant Controller of Capital Re Corp., the Company’s predecessor.
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Ling Chow has been General Counsel and Secretary of AGL since January 1, 2018. She is responsible for legal affairs and corporate governance at the Company, including its litigation and other legal strategies relating to distressed credits, and its corporate, compliance, regulatory and disclosure efforts. She is also responsible for the Company’s human resources function. Ms. Chow began her tenure at the Company in 2002 as a transactional attorney, working on the insurance of structured finance and derivative transactions. She previously served as Deputy General Counsel and Assistant Secretary of AGL from May 2015 and as Assured Guaranty’s U.S. General Counsel from June 2016. Prior to that, Ms. Chow served as Deputy General Counsel of Assured Guaranty’s U.S. subsidiaries in several capacities from 2004. Before joining Assured Guaranty, Ms. Chow was an associate at law firms in New York City, where she was responsible for transactional work associated with public and private mergers and acquisitions, venture capital investments, and private and public securities offerings.
David A. Buzen has been the Chief Investment Officer (CIO) and Head of Asset Management of the Company’s U.S. Insurance Subsidiaries and Chief Executive Officer and CIO of AssuredIM since August 2020. Previously, Mr. Buzen served as Deputy CIO of BlueMountain (now AssuredIM LLC). Prior to that, he was the Senior Managing Director, Alternative Investments, where he was responsible for leading the Company’s efforts to enter the asset management business. Mr. Buzen joined Assured Guaranty in 2016 after the acquisition of CIFG Holding Inc., where he was President and CEO. Prior to his years at CIFG, Mr. Buzen was Chief Financial Officer of Churchill Financial, a commercial finance and asset management company after heading DEPFA Bank’s municipal reinvestment and U.S. financial guarantee businesses. Earlier, he served as Chief Operating Officer of ACE Financial Solutions, an operating division of ACE Limited. Before that, he was the Chief Financial Officer of Capital Re Corp., a company that was acquired by ACE Limited in 1999 and which owned the company now known as Assured Guaranty Corp. until Assured Guaranty’s 2004 IPO. He began his career in the financial guaranty industry at Ambac Financial Group.
Stephen Donnarumma has been the Chief Credit Officer of AGC since 2007, and of AGM since its 2009 acquisition. Mr. Donnarumma joined Assured Guaranty in 1993 and has held a number of positions over the years, including Deputy Chief Credit Officer of AGL, Chief Operating Officer and Chief Underwriting Officer of AG Re, Chief Risk Officer of AGC, and Senior Managing Director, Head of Mortgage and Asset-backed Securities of AGC. Prior to joining Assured Guaranty, Mr. Donnarumma was with Financial Guaranty Insurance Company from 1989 until 1993, where his responsibilities included underwriting domestic and international financial guaranty transactions. Prior to that, he served as a Director of Credit Risk Analysis at Fannie Mae from 1987 until 1989. Mr. Donnarumma was also an analyst with Moody’s Investors Services from 1985 until 1987.
Jorge A. Gana has been Chief Risk Officer of AGL and Chair of the U.S. Risk Management and Portfolio Risk Management Committees since January 1, 2023. Mr. Gana also maintains primary responsibility for the environmental aspect of Assured Guaranty’s ESG efforts. Prior to that, Mr. Gana served as Deputy Chief Risk Officer of AGM and AGC. Mr. Gana joined Assured Guaranty in 2005 as a Director in structured finance. Over the years, Mr. Gana has held a number of positions at Assured Guaranty, including Managing Director, Structured Finance at AGC, Senior Managing Director of Workouts and Government & Corporate Affairs at AGM and AGC, and chair of AGM's and AGC's Workout Committees. Mr. Gana continues to serve as a voting member of AGM's and AGC's Credit and Workout Committees. Prior to joining Assured Guaranty, Mr. Gana served as a Director of Global Commercial Asset Securitization for XLCA (now Syncora). Prior to XLCA, Mr. Gana worked at Natexis Banques Populaires (now Natixis) and at Banco Santander in global capacities dealing with credit and risk, managing investment portfolios, originating complex transactions, and issuing repackaged debt. Mr. Gana also worked for the Chile Economic Development Agency, New York Office, and as Editor of the Chile Economic Report until 1996.
Holly L. Horn has been Chief Surveillance Officer of AGL and the Company’s US Insurance Subsidiaries since January 2022. Prior to that, Ms. Horn served as AGM’s and AGC’s Chief Surveillance Officer, Public Finance where she was responsible for ongoing surveillance, monitoring and loss mitigation of municipal risks insured by the Company across all sectors of the municipal market. She joined AGM in 2003 as a director in the health care underwriting group, where she was responsible for analyzing and recommending the insurability of health care credits. She also served as a director in AGM’s health care surveillance group. Ms. Horn began her public finance career at Inova Health System, a nationally ranked integrated health care delivery system, and subsequently served as a senior manager for the national health care strategy practice at Ernst & Young.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
AGL’s common shares are listed on the NYSE under the symbol “AGO.” On February 24, 2023, the approximate number of shareholders of record at the close of business on that date was 82.
AGL is a holding company whose principal source of liquidity is dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to AGL and AGL’s ability to pay dividends to its shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of AGL’s Board and will be dependent upon the Company’s profits and financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as the Board deems relevant. AGL paid quarterly cash dividends in the amount of $0.25 and $0.22 per common share in 2022 and 2021, respectively. For more information concerning AGL’s dividends, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources and Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity.
Issuer’s Purchases of Equity Securities
In 2022, the Company repurchased a total of 8,847,981 common shares for approximately $503 million at an average price of $56.79 per share.
From time to time, the Board authorizes the repurchase of additional common shares under a program without an expiration date that it initiated on January 18, 2013. Most recently, on August 3, 2022, the Board authorized the repurchase of an additional $250 million of its common shares. As of February 28, 2023, the Company was authorized to purchase $201 million of its common shares. The Company expects future common share repurchases under the current authorization to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase authorization may be modified, extended or terminated by the Board at any time. It does not have an expiration date. See Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity for additional information about share repurchases and authorizations.
The following table reflects purchases of AGL common shares made by the Company during the fourth quarter of 2022.
| 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) | ||||||||||||||||||||||
| October 1 - October 31 | 648,249 | $ | 52.97 | 648,249 | $ | 268,933,146 | ||||||||||||||||||||
| November 1 - November 30 | 576,084 | $ | 60.11 | 571,992 | $ | 234,542,994 | ||||||||||||||||||||
| December 1 - December 31 | 493,770 | $ | 63.34 | 493,175 | $ | 203,303,329 | ||||||||||||||||||||
| Total | 1,718,103 | $ | 58.35 | 1,713,416 | ||||||||||||||||||||||
____________________
(1) After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through February 28, 2023, the Company has repurchased a total of 141 million common shares for approximately $4.7 billion, excluding commissions, at an average price of $33.09 per share. The repurchase program has no expiration date and the Board has previously increased the authorization periodically.
(2) Excludes commissions.
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Performance Graph
Set forth below are a line graph and a table comparing the dollar change in the cumulative total shareholder return on AGL’s common shares from December 31, 2017 through December 31, 2022 as compared to the cumulative total return of the Standard & Poor’s 500 Stock Index, the cumulative total return of the Standard & Poor’s 500 Financials Sector GICS Level 1 Index and the cumulative total return of the Russell Midcap Financial Services Index. The Company added the Russell Midcap Financial Services Index in 2018 because it believes that this index, which includes the Company, provides a useful comparison to other companies in the financial services sector, and excludes companies that are included in the Standard & Poor's 500 Financials Sector GICS Level 1 Index but are many times larger than the Company. The chart and table depict the value on December 31 of each year from 2017 through 2022 of a $100 investment made on December 31, 2017, with all dividends reinvested:
| Assured Guaranty | S&P 500 Index | S&P 500 Financials Sector GICS Level 1 Index | Russell Midcap Financial Services Index | ||||||||||||||||||||
| 12/31/2017 | $ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | |||||||||||||||
| 12/31/2018 | 114.96 | 95.61 | 86.96 | 89.96 | |||||||||||||||||||
| 12/31/2019 | 149.59 | 125.70 | 114.87 | 120.14 | |||||||||||||||||||
| 12/31/2020 | 98.82 | 148.81 | 112.85 | 126.08 | |||||||||||||||||||
| 12/31/2021 | 160.44 | 191.48 | 152.20 | 171.28 | |||||||||||||||||||
| 12/31/2022 | 202.48 | 156.77 | 136.11 | 149.87 | |||||||||||||||||||
___________________
Source: Calculated from total returns published by Bloomberg.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, the following discussion and analysis of the Company’s financial condition and results of operations should be read in its entirety with the servicersCompany’s consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. The following discussion and analysis of the Company’s financial condition and results of operations contains forward looking statements that involve risks and uncertainties. See “Forward Looking Statements” for more information. The Company’s actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the headings “Risk Factors” and “Forward Looking Statements.”
Discussion related to the results of operations for the Company’s comparison of 2021 results to 2020 results have been omitted in this Form 10-K. The Company’s comparison of 2021 results to 2020 results is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Business
The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company’s Corporate division and other activities (including FG VIEs and CIVs) are presented separately.
In the Insurance segment, the Company provides credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. In the Asset Management segment, the Company provides investment advisory services, which include the management of CLOs and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, and Note 2, Segment Information.
Economic Environment
Real gross domestic product (GDP) increased 2.1% in 2022, compared to an increase of 5.9% in 2021, according to the second estimate released by the U.S. Bureau of Economic Analysis (BEA). Additionally, the BEA second estimate reported real GDP increased at an annual rate of 2.7% in the fourth quarter of 2022. At the end of December 2022, the U.S. unemployment rate, seasonally adjusted, stood at 3.5%, lower than where it started the year at 3.9%, and down from the COVID-19 pandemic high of 14.7% in April 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default.
According to the U.S. Bureau of Labor Statistics, the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending December 2022, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 6.5%, as compared to 8.2% for the 12-month period ending September 2022. According to the U.K.’s Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose 9.2% in the 12 months to December 2022, up from 8.8% in September 2022. The CPIH 12-month rate started the year at 4.8%. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $19.8 billion of net par outstanding as of December 31, 2022, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally.
With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, the FOMC decided at its meeting in March 2022 to start again raising the target range for the federal funds rate and has continued to do so since then. In addition, the FOMC stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through December 2022, the FOMC raised the target range for the federal funds rate seven
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times, from 0% to 0.25% where it started the year to 4.25% to 4.50% at its mid-December 2022 meeting. Although acknowledging that a disinflationary process has begun, at the conclusion of its January 31-February 1, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 4.5% to 4.75%, its eighth consecutive increase, stating that it anticipates that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
The level and direction of interest rates and credit spreads impact the Company in numerous ways. On the one hand, higher interest rates may present a more challenging environment for distressed RMBS the Company insures to the extent it causes housing prices to decline. Data released for the November 2022 S&P CoreLogic Case-Shiller Indices show the recent trend of home prices declining across the U.S., with the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reporting a seasonally adjusted month-over-month decrease of 0.3%, and the 10-City and 20-City Composites both posting decreases of 0.5%. The National Association of Realtors reported existing-home sales in 2022 declined 17.8% from 2021 as 2022’s rapidly escalating interest rate environment weighed on the residential real estate market. Higher interest rates may also reduce the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, dampen municipal bond issuance and negatively impact the finances of some of the RMBSobligors whose payments the Company insures.
On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it insurescan charge for those products. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.00% for 2022, higher than the 1.54% average of 2021. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve30-year AAA MMD averaged 90 bps in 2022. This represented an increase from an average of 70 bps in 2021 but remained well below the performance121 bps average in 2020, which included a period of instability following the onset of the related RMBS.
Asset Management
The BlueMountain Acquisition represents a significant increase in the Company'sCompany significantly increased its participation in the asset management industry. business with the completion, on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain and its associated entities, for a purchase price of $157 million. The Company used BlueMountain to establish AssuredIM and diversify the Company into the asset management industry, with the goal of utilizing the Company’s core competency in credit while diversifying its revenues and expanding its marketing reach through a fee-based platform.
The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will result in any transaction. Please see Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in the benefits anticipated.”
Investment Managers
The following is a description of the Company’s principal investment management subsidiaries:
•AssuredIM LLC. AssuredIM LLC is a Delaware limited liability company established in 2003 and located in New York and is an investment adviser registered with the Securities and Exchange Commission (SEC). AssuredIM LLC serves as an investment adviser to pooled investment vehicles, special purpose vehicles for CLOs, and institutional accounts that are primarily U.S. and non-U.S. limited partnerships, U.S. limited liability companies, trusts and other non-U.S. companies. AssuredIM LLC generally provides investment management and supervisory services to its advisory clients on a discretionary basis. AssuredIM LLC was formerly known as BlueMountain Capital Management, LLC.
•Assured Investment Management (London) LLP. Assured Investment Management (London) LLP (AssuredIM London) is an affiliate of AssuredIM and serves as subadviser to AssuredIM, primarily with respect to issuers based in Europe, and is compensated by AssuredIM for its services. AssuredIM London was formerly known as Blue Mountain Capital Partners (London) LLP. AssuredIM London is registered with the Financial Conduct Authority (FCA) and is a diversifiedrelying adviser in AssuredIM LLC’s SEC registration.
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•Assured Healthcare Partners LLC. Assured Healthcare Partners LLC (AHP) is a Delaware limited liability company formed in September 2020 as a continuation of the private healthcare strategy established at AssuredIM in 2013 to provide investment advisory services primarily focused on private investments in the healthcare sector. AHP serves as an investment adviser to certain funds, pooled investment vehicles or accounts, which are its advisory clients. AHP is a relying adviser in AssuredIM LLC’s SEC registration.
Management of a Portion of Insurance Company Capital
The Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns, improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The U.S. Insurance Subsidiaries, through their jointly-owned investment subsidiary, AG Asset Strategies LLC (AGAS), are authorized to invest up to $750 million in funds managed by AssuredIM (AssuredIM Funds). Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through AGAS. As of December 31, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, and healthcare structured capital. As of December 31, 2022 and December 31, 2021, the fair value of AGAS’ interest in AssuredIM Funds was $569 million and $543 million, respectively. In addition, the U.S. Insurance Subsidiaries invested $550 million in third-party separately managed accounts under an Investment Management Agreement (IMA) with AssuredIM. As of December 31, 2022, total capital managed by AssuredIM on behalf of the Company was $1.2 billion. These investments provide the Company with an opportunity to enhance its returns on a meaningful portion of its portfolio. They also have had the effect of facilitating the growth of AssuredIM’s CLO business and the launch on the AssuredIM platform of new products or funds in the asset-based and healthcare sectors. All of the AssuredIM Funds that were established since the BlueMountain Acquisition and in which the Company directly invested are consolidated as of December 31, 2022. Consolidated AssuredIM Funds are not included in the investment portfolio on the balance sheet, but instead as assets and liabilities of consolidated investment vehicles (CIVs). CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses.
Asset Management Strategies
CLOs
The Company’s CLO management business was established in 2005 and is the largest business by assets under management (AUM) in the Asset Management segment. As of December 31, 2022, CLOs consisted of $15.2 billion in AUM. The Company is among the top 25 global managers of CLOs when measured by AUM, according to Creditflux Ltd., issuing CLOs in both the U.S. and Europe. The CLOs managed by the Company are backed predominantly by non-investment grade first-lien senior secured loans. The CLOs typically have reinvestment periods ranging from three to five years with a stated maturity of 12 to 13 years. The Company employs an active portfolio management strategy focused on seeking relative value and maximizing absolute return of the loan portfolio.
The Company also manages a fund that invests in the equity of U.S. and European CLOs as well as the first loss equity of CLO warehouses managed by AssuredIM. (A CLO warehouse is a special purpose vehicle that invests in a diverse portfolio of loans until such time as sufficient loans have been acquired and the market conditions are opportune to securitize and issue a new CLO.) The CLO fund has the ability to, and may at times, invest in the mezzanine securities of a CLO managed by AssuredIM. The Company has committed capital to, and invests in, the CLO fund through AGAS. The Company has committed $380 million to the CLO Fund, and as of December 31, 2022, $276 million has been funded.
In addition to CLO management, the Company offers CLO investing capabilities, deploying managed capital across the entire CLO capital structure. The Company’s CLO investment management team manages funds for the Company’s Insurance segment under an IMA in a separately managed account. This account invests in investment grade CLO tranches managed by unaffiliated managers.
Opportunity Funds
Opportunity funds invest in strategies that may have higher concentrations in less liquid investments. Typically, opportunity funds have limited redemption rights and instead offer contractual cash flow distributions based on the legal agreement of each respective opportunity fund. The Company manages opportunity funds that focus on healthcare investments, and asset-based investments.
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Healthcare Investing. AssuredIM established its private healthcare strategy in 2013. Through its healthcare opportunity funds, the Company offers to the healthcare services industry flexible capital solutions supporting mergers and acquisitions, acceleration of organic growth, consolidation, repositioning, shareholder liquidity, and restructuring opportunities. The Company focuses investments in post-acute and long-term care, behavioral and mental health, physician practice management, regional health systems, and payer and provider services (non-clinical).
The Company typically earns management fees on the total committed capital of a healthcare opportunity fund during the investment period, and on remaining invested capital during the harvest period (the period post reinvestment period where capital is returned to investors upon the disposition of investments). A portion of fees are paid without regard to performance and a portion is performance-based. The Company receives performance-based fees if and to the extent one or more contractual thresholds, such as certain rate of return or a multiple on invested capital (each a “hurdle”), is exceeded. Performance-based fees are typically not recognized until near the end of the fund life. Generally, the Company’s healthcare funds have expected fund lives of between 5 and 10 years at close.
The Company manages two healthcare opportunity funds. The Company has committed capital to this strategy through AGAS.
Asset-Based Investing. The Company’s asset-based investment management business was founded in 2008. It seeks to generate returns by investing in specialty finance companies that originate and service a broad array of consumer and commercial assets, as well as by investing in discrete pools of such assets through either privately negotiated transactions or publicly issued securitizations. The asset classes of focus include auto loans, student loans, unsecured consumer loans, equipment loans, leases and dealer floor plan loans.
The Company manages a fund that is invested in a consumer finance company focused on auto loans and also manages an asset-based fund. The Company has committed capital to this strategy through AGAS.
Legacy Opportunity Funds. The Company manages two opportunity funds that are multi-strategy funds and were established prior to the BlueMountain Acquisition. These funds are in the harvest periods and returning capital to investors. The Company does not have any capital commitments to these funds.
Liquid Strategies
The municipal investment management team currently invests in investment grade municipal securities as an income generation strategy for the Company’s Insurance segment in a separately managed account under an IMA. This strategy seeks to maximize after-tax income and total return across a broad portfolio of both taxable and tax-exempt municipal bonds. It also seeks to generate returns through a combination of investment yield and price return due to credit spread changes and duration impact.
Wind-Down Funds
The Company manages several funds that were established prior to the BlueMountain Acquisition and are currently returning capital to investors. These funds are structured as co-mingled hedge funds and single investor funds not otherwise described above. The Company does not have any capital commitments to these funds.
Asset Management Revenues
Fees in respect of investment advisory services are the largest components of revenues for the Asset Management segment. The Company is compensated for its investment advisory services generally through management fees charged to its advisory clients that are typically based on a percentage of value of a client’s net AUM. The Company believes that AUM was impacted by a range of factors in 2022, including the condition of the global economy and financial markets, the widening of CLO spreads following Russia’s invasion of Ukraine, the runoff of legacy funds, and certain strategic limitations during the year. AUM may also be impacted by the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions.
With respect to the CLOs, the Company earns management fees on the total adjusted par outstanding of a CLO. A portion of fees are paid senior (senior investment management fees) in the structure and a portion is paid after all notes have received current interest (subordinated investment management fees). Existing CLOs have total fees of between 25 basis points (bps) and 50 bps per annum that are paid on a quarterly basis. In the typical structure, downgrades of underlying loans and defaults of underlying loans may cause the CLO to fail one or more performance tests. If such test failure occurs, subordinated
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investment management fees are not paid in that quarter and are deferred until the CLO resumes passing these tests. In addition, the subordinated notes or more commonly referred to as CLO equity (CLO Equity) of the CLO do not receive distributions when such tests are failing. Funds that would have been used to pay the CLO Equity are required to be used to buy new loans or pay down the senior notes of the CLO. Over time, the CLO may come back into compliance with these performance tests by reinvesting excess spread in new loans, improvements in the underlying loans and through active trading. If and when the CLO comes back into compliance, the deferred subordinated investment management fees are paid and the CLO Equity resumes its quarterly distributions.
When a market dislocation or negative credit cycle causes the deferral of subordinated investment management fees and suspension of CLO Equity distributions, the Company may be impacted in two ways. First, the subordinated fees are deferred and not currently paid to AssuredIM, as occurred in 2020 (all such deferred subordinated fees have since been collected). Second, the investments in the CLO Equity made by an AssuredIM Fund held by the Company through AGAS will typically see a decline in market value, reducing insurance segment adjusted operating income. The fair value of the Insurance segment’s investment in AssuredIM-managed CLO funds at December 31, 2022 was $272 million.
With respect to opportunity funds, the Company typically receives monthly or quarterly management fees. In certain opportunity funds the Company receives management fees expressed as a percentage of the committed amount and funded amount while in other opportunity, liquid strategy and wind-down funds, fees are expressed as a percentage of their net assets values.
In addition, the Company may receive performance-based fees (performance fees, incentive allocations, and carried interest are collectively referred to as performance fees) with respect to a performance period, typically expressed as a percentage of net profits. For certain opportunity funds, and wind-down funds, performance-based fees are typically allocated to each investor on an annual basis, payable at the end of each year or performance period. For these funds, performance-based fees are typically reduced by the amount of management fees paid over a specified period and/or subject to a “high-water mark” or “loss carryforward provision”. (A “high-water mark” provision typically requires that, once a performance fee is paid based on net asset value (NAV) or other measure during a period, any subsequent performance fee be measured from that value, or high-water mark; and a “loss carryforward” provision similarly ensures that losses must be recouped before the fund manager receives any incentive compensation. With respect to certain opportunity funds, the Company receives performance-based fees if and to the extent one or more contractual thresholds, such as a certain rate of return or a multiple on invested capital (each a “hurdle”), is exceeded.
Depending on the characteristics of a fund, fees may be higher or lower. The Company reserves the right to credit, reduce or waive some or all fees for certain investors, including investors affiliated with the Company. Further, to the extent that the Company’s wind-down and/or opportunity funds are invested in the Company’s managed/serviced CLOs, the Company may rebate any management fees and/or performance-based fees earned from the CLOs to the extent that such fees are attributable to the funds’ holdings of CLOs also managed or serviced by the Company.
Competition
The asset management industry is a highly competitive market. AssuredIM competes with many other firms in every aspect of the asset management business, including raising funds, seeking investments, and hiring and retaining talented professionals. Some of AssuredIM’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by AssuredIM. Some of these competitors also may have a lower cost of capital and access to funding sources that are not available to AssuredIM and/or the Company, which may create further competitive challenges with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships than those available to AssuredIM and/or the Company. On the other hand, the Company believes being part of a financial services company the size of the Company gives AssuredIM a number of key advantages as compared with many of its competitors, especially those that are smaller. For example, the Company is able to provide AssuredIM with access to capital to help initiate its strategies and to share its institutional experience in a number of asset classes. In addition, the Company believes that AssuredIM has built a platform that is scalable for future strategies.
Investment Portfolio
The Company’s investment portfolio primarily consists of fixed-maturity securities supporting its Insurance segment. The Corporate division primarily includes short-term investments used to support business operations and corporate initiatives.
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Investment income from the Company’s investment portfolio is one of the primary sources of cash flow supporting its operations and insurance claim payments.
The Company’s principal objectives in managing its investment portfolio are to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio; to maximize after tax book income; to manage investment risk within the context of the underlying portfolio of insurance risk; and to preserve the highest possible ratings for each Assured Guaranty subsidiaries. If the Company’s calculations with respect to its insurance subsidiaries liabilities are incorrect or other unanticipated payment obligations arise, or if the Company improperly structures its investments to meet these and other corporate liabilities, it could have unexpected losses, including losses resulting from forced liquidation of investments. The investment policies of the Company’s insurance subsidiaries are subject to insurance law requirements, and may change depending upon regulatory, economic, rating agency and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the businesses. The performance of invested assets is subject to the ability of the Company and its internal and external investment managers to select and manage appropriate investments.
On the consolidated balance sheet, approximately 98% of the reported total investments, which were $8.4 billion as of December 31, 2022 and $9.6 billion as of December 31, 2021, represent fixed-maturity securities and short-term investments consisting primarily of the following.
Assets Managed by External Investment Managers: The Company’s three external asset managers are Goldman Sachs Asset Management, L.P., Wellington Management Company, LLP, and MacKay Shields LLC, each of which has discretionary authority over the portion of the investment portfolio it manages, within the limits of the investment guidelines approved by the Company’s Board of Directors. Each manager is compensated based upon a fixed percentage of the market value of the portion of the portfolio being managed by such manager. Wellington Management Company LLP owns or manages funds that own more than 5% of the Company’s common shares. As of December 31, 2022, 67% of the investment portfolio, with a fair value of $5.6 billion, compared with 72% or $7.0 billion as of December 31, 2021, is externally managed.
Puerto Rico New Recovery Bonds and Contingent Value Instruments (CVIs): After over five years of negotiations, in 2022 a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico):
• On January 18, 2022, the Federal District Court of Puerto Rico, acting under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority (GO/PBA Plan).
• On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of the Puerto Rico Convention Center District Authority (PRCCDA).
• On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered another order under Title VI of PROMESA (PRIFA Modification) modifying certain debt of the Puerto Rico Infrastructure Financing Authority (PRIFA).
• On October 12, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the Modified Fifth Amended Title III Plan of Adjustment (HTA Plan) of the Puerto Rico Highways and Transportation Authority (PRHTA).
As a result of the consummation on March 15, 2022 of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash and CVIs, as well as new general obligation bonds (under the GO/PBA Plan) (New GO Bonds) and new bonds backed by toll revenues (under the HTA Plan) (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds). See Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. As of December 31, 2022, 7.9% of the investment portfolio, with a fair value of $661 million, represents New Recovery Bonds and CVIs obtained as part of the 2022 Puerto Rico Resolutions (excluding amounts held in the consolidated
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Puerto Rico Trusts). The Company has continued to sell New Recovery Bonds received as salvage, and had $486 million fair value of New Recover Bonds and CVIs remaining as of February 24, 2023.
Loss Mitigation Securities: As of December 31, 2022, Loss Mitigation Securities represent 6.1% of the investment portfolio or $508 million at fair value (excluding the benefit of any insurance provided by the Company). As of December 31, 2021, the Company had $581 million of such securities, at fair value, representing 6.1% of its reported investment portfolio.
Fixed-Maturity Securities Managed by AssuredIM: The Company also has a portfolio of investment grade municipal bonds and investment grade tranches of CLOs, which represents approximately 6% of the investment portfolio with a fair value $537 million, and $541 million as of December 31, 2022 and December 31, 2021, respectively, that are managed by AssuredIM under an IMA.
In addition to its fixed-maturity and short-term investments portfolio, the Company also invests in non-AssuredIM alternative investments. As of December 31, 2022 and December 31, 2021, the Company had $123 million and $169 million, respectively, in other non-AssuredIM alternative investments.
In addition to assets reported in the total investment line item on the consolidated financial statements, the Company has other invested capital that is reported on the consolidated balance sheets as part of financial guaranty variable interest entities (FG VIEs) assets or as CIVs with other investors’ ownership interest reported as noncontrolling interests. See Part II, Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
AssuredIM Funds and CLOs: The Company considers leveraging the knowledge and experience of AssuredIM to manage its assets to be a value-added opportunity, and has authorized up to $750 million of Insurance segment assets to be invested in AssuredIM Funds. The portion of the Insurance segment’s assets that is invested in AssuredIM Funds is excluded from the amounts reported in investments if, under accounting principles generally accepted in the U.S. (GAAP), the entity is consolidated. In instances where consolidation of these entities is required, the assets and liabilities of consolidated AssuredIM Funds and CLOs are reported in the line items captioned “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles,” resulting in a gross-up of the Company’s consolidated assets and liabilities.
As of December 31, 2022 and December 31, 2021, all AssuredIM Funds in which the Insurance segment invests were consolidated, and the U.S. Insurance Subsidiaries had investments in AssuredIM Funds with a fair value of $569 million and $543 million on those dates, respectively. These are reported as a component of CIVs in the Company's consolidated financial statements. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Investment Portfolio — Other Investments.
Puerto Rico Trust Assets: In addition to New Recovery Bonds and CVIs described above, for bondholders that elected to receive custody receipts that represent an interest in the legacy insurance policy plus any cash, New Recovery Bonds and CVIs under the 2022 Puerto Rico Resolutions, such assets reside in consolidated trusts. As of December 31, 2022, the Company reported $212 million in Puerto Rico Trusts’ assets in FG VIEs assets on the consolidated balance sheets. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts.
Risk Management
Organizational Structure
The Company’s Board of Directors (the Board or AGL’s Board) oversees the risk management process. The Board employs an enterprise-wide approach to risk management that supports the Company’s business plans within a reasonable level of risk. Risk assessment and risk management are not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for that company. The Board annually approves the Company’s business plan, factoring risk management into account. It also approves the Company’s risk appetite statement, which articulates the Company’s tolerance for risk and describes the general types of risk that the Company accepts or attempts to avoid. The involvement of the Board in setting the Company’s business strategy is a key part of its assessment of management’s risk tolerance and a determinant of what constitutes an appropriate level of risk for the Company.
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While the Board has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk assessment and risk management. The Risk Oversight Committee of the Board oversees the standards, controls, limits, underwriting guidelines and policies that the Company establishes and implements in respect of credit underwriting and risk management. It focuses on management's assessment and management of credit risks as well as other risks, including, but not limited to, market, financial, legal, and operational risks (including cybersecurity and data privacy risks), and risks relating to the Company's reputation and ethical standards. In addition, the Audit Committee of the Board is responsible for, among other matters, reviewing policies and processes related to risk assessment and risk management, including the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures. It also oversees cybersecurity and data privacy and reviews compliance with related legal and regulatory requirements. The Compensation Committee of the Board reviews compensation-related risks to the Company. The Finance Committee of the Board oversees the investment of the Company’s investment portfolio (including alternative investments) and the Company’s capital structure, liquidity, financing arrangements, rating agency matters, and any corporate development activities in support of the Company’s financial plan. The Nominating and Governance Committee of the Board oversees risk at the Company by developing appropriate corporate governance guidelines and identifying qualified individuals to become board members. The Environmental and Social Responsibility Committee oversees the Company’s risk and opportunities related to environmental issues, such as climate change, as well as aspects of human capital management, including diversity and inclusion.
The board of directors of each of the Company’s insurance subsidiaries has overall responsibility for the system of governance, oversight of the business and affairs and establishment of the key strategic direction and key financial objectives, including risk management, of its respective company. The AGUK Board and the AGE Board have each delegated, pursuant to written terms of reference, responsibility for risk matters to their respective Risk Oversight Committees. The AGUK Board and the AGE Board have delegated the day-to-day management of their companies to their Chief Executive Officer and Managing Director respectively, who is in each case supported by a number of management committees.
The Company has established several management committees to develop enterprise level risk management guidelines, policies and procedures for the Company’s insurance, reinsurance and asset management subsidiaries that are tailored to their respective businesses, providing multiple levels of review, analysis and control.
The Company’s management committees responsible for risk management in its Insurance segment include:
•Portfolio Risk Management Committee—The Portfolio Risk Management Committee is responsible for enterprise risk management for the Company’s Insurance segment and focuses on measuring and managing credit, market and liquidity risk for the Company’s Insurance segment. This committee establishes company-wide credit policy for the Company’s direct and assumed insured business. It implements specific underwriting procedures and limits for the Company and allocates underwriting capacity among the Company’s subsidiaries. All transactions in new asset classes or new jurisdictions, or otherwise outside the Company’s Board-approved risk appetite statement, must be approved by this committee.
•Risk Management Committees—The U.S., AG Re and AGRO risk management committees and the European Insurance Subsidiaries Surveillance Committees conduct an in-depth review of the insured portfolios of the relevant subsidiaries, focusing on varying portions of the portfolio at each meeting. They review and may revise internal ratings assigned to the insured transactions and review sector reports, monthly product line surveillance reports and compliance reports. The European Insurance Subsidiaries Executive Risk Committees are responsible for assisting the risk oversight committees of their respective board of directors in the management of risk and oversight of their respective company’s risk management framework and processes. This includes monitoring their respective company’s compliance with risk strategy, risk appetite, risk limits, as well as overseeing and challenging their respective company’s risk management and compliance functions. In carrying out its responsibilities, each of the risk management committees considers numerous factors that could impact their insured portfolios, including macroeconomic factors, long term trends and climate change.
•U.S. Workout Committee—This committee receives reports from surveillance and workout personnel on insurance transactions at AGM and/or AGC that might benefit from active loss mitigation or risk reduction and approves loss mitigation or risk reduction strategies for such transactions.
•Reserve Committees—Oversight of reserving risk is vested in the U.S. Reserve Committee, the European Insurance Subsidiaries Executive Risk Committees, the AG Re Reserve Committee and the AGRO Reserve Committee. The committees review the reserve methodology and assumptions for each major asset class or significant below-investment-grade (BIG) transaction, as well as the loss projection scenarios used and the
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probability weights assigned to those scenarios. The reserve committees establish reserves for the relevant subsidiaries, taking into consideration supporting information provided by surveillance personnel, and are responsible for changes to assumptions that that have a significant impact on expected losses.
The Company’s committees responsible for risk management in its Asset Management segment include:
•AssuredIM Investment Committees—These committees focus on application of investment evaluation criteria for the Asset Management segment’s investing activity within each investment strategy. Each Asset Management segment investment committee consists of the Chief Investment Officer and two or more senior investment professionals with deep expertise in the markets relevant to each investment.
•AssuredIM Risk Committee—This committee focuses on avoiding inappropriate risk of loss, legal or reputational damage to AssuredIM’s investors arising from the Asset Management segment’s investment and business processes. Moreover, the committee reviews risk matters that need to be addressed by the broader group rather than the regular oversight and escalation designees, which would include, but is not limited to, fund limit breaches, investment mandate compliance, allocations, trade execution, counterparty agreements, legal and regulatory compliance and business continuity. Within such responsibilities, the committee reviews principal transactions and cross transactions among clients within the Asset Management segment. Compliance and other operational sub-committees report to this committee on the full range of compliance and other operational risk matters applicable to the Asset Management segment including policies, risks and controls, audits, personal trading activity, compliance testing results, operational diligence and regulatory filings.
•AssuredIM and AssuredIM Healthcare Partners Valuation Committees—These committees focus on oversight of the Asset Management segment’s valuation policies and procedures. The respective committees meet to review the period-end valuations prior to the release of net asset valuations to fund investors (either monthly or quarterly depending on the investor reporting cycle). The period-end package includes details of estimated versus final NAV differences, securitized products price verification, valuation model reviews, price back testing, derivative valuation verification, administrator valuation reconciliation and latent price analysis. In addition, these committees convene to review and decide on material changes to fund valuation methodology, material valuation changes on an Accounting Standards Codification (ASC) 820 Level 3 asset, pricing or valuation exceptions, valuation approach to new products, new model approval, guidelines and policies for classification of assets and changes to policies and procedures.
Enterprise Risk Management
The business units and functional areas are responsible for identifying, assessing, monitoring, reporting and managing their own risks. The Chief Risk Officer and other risk management personnel are separate from the business units and are responsible for developing the risk management framework, ensuring applicable risk management policies and procedures are followed consistently across business units, and for providing objective oversight and aggregated risk analysis.
The internal audit function (Internal Audit) provides independent assurance around effective risk management design and control execution. On a quarterly basis, or more frequently when required, Internal Audit reports its findings directly to the Audit Committee of the Board of Directors and informs the Chief Executive Officer of any material issues.
The Company has established an enterprise level risk appetite statement, approved by the Board, and risk limits, that govern the Company’s risk-taking activities, with similar documents governing the activities of each operating subsidiary. Risk management personnel monitor a variety of key risk indicators on an ongoing basis and work with the business units to take the appropriate steps to manage the Company’s established risk appetites and tolerances. Risk management also uses an internally developed economic capital model to project potential credit losses in the insured portfolio as well as potential ultimate losses on investments, and analyze the related capital implications for the Company, and performs stress and scenario testing to both validate model results and assess the potential financial impact of emerging risks and major strategic initiatives such as acquisitions or releases of capital.
Quarterly risk reporting keeps management and the Board and its Risk Oversight Committee, senior management, the business units and functional areas informed about material risk-related developments. At least once each year, risk management personnel prepare an Own Risk and Solvency Assessment for the Company as a whole and each of the operating companies (Commercial Insurer Solvency Self-Assessment for AG Re and AGRO) which reports the results of capital modeling, the status of key risk indicators and any emerging risks. In addition, the Company performs in-depth reviews annually of risk topics of interest to management and the Board. To the extent potentially significant business activities or
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operational initiatives are considered, the Chief Risk Officer analyzes the possible impact on the Company’s risk profile and capital adequacy.
Surveillance of Insured Transactions
The Company’s surveillance personnel are responsible for monitoring and reporting on the performance of each risk in its insured portfolio, including exposures in both the financial guaranty direct and assumed businesses, and tracking aggregation of risk. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, change or affirm ratings during reviews, and recommend remedial actions to management. The Company assigns internal credit ratings at closing to all transactions in the insured portfolio, and surveillance personnel recommend rating affirmations or adjustments to those ratings via the Risk Management Committees to reflect changes in transaction credit quality. The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual review cycles based on the Company’s view of the exposure’s 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.
The review cycle and scope vary based upon transaction type and credit quality. In general, the review process includes the collection and analysis of information from various sources, including trustee and servicer reports, performance reports from Intex (a commercially available structured finance reporting system), financial statements, general industry or sector news and analyses, and rating agency reports. For public finance risks, the surveillance process includes monitoring general economic trends, developments with respect to state and municipal finances, regulatory changes, environmental trends, and the financial situation of the issuers. For structured finance transactions, the surveillance process can include monitoring transaction performance data and cash flows, compliance with transaction terms and conditions, and evaluation of servicer or collateral manager performance and their financial condition. Additionally, the Company uses various quantitative tools, scorecards and models to assess transaction performance and identify situations where there may have been a change in credit quality. Surveillance activities may include discussions with or site visits to issuers, servicers, collateral managers or other parties to a transaction. Surveillance may adopt augmented procedures in response to various events, as it has done in response to the COVID-19 pandemic, major hurricanes or floods, and the transition away from the London Interbank Offered Rate (LIBOR) as a reference rate.
For transactions that the Company has assumed, the ceding insurers are responsible for conducting ongoing surveillance of the exposures that have been ceded to the Company, except that the Company provides surveillance for exposures assumed from SGI in a manner consistent with its own direct portfolio. The Company’s surveillance personnel monitor the ceding insurer’s surveillance activities on exposures ceded to the Company through a variety of means, including reviews of surveillance reports provided by the ceding insurers, and meetings and discussions with their analysts. For public finance risks, the Company’s surveillance personnel independently review assumed exposure utilizing the same procedures as applied to the Company’s direct exposures. The Company’s surveillance personnel also monitor transaction performance (for structured finance and infrastructure transactions), general news and information, industry trends and rating agency reports to help focus surveillance activities on sectors or exposures of particular concern. For certain exposures, the Company also will undertake an independent analysis and remodeling of the exposure. The Company’s surveillance personnel also take steps to ensure that the ceding insurer is managing the risk pursuant to the terms of the applicable reinsurance agreement.
Workouts
The Company’s workout and surveillance personnel are responsible for managing workout, loss mitigation and risk reduction situations. They work to develop and implement strategies on transactions that are experiencing loss or could possibly experience loss. They, along with the Workout Committee, develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies and mitigate potential losses. The Company’s workout and surveillance personnel also engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the Company’s litigation proceedings. They may also make open market or negotiated purchases of securities that the Company has insured, or negotiate or otherwise implement consensual terminations of insurance coverage prior to contractual maturity. The Company’s surveillance personnel work with servicers of RMBS transactions to enhance their performance.
Asset Management
The Company’s Asset Management segment risk personnel are responsible for quantifying, analyzing and reporting the risks of each asset management fund and ensuring adherence to agreed investor mandates, independent from Asset Management segment investment personnel. The Asset Management segment applies investment and risk management
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processes across all managed funds and investments. Investment professionals are responsible for sourcing, evaluating, structuring, executing, managing, and exiting existing investments. After the evaluation and diligence processes, and as appropriate thereafter, investment team members submit recommended actions to the relevant Asset Management segment investment committee in accordance with each strategy’s required investment procedures. The relevant Asset Management segment investment committee carefully considers the alignment of each investment with the unique objectives and constraints of the vehicle(s) to which it is allocated. Asset Management segment risk professionals further independently monitor and ensure alignment of risk taking with the objectives and constraints of each investment mandate at inception and thereafter, using both proprietary and third-party quantitative data, analytic tools, and reports.
Cybersecurity
The Company relies upon information technology and systems, including technology and systems provided by or interfacing with those third parties, to conduct its businesses and interact with market participants and vendors. With this reliance on technology comes the associated security risks from using today’s communication technology and networks. To defend the Company’s computer systems from cyberattacks, the Company uses tools such as firewalls, anti-malware software, multifactor authentication, e-mail security services, virtual private networks, and timely applied software patches, among others. In addition, the Company evaluates the adequacy of the cybersecurity controls of applicable third-party service providers, including through a rigorous vendor selection and management process. The Company has also engaged third-party consultants to conduct penetration tests to identify any potential security vulnerabilities. The Company trains personnel on how to identify potential cybersecurity risks and protect Company information and resources. This training is mandatory for all employees globally upon hire and on an annual basis. Although the Company believes its defenses against cyber intrusions are sufficient, it continually monitors its computer networks for new types of threats.
Data Protection
The Company is subject to local, state, and national laws and regulations in the U.S., U.K., the European Union (EU), the other EEA countries that comply with data protection laws in the EU, and other non-U.S. jurisdictions that require financial institutions and other businesses to protect personal and other sensitive information and provide notice of their privacy and security practices relating to the collection, disclosure and other processing of personal information. The Company is also subject to local, state, and national laws and regulations in the U.S., U.K., EEA, and other non-U.S. jurisdictions that require notification to affected individuals and regulators regarding data security breaches. To address these requirements, the Company has established and implemented policies and procedures that are intended to protect the privacy and security of personal information that comes into the Company’s possession or control, and to comply with applicable laws and regulations. Company policies and procedures include, but are not limited to, specific technical, administrative, and physical safeguards for personal information, periodic risk assessments on privacy and security measures, monitoring and testing, an incident response plan that requires Company personnel to promptly report suspected and actual data breach incidents to designated management representatives, an enterprise-wide data governance program, and regularly maintained records that demonstrate the Company’s accountability for compliance with the core privacy principles, relating to the processing of personal information and applicable data protection laws. The Company has imposed similar requirements, as applicable, on third parties with whom it shares personal information including through a rigorous vendor selection and management process. The Company engages its personnel and enhances data privacy and security awareness through training, which is mandatory for all employees globally on an annual basis.
Climate Change Risk
The Company has long considered environmental impacts as part of its underwriting process, in particular with regard to U.S. public finance transactions. Global awareness of climate change has drawn greater attention to the potential financial implications and long-term consequences of increasing frequency or severity of natural disaster events (e.g., storms and wildfires). As a financial guarantor of municipal and structured finance transactions, the Company does not take direct insurance exposure to climate change but does face the risk that its obligors’ ability to pay debt service will be impaired by the impact of climate related perils.
The Company continues to enhance its approach to the consideration of climate risk in the origination, underwriting, credit approval, and surveillance of its insured exposures and has integrated climate risk into its risk management and control functions. Credit underwriting submissions are required to include an assessment of environmental and/or transitional risk factors as part of the underwriting analysis. Specifically, the vulnerability of obligors is evaluated with respect to climatic changes (e.g., sea level rise, droughts), extreme weather events (e.g., hurricanes, tornadoes, floods) or geological events (e.g., earthquakes, volcanoes) as well as resilience factors (e.g., mitigation capabilities, adaptation capacity) to determine if such environmental issues could materially impact an obligor’s expected performance.
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The Company’s assessment of how climate change-driven risks may impact a prospective obligor’s ability to pay debt service is informed by its extensive experience in municipal finance coupled with proprietary analytics and third-party data and insights. To improve the Company’s understanding of climate change and to develop the analytical tools needed to measure and manage the related financial risks, the Company has been investing in both talent and technology. The Company’s risk management resources include climate science expertise. In addition, a dedicated internal team is currently working with a geospatial data analytics company specializing in climate change/risk analysis and its effect on cities, counties, and states, to develop analytical capabilities to evaluate climate risk and assess potential negative impacts that climate change could have on the proposed obligor’s ability to pay debt service.
The Company is also exposed indirectly to climate change trends and events that might impair the performance of securities in its investment portfolio. The portfolio consists predominantly of fixed-income assets. Nevertheless, environmental issues, including regulatory changes, changes in supply or demand characteristics of fuels, and extreme weather events, may impact the value of certain securities. In 2016, the Company determined not to make any new investments in thermal coal enterprises. In fourth quarter of 2019, the Company revised its investment guidelines to incorporate material environmental factors into its investment analysis to enhance the quality of investment decisions. On an annual basis, the Company instructs its primary external portfolio managers to conduct an environmental, social and governance (ESG) analysis of their respective portion of the Company’s investment portfolio, for which ESG data is readily available. The Company conducts the ESG review to analyze if there are any material ESG risks in the portfolio that may adversely impact return expectations or are otherwise not in keeping with the Company’s risk appetite statement.
Regulatory Reporting. As the global community moves to address and mitigate the effects of climate change, regulators across jurisdictions have taken steps to require climate change risk management and related reporting. Several of the Company’s subsidiaries are, or are anticipated to be, subject to regulatory reporting with respect to managing and disclosing the impact of climate change and the related financial risks. In November 2021, the NYDFS, which is the regulator for AGM, issued its “Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change” In the U.K., the PRA, which regulates AGUK, has established certain requirements in relation to understanding the financial impact of climate change, as part of its ongoing supervisory approach. In August 2022, the Bermuda Monetary Authority issued, for consultation, its “Guidance Note on the Management of Climate Change Risks for Commercial Insurers”, detailing its expectations regarding the management of climate risk by commercial insurers. The Company continues to monitor regulatory developments and meet requirements applicable to its subsidiaries. To date, the costs associated with complying with regulatory reporting obligations have not had a material impact on the Company’s business, financial condition, and results of operations.
Managing Greenhouse Gas Emissions. As a financial services firm with approximately 400 employees, the direct impact of Assured Guaranty’s operations on the environment is relatively small. The Company contributes to the global effort to combat climate change by monitoring its greenhouse gas emissions (GHG). In 2019, the Company instituted a program to measure, manage and report its GHG emissions on an enterprise-wide basis and set targets for reducing such emissions. Pursuant to the Greenhouse Gas Protocol, the Company collects and analyzes internal data annually for its Scope 1, Scope 2 and certain key Scope 3 GHG emissions (business travel and data hosting). In 2021, the most recent year for which data is available, the Company’s total GHG emissions (using location-based Scope 2) equaled approximately 2,220 total tonnes of carbon dioxide. The Company’s methodology and results are reviewed by an independent third party, which conducts a reasonable assurance review for Scope 1 and Scope 2 emissions and a limited assurance review for Scope 3 emissions, in accordance with ISO 14064-3 International Standards.
The Company believes that the physical effects of climate change on the Company’s business operations are not likely to be material and the Company does not anticipate capital expenditures for climate related projects.
Governance. The Environmental and Social Responsibility Committee and the Risk Oversight Committee of AGL’s Board of Directors, each consisting solely of independent directors, provide oversight of the Company's approach to addressing climate change risk in accordance with their respective charters. The Environmental and Social Responsibility Committee reviews updates on the consideration of environmental risks in the Company’s insurance risk management and its investment portfolio, as well as legislative and regulatory developments of significance to the Company’s environmental initiatives and related oversight. The Risk Oversight Committee reviews the establishment and implementation of enterprise risk management policies and practices.
At the operating company level, the AGM and AGC boards of directors review environmental risk reports at each of their quarterly meetings. The Chief Risk Officer is designated as the AGM and AGC board member and member of senior management responsible for overseeing the management of climate risks. The Company has also formed an environmental risk working group composed of senior members of the Company’s credit, underwriting, surveillance, and risk management departments, to review the impact of environmental risk on the Company, including the development of objective risk
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measures, metrics and methodologies needed to evaluate the financial impact of climate change on obligors in its insured portfolio on both aggregate and individual risk levels.
Regulation
Overview
The Company’s operations are regulated by many different regulatory authorities, including insurance, securities, derivatives and investment advisory. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision since the financial crisis that began in 2008.
The Company and its subsidiaries are subject to insurance-related and asset management-related statutes, regulations and supervision by the U.S. states and territories and the non-U.S. jurisdictions in which they do business. The degree and type of regulation varies from one jurisdiction to another. We expect that the U.S. and non-U.S. regulations applicable to the Company and its regulated entities will continue to evolve for the foreseeable future.
United States Regulation
Insurance and Financial Services Regulation
AGL has two operating insurance subsidiaries domiciled in the U.S., which the Company refers to collectively as the U.S. Insurance Subsidiaries.
•AGM is a New York domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.
•AGC is a Maryland domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia and Puerto Rico.
Insurance Holding Company Regulation
The U.S. Insurance Subsidiaries are subject to the insurance holding company laws of their respective jurisdictions of domicile, as well as other jurisdictions where these insurers are licensed to do insurance business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and annually to furnish financial and other information about the operations of companies within its holding company system. Generally, all transactions among companies in the holding company system to which any of the U.S. Insurance Subsidiaries is a party (including sales, loans, reinsurance agreements and service agreements) must be fair, reasonable and equitable, and, if material or of a specified category, such as reinsurance or service agreements, require prior notice to and approval or non-disapproval by the insurance department where the applicable subsidiary is domiciled.
Change of Control
Before a person can acquire control of a U.S.-domiciled insurance company, prior written approval must be obtained from the insurance commissioner of the state where the insurer is domiciled or deemed commercially domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of such insurer. Because a person acquiring 10% or more of AGL’s common shares would indirectly control the same percentage of the stock of our U.S. Insurance Subsidiaries, the insurance change of control laws of Maryland and New York would likely apply to such acquisition. Accordingly, a person acquiring 10% or more of AGL’s common shares must either file disclaimers of control of our U.S. Insurance Subsidiaries with the insurance commissioners of the States of Maryland and New York or apply to acquire control of such subsidiaries with such insurance commissioners. However, this presumption does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a control determination. Significantly, an acquirer of less than 10% of an insurer’s voting securities may still be deemed to control the insurer based on all the facts and circumstances, including the terms and conditions of the proposed transaction. Moreover, a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer. Prior to approving an application to acquire control of a domestic insurer, each state insurance commissioner will consider factors such as the financial strength of the applicant, the integrity and management of the applicant’s board of directors and executive officers, the applicant's plans for the management of the board of directors and executive officers of the insurer, the applicant’s plans for the future operations of the insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. These laws may
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discourage potential acquisition proposals and may delay, deter or prevent a change of control involving AGL that some or all of AGL’s shareholders might consider to be desirable, including, in particular, unsolicited transactions.
Other State Insurance Regulations
State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including licensing these companies to transact business, “accrediting” reinsurers, determining whether assets are “admitted” and counted in statutory surplus, prohibiting unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends and, in certain instances, approving policy forms and related materials and approving premium rates. State insurance laws and regulations require the U.S. Insurance Subsidiaries to file financial statements with insurance departments in every U.S. state or jurisdiction where they are licensed, authorized or accredited to conduct insurance business, and their operations are subject to examination by those departments at any time. The U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with Statutory Accounting Principles, or SAP, and procedures prescribed or permitted by these departments. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years.
The NYDFS, the regulatory authority of the domiciliary jurisdiction of AGM, and the Maryland Insurance Administration (the MIA), the regulatory authority of the domiciliary jurisdiction of AGC, each conducts a periodic examination of insurance companies domiciled in New York and Maryland, respectively, usually at five-year intervals. In 2018, NYDFS last completed an examination of AGM, and the MIA last completed an examination of AGC. The examinations for AGM and AGC were for the five-year period ending December 31, 2016. The examination reports from the NYDFS and the MIA did not note any significant regulatory issues.
The NYDFS and the MIA formally commenced their current ongoing joint examination of AGM and AGC in the second quarter of 2022 for the five-year period ending December 31, 2021.
State Dividend Limitations
New York. One of the primary sources of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGM. Under the New York Insurance Law, AGM may only pay dividends out of “earned surplus,” which is the portion of an insurer’s surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to the insurer’s shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the NYDFS in an amount that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the NYDFS) or 100% of its adjusted net investment income during that period. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
Maryland. Another primary source of cash for repurchases of shares and the payment of debt service and dividends by the Company is the receipt of dividends from AGC. Under Maryland’s insurance law, AGC may, with prior notice to the MIA, pay an ordinary dividend in an amount that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders’ surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. A dividend or distribution to a shareholder of AGC in excess of this limitation would constitute an “extraordinary dividend,” which must be paid out of AGC’s “earned surplus” and reported to, and approved by, the MIA prior to payment. "Earned surplus" is that portion of AGC's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to its shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized capital gains and appreciation of assets. AGC may not pay any dividend or make any distribution, including ordinary dividends, unless it notifies the MIA Insurance Commissioner (the Maryland Commissioner) of the proposed payment within five business days following declaration and at least ten days before payment. The Maryland Commissioner may declare that such dividend not be paid if it finds that AGC’s policyholders’ surplus would be inadequate after payment of the dividend or the dividend could lead AGC to a hazardous financial condition. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries, for the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent capital movements.
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Contingency Reserves
Each of AGM, under the New York Insurance Law, and AGC, under Maryland insurance law and regulations, must establish a contingency reserve, as reported on its statutory financial statements, to protect policyholders. The New York Insurance Law and Maryland insurance laws and regulations, as applicable, determine the calculation of the contingency reserve and the period of time over which it must be established and, subsequently, can be released.
In both New York and Maryland, releases from the insurer’s contingency reserve may be permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.
From time to time, the U.S. Insurance Subsidiaries have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer’s outstanding insured obligations. In 2022, the U.S. Insurance Subsidiaries each requested a release of accumulated contingency reserve which were deemed excessive in relation to the Company’s outstanding insured obligations. AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $87.3 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $1.3 million, which represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $87.3 million release. Both AGM’s and AGC’s release were recorded in 2022. In 2021 AGM obtained the NYDFS’s approval for a contingency reserve release of approximately $104 million and AGC obtained the MIA’s approval for a contingency reserve release of approximately $246 million, of which approximately $1.5 million represented the assumed contingency reserves maintained by AGC, as a reinsurer of AGM, in connection with the same insured obligations that were the subject of AGM’s $104 million release.
Applicable New York and Maryland laws and regulations require regular, quarterly contributions to contingency reserves, but such laws and regulations permit the discontinuation of such quarterly contributions to an insurer's contingency reserves when such insurer’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the insurer’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category. In accordance with such laws and regulations, and with the approval of the NYDFS and the MIA, respectively, AGM ceased making quarterly contributions to its contingency reserves for non-municipal business and AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business, in each case beginning in the fourth quarter of 2014. Such cessations are expected to continue for as long as AGM and AGC satisfy the foregoing condition for their applicable line(s) of business.
Single and Aggregate Risk Limits
The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty insurers applicable to all obligations insured by a financial guaranty insurer that are issued by a single entity and backed by a single revenue source. For example, under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. In addition, the insured unpaid principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and collateral, is limited to 75% of the insurer’s policyholders’ surplus and contingency reserves.
Under the limit applicable to qualifying asset-backed securities, the lesser of:
•the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or
•the insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral,
may not exceed 10% of the sum of the insurer’s policyholders’ surplus and contingency reserves, subject to certain conditions.
Single-risk limits are also specified for other categories of insured obligations, and generally are more restrictive than those described above for municipal and asset-backed obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to a catch-all or “other” limit under which the unpaid principal of the single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders’ surplus and contingency reserves. For example, “triple-X” and “future flow” securitizations, as well as unsecured corporate obligations and unsecured investor-owned utility obligations, are generally subject to this catch-all or “other” single-risk limit.
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The New York Insurance Law and the Code of Maryland Regulations also establish an aggregate risk limit on the basis of the aggregate net liability insured by a financial guaranty insurer as compared with its statutory capital. “Aggregate net liability” is defined for this purpose as the outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under this limit, an insurer’s combined policyholders’ surplus and contingency reserves must not be less than the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment-grade obligations. As of December 31, 2022, the aggregate net liability of each of AGM and AGC utilized approximately 26% and 9% of their respective policyholders’ surplus and contingency reserves.
The NYDFS Superintendent (New York Superintendent) and the Maryland Commissioner each have broad discretion to order a financial guaranty insurer to cease new business originations if the insurer fails to comply with single or aggregate risk limits. In the Company’s experience in New York, the New York Superintendent has shown a willingness to work with insurers to address these concerns.
Investments
The U.S. Insurance Subsidiaries are subject to laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain asset categories, such as BIG fixed-maturity securities, real estate, equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. In addition, any investment by a U.S. Insurance Subsidiary must be authorized or approved by that insurance company’s board of directors or a committee thereof that is responsible for supervising or making such investment.
Group Regulation
In connection with AGL’s establishment of tax residence in the U.K., as discussed in greater detail under “Tax Matters” below, the NYDFS has been designated as group-wide supervisor for the Assured Guaranty group. Group-wide supervision by the NYDFS results in additional regulatory oversight over Assured Guaranty, particularly with respect to group-wide enterprise risk, and may subject Assured Guaranty to new regulatory requirements and constraints.
U.S. Credit for Reinsurance Requirements for Non-U.S. Reinsurance Subsidiaries
The Company’s Bermuda reinsurance subsidiaries, AG Re and AGRO, are affected by regulatory requirements in various U.S. states governing the ability of a ceding company domiciled in the state to receive credit on its statutory financial statements for reinsurance provided by a reinsurer. In general, under such requirements, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the ceding company’s state of domicile is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), and loss and LAE reserves ceded to the reinsurer. The substantial majority of states, however, also permit a credit on the statutory financial statements of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer secures its reinsurance obligations to the ceding insurer by providing collateral in the form of a letter of credit, trust fund or other acceptable security arrangement. Certain of those states also permit such non-licensed/non-accredited reinsurers that meet certain specified requirements to apply for “certified reinsurer” status. If granted, such status allows the certified reinsurer to post less than 100% collateral (the exact percentage depends on the certifying state's view of the reinsurer's financial strength) and the applicable ceding company will still qualify, on the basis of such reduced collateral, for full credit for reinsurance on its statutory financial statements with respect to reinsurance contracts renewed or entered into with the certified reinsurer on or after the date the reinsurer becomes certified. Certain states have eliminated the reinsurance collateral requirements for unauthorized reinsurers in certain qualifying jurisdictions that (i) meet specified requirements, such as minimum capital and surplus amounts and minimum solvency or capital ratios, and (ii) provide certain commitments to the ceding insurer’s domiciliary state, such as submission to such state’s jurisdiction and the filing of annual audited financial statements with the state. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.
AG Re and AGRO are not licensed, accredited or approved in any state and have established trusts to secure their reinsurance obligations. In 2017, AGRO obtained certified reinsurer status in Missouri, which allows AGRO to post 10% collateral in respect of any reinsurance assumed from a Missouri-domiciled ceding company on or after the date of AGRO’s certification (although, currently, AGRO does not assume any such reinsurance). See “International Regulation —Bermuda—Bermuda Insurance Regulation” for Bermuda regulations applicable to AG Re and AGRO.
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Regulation of Swap Transactions Under Dodd-Frank
The Company’s U.S. insurance businesses are subject to direct and indirect regulation under U.S. federal law. In particular, their derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd- Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Based on the size of its U.S. Insurance Subsidiaries’ remaining legacy derivatives portfolios, AGL does not believe any of its U.S. subsidiaries are required to register with the Commodity Futures Trading Commission (CFTC) as a “major swap participant” or with the SEC as a “major securities-based swap participant.” Certain of the Company's subsidiaries may be subject to Dodd-Frank Act requirements to post margin for, or to clear on a regulated execution facility, future swap transactions or with respect to certain amendments to legacy swap transactions, if they enter into such transactions.
Regulation of U.S. Asset Management Business
AGL has two principal operating asset management subsidiaries domiciled in the U.S.: AssuredIM LLC and AHP. AssuredIM LLC is registered as an investment adviser with the SEC and AHP is a relying adviser of AssuredIM LLC. Registered investment advisers, including their relying advisers, are subject to the requirements and regulations of the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). As registered investment advisers, AssuredIM must submit periodic filings with the SEC on Forms ADV, which are publicly available. AssuredIM LLC’s SEC filings include information regarding AHP as a relying advisor. The Advisers Act also imposes additional requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. AssuredIM is also registered with the CFTC as a commodity pool operator and is a member of the National Futures Association (NFA), therefore subject to their respective periodic filing and other requirements. BlueMountain CLO Management, LLC (BMCLO), a third asset management subsidiary, has limited activity with a relatively small AUM and, accordingly, ceased to be registered with the SEC in 2022.
In addition, private funds advised by AssuredIM LLC, AHP and BMCLO rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. These exemptions are complex and may in certain circumstances depend on compliance by third parties which are not controlled by the Company.
International Regulation
General
A portion of the Company’s business is conducted in foreign countries. Generally, the Company’s subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Certain of these jurisdictions require registration and periodic reporting by insurance and reinsurance companies that are licensed or authorized in such jurisdictions and are controlled by other entities. Applicable legislation also typically requires periodic disclosure concerning the entity that controls the insurer and reinsurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including, in some instances, payment of dividends by the insurance and reinsurance subsidiary within the holding company system.
In addition to these licensing, disclosure and asset transfer requirements, the Company’s foreign operations are also regulated in various jurisdictions with respect to, among other matters, policy language and terms, amount and type of reserves, amount and type of capital to be held, amount and type of local investment, local tax requirements, and restrictions on changes in control. AGL, as a Bermuda-domiciled holding company, is also subject to shareholding restrictions. Such shareholding restrictions of AGL and restrictions on changes in control of our foreign operations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and, in particular, unsolicited transactions, that some or all of its shareholders might consider to be desirable. See Item 1A. Risk Factors, Risks Related to GAAP, Applicable Law and Regulations captioned “Applicable insurance laws may make it difficult to effect a change of control of AGL.”
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Bermuda
The Bermuda Monetary Authority (the Authority) regulates the Company’s operating insurance and reinsurance subsidiaries in Bermuda. AG Re and AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations (collectively, the Insurance Act). AG Re is registered and licensed as a Class 3B insurer and is authorized to carry on general insurance business (as understood under the Insurance Act), subject to any conditions attached to its license and to compliance with the requirements imposed by the Insurance Act.
AGRO is registered and licensed as both a Class 3A insurer and a Class C long-term insurer, and therefore carries on both general and long-term business (as understood under the Insurance Act), subject to any conditions attached to its license. In particular, AGRO must keep its accounts in respect of its general business and its long-term business separate in respect of any other business. AGRO is required to maintain both a general business fund and a long-term business fund (as defined in the Insurance Act.)
Bermuda Insurance Regulation
The Insurance Act, as enforced by the Authority, imposes on AG Re and AGRO a variety of requirements and restrictions, including the filing of annual GAAP financial statements and audited statutory financial statements; compliance with minimum enhanced capital requirements; compliance with the Authority’s Insurance Code of Conduct; compliance with the Authority’s Insurance Sector Operational Cyber Risk Management Code of Conduct; compliance with minimum solvency and liquidity standards; restrictions on the declaration and payment of dividends and distributions; preparation and publication of an annual Financial Condition Report providing details on measures governing the business operations, corporate governance framework, solvency and financial performance of the insurer and reinsurer; restrictions on changes in control of regulated insurers and reinsurers; restrictions on the reduction of statutory capital; and the need to have a principal representative and a principal office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Authority the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance and reinsurance companies and in certain circumstances share information with foreign regulators.
Shareholder Controllers
Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or more or 50% or more of the Company’s common shares must notify the Authority in writing within 45 days of becoming such a holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may direct, among other things, that the voting rights attached to their common shares are not exercisable.
Minimum Solvency Margin and Enhanced Capital Requirements
Under the Insurance Act, AG Re and AGRO must each ensure that the value of its general business statutory assets exceeds the amount of its general business statutory liabilities by an amount greater than a prescribed minimum solvency margin and each company’s applicable enhanced capital requirement, which is established by reference to either its Bermuda Solvency Capital Requirement (BSCR) model or an approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an insurer’s capital requirements (statutory economic capital and surplus) by establishing capital requirements for ten categories of risk in the insurer’s business: fixed income investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentration risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk.
Restrictions on Dividends and Distributions
The Insurance Act limits the declaration and payment of dividends by AG Re and AGRO, including by prohibiting each company from declaring or paying any dividends during any financial year if it is in breach of its prescribed minimum solvency margin, minimum liquidity ratio or enhanced capital requirement, or if the declaration or payment of such dividends would cause such a breach. Dividends are paid out of each insurer's statutory surplus and, therefore, dividends cannot exceed such surplus. See “Minimum Solvency Margin and Enhanced Capital Requirements” above and “Minimum Liquidity Ratio” below.
The Companies Act 1981 of Bermuda (Companies Act) also limits the declaration and payment of dividends and other distributions by Bermuda companies such as AGL and its Bermuda subsidiaries, which, in addition to AG Re and AGRO,
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also include Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries). Such companies may only declare and pay a dividend or make a distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing that the company is, and after the payment will be, able to meet and pay its liabilities as they become due and the realizable value of the company’s assets will not be less than its liabilities.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding insurers and any other assets which the Authority accepts on application. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit, corporate guaranties and other instruments.
Certain Other Bermuda Law Considerations
Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.
AGL is not currently subject to taxes computed on profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual government fees, business fees, payroll tax and other taxes and duties. See “— Tax Matters—Taxation of AGL and Subsidiaries—Bermuda.”
United Kingdom Insurance and Financial Services Regulation
Each of AGUK and Assured Guaranty Finance Overseas Ltd. (AGFOL) are subject to the FSMA, which covers financial services relating to deposits, insurance, investments and certain other financial products. Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K. each constitutes a “regulated activity” requiring authorization by the appropriate regulator.
The PRA and the FCA are the main regulatory authorities responsible for insurance regulation in the U.K. These two regulatory bodies cover the following areas:
•the PRA, a part of the Bank of England, is responsible for prudential regulation of certain classes of financial services firms, including insurance companies, and
•the FCA is responsible for the prudential regulation of all non-PRA firms and the regulation of market conduct by all firms.
AGUK, as an insurance company, is regulated by both the PRA and the FCA. They impose on AGUK a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; intervention and enforcement; and fees and levies. AGFOL, as an insurance intermediary, is regulated by the FCA. AGFOL’s permissions from the FCA allow it to introduce business to the U.S. Insurance Subsidiaries, so that AGFOL can arrange financial guaranties underwritten by the U.S. Insurance Subsidiaries. AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or places.
AGUK also is the principal of Assured Guaranty Credit Protection Ltd. (AGCPL). Prior to 2009, AGCPL entered into a limited number of derivative contracts, some of which are still outstanding, that provide credit protection on certain referenced obligations. AGUK guarantees AGCPL’s obligations under such derivative contracts. AGCPL is not authorized by the PRA or FCA, but is an appointed representative of AGUK. This means that AGCPL can carry on insurance distribution activities without a license because AGUK has regulatory responsibility for it.
PRA Supervision and Enforcement
The PRA has extensive powers to intervene in the affairs of an authorized firm, including the power in certain circumstances to withdraw the firm’s authorization to carry on a regulated activity. The PRA carries out the prudential
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supervision of insurance companies like AGUK through a variety of methods, including the collection of information from statistical returns, the review of accountants’ reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of insurance companies.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The PRA weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its regulatory objectives. It is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
AGUK calculates its minimum required capital according to the Solvency II criteria and is in compliance.
Other U.K. Regulatory Requirements
In 2010 it was agreed between AGUK’s management and its then regulator, the Financial Services Authority (now the PRA), that new business written by AGUK would be guaranteed using a co-insurance structure pursuant to which AGUK would co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGUK's financial guaranty for each transaction covers a proportionate share (currently fixed from 2018 at 15%) of the total exposure, and AGM or AGC, as the case may be, guarantees the remaining exposure under the transaction. AGM or AGC, as the case may be, will also provide a second-to-pay guaranty to cover AGUK’s financial guaranty.
Solvency II and Solvency Requirements
Solvency II took effect from January 1, 2016, in the U.K. and remains in effect as part of the U.K.’s retained EU law after the withdrawal of the U.K. from the EU (Brexit). The reform of Solvency II as it applies in the U.K. is currently under consideration by the U.K. government. Solvency II provides rules on capital adequacy, governance and risk management and regulatory reporting and public disclosure. Under Solvency II, AGUK is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the PRA may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGUK calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
U.K. company law prohibits each of AGUK and AGFOL from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s capital requirements may in practice act as a restriction on dividends for AGUK.
Change of Control
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an insurance company) they must give the PRA (if regulated by the PRA and FCA) or the FCA (if regulated solely by the FCA) notice in writing before making the acquisition. The PRA and the FCA have up to 60 working days (without including any period of interruption) in which to assess a change of control case. Any person (a company or individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power, of a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and Markets in Financial Instruments Directive (MiFID)
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investment firms, and the 20% threshold to insurance brokers and certain other firms that are Non-Directive firms for the purposes of the Solvency II Directive.
U.K. Withdrawal from the European Union
Through 2019, AGUK wrote business in the U.K. and various countries throughout the EU as well as certain other non-EU countries. In mid-2019, to address the impact of the withdrawal of the U.K. from the EU, AGL established AGE as a French incorporated company. AGE was authorized by the French insurance and banking supervisory authority, the ACPR, to conduct financial guarantee business from January 2, 2020, and from that date AGUK ceased the underwriting of new business within the EEA. In October 2020, in preparation for Brexit, AGUK transferred to AGE certain existing AGUK policies relating to risks in the EEA under the Part VII Transfer.
AGUK will continue to write new business in the U.K. and certain other non-EEA countries.
Regulation of U.K. Asset Management Business
AssuredIM London is domiciled in the U.K. and is authorized by the FCA as an investment manager in the U.K. with certain permissions. The FSMA and rules promulgated thereunder, together with certain additional legislation, govern all aspects of the U.K. investment business, including sales, research and trading practices, the provision of investment advice, and discretionary management services, the use and safekeeping of client funds and securities, regulatory capital, margin practices and procedures, the approval standards for individuals, anti-money laundering, periodic reporting and settlement procedures.
AssuredIM London acts as a subadvisor to AssuredIM LLC, is a relying adviser of AssuredIM LLC for US regulatory purposes and its information is incorporated into AssuredIM LLC’s periodic filings on Forms ADV, which are publicly available. As a result of its FCA registration and being a relying adviser of AssuredIM LLC, AssuredIM London is subject to both U.K. and U.S. requirements on registered advisers, including the maintenance of a Code of Ethics addressing potential conflicts of interest, an effective compliance program, recordkeeping and reporting, disclosure, limitations on cross and principal transactions between an adviser and its advisory clients and general anti-fraud prohibitions. In 2022, AssuredIM London ceased to be registered as a commodity trading adviser with the CFTC and is no longer a member of the NFA due to its limited role as a subadvisor to AssuredIM LLC.
In addition, AssuredIM London relies on complex exemptions from the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, the Commodity Exchange Act and the U.S. Employee Retirement Income Security Act of 1974, as amended. Such exemptions may in certain circumstances depend on compliance by third parties not controlled by the Company.
France
As an insurance company licensed in France, AGE is regulated by the ACPR and is subject to the provisions of Solvency II as well as related EU delegated regulations as implemented in France, and by the French Insurance Code and the Monetary and Financial Code, both of which set out the primary rules governing the insurance industry in France. In accordance with French insurance regulation and Solvency II, AGE is permitted to carry on its activities in the countries of the EEA where it is authorized to operate under the freedom to provide services regime.
French regulation of insurance companies imposes on AGE a variety of requirements and restrictions, including minimum solvency capital requirements; change of control; reporting requirements; supervision of management; and intervention and enforcement.
ACPR Supervision and Enforcement
The ACPR has extensive powers to intervene in the affairs of an insurance company, including the power in certain circumstances to withdraw the company’s authorization to carry on a regulated activity. The ACPR carries out the prudential supervision of insurance companies like AGE through a variety of methods, including the collection of information from statistical returns, the review of accountants' reports and insurers’ annual reports and disclosures, visits to insurance companies and regular formal interviews.
The ACPR assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and whether they meet, and are likely to continue to meet, threshold conditions. The ACPR is forward-looking, assessing its objectives not just against current risks, but also against those that
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could plausibly arise in the future. Its risk assessment framework looks at the insurer’s risk context, the potential impact of failure of the insurer and mitigating factors.
Solvency II and Solvency Requirements
Solvency II came into effect in France on January 1, 2016, and is the legal and regulatory basis for the supervision of insurance firms in France. It provides rules on capital adequacy, governance, risk management, and regulatory reporting and public disclosure. Under Solvency II, AGE is subject to certain limits and requirements, including the maintenance of a minimum solvency capital requirement (which depends on the type and amount of insurance business a company writes and the other risks to which it is exposed) and the establishment of technical provisions, which include projected losses and premium earnings. Failure to maintain capital at least equal to the capital requirements under Solvency II is one of the grounds on which the wide powers of intervention conferred upon the ACPR may be exercised.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following features: (1) assets and liabilities are generally to be valued at their market value; (2) the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated insurance firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and (3) reinsurance recoveries are treated as a separate asset (rather than being netted off the underlying insurance liabilities). AGE calculates its solvency capital requirements using the Standard Formula under Solvency II and is in compliance.
Restrictions on Dividend Payments
French company law prohibits AGE from declaring a dividend to its shareholders unless it has “profits and/or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While French law imposes no statutory restrictions on an insurer's ability to declare a dividend, the ACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE.
Change of Control
The French insurance code has requirements regarding acquisitions, disposals, and increases or decreases in ownership of a French-licensed insurance company.
Any transaction enabling a person (a company or individual), acting alone or in concert with other persons, to acquire, increase, dispose of or reduce its ownership in an insurance company licensed in France requires express or implied approval from the ACPR: (i) where such transaction results directly or indirectly in the proportion of shares or voting rights held by that person or those persons rising above 10%, 20%, one-third or 50% of all shares or voting rights; (ii) where the insurance or reinsurance company becomes a subsidiary of that person or those persons; and (iii) where the transaction allows this person or persons to exercise a significant influence over the management of this company.
As a matter of principle, the ACPR has 60 business days from the date on which it acknowledges receipt of the notification of the transaction to notify the reporting entity and the insurance company whose ownership change is contemplated of its refusal or approval of the transaction. In approving or refusing the transaction, the ACPR takes into account various factors, including the reputation of the acquirer, the effect of the transaction on the business and the management of the company, the impact of the transaction on the financial strength of the company, or the ability of the company to continue to comply with applicable regulation.
Human Capital Management
The Company recognizes that its workforce, as a key driver of long-term performance, is among its most valued assets. Accordingly, the Company’s key human capital management objectives are to attract, retain, develop and support a diverse group of the highest quality employees, including talented and experienced business leaders who drive its corporate strategies and build long-term shareholder value. To promote these objectives, the Company’s human capital management programs are designed to reward and support employees with competitive compensation and benefit packages in each of its locations around the globe, and with professional development opportunities to cultivate talented employees and prepare them for critical roles and future leadership positions.
As of December 31, 2022, the Company employed 411 people worldwide; approximately 89% of employees are based in the U.S. and Bermuda and approximately 11% are based in the U.K. and France. Approximately 36% of the Company’s
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workforce is female and 64% is male. The average tenure is 11.9 years. Other than in France, none of the Company’s employees are subject to collective bargaining agreements. The Company believes its employee relations are satisfactory.
Learning and Development; Mentoring. The Company invests in the professional development of its workforce. To support the advancement of its employees, the Company endeavors to strengthen their knowledge and skills by providing equitable access to training, including in leadership, management and effective communication skills, mentoring opportunities, as well as tuition reimbursement assistance. Employee evaluations and performance reviews are conducted annually, during which managers and employees are encouraged to discuss employee goals and opportunities for development, including, as appropriate, training and coaching.
The Company also provides opportunities for qualified employees to work abroad in another of the Company’s offices as part of its international rotation program.
The Company’s collegial and collaborative culture fosters informal mentoring and learning. The Company also has a formal one-on-one mentoring program to provide an additional learning resource for its employees, facilitate the onboarding of new recruits and reinforce connectedness. The mentoring program is offered to all employees across the Company’s offices. The Company utilizes an outside consultant to provide workshops for both mentors and mentees. In addition, the Company sponsors memberships for its employees in external organizations to provide further opportunities for professional development, mentoring and networking.
Compensation and Benefits. The compensation program is designed to attract, retain and motivate talented individuals and to recognize and reward outstanding achievement. The components of the program consist of base salary and may include incentive compensation in the form of an annual cash incentive and deferred compensation in the form of cash and/or equity (including, in the case of certain AssuredIM professionals, an entitlement to a portion of carried interest allocated to the general partners of certain AssuredIM Funds). The Company believes that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns the interests of employees and investors. To maintain the wellness of its employees, the Company offers a benefits package designed to promote and support physical and mental health as well as financial security. Benefits include life and health (medical, dental and vision) insurance, retirement savings plans, an employee stock purchase plan, paid time off, paid family leave, an employee assistance program, commuter benefits, tuition reimbursement, fertility and family planning resources, emergency backup child, elder and pet care, reimbursement of health club fees, online classes for children, and corporate matches of an employee’s charitable contributions.
Culture. The Company seeks to foster and maintain strong ethical standards and a reputation as a business that conducts itself professionally and with a high degree of integrity. In addition, the Company works to provide and support a respectful and inclusive environment that values the abilities of each employee, leading to enhanced engagement and improved retention. Education and awareness are critical components in promoting the Company’s cultural values across the organization. Upon onboarding and annually, all employees are required to complete training in the Company’s Global Code of Ethics as well as its policies on the prevention of sexual harassment and discrimination. The Company also provides additional targeted training and guidance to specific personnel regarding anti-fraud, anti-bribery and anti-corruption related matters. Transparency towards stakeholders, including shareholders, policyholders, investors and employees, is another hallmark of the Company’s culture. Each quarter after the Company issues its financial results, in addition to meeting with shareholders and policyholders, the AGL Chief Executive Officer and Chief Financial Officer hold a town-hall style meeting for all employees where they provide an update on the Company’s performance and strategy, acknowledge contributions made by employees to the continued success of its business and answer questions.
Employee Engagement. In 2022, the Company launched its inaugural employee engagement survey. While the Company encourages open dialogue, the engagement survey provided a confidential forum for employees to provide more candid feedback. The Company engaged a third-party provider to foster confidentiality; the vendor conducted the survey, collected and aggregated feedback and benchmarked results relative to other similar-size financial services companies. The survey was sent to the total global workforce; 88% of all employees participated in the survey. The overall engagement score exceeded the benchmark.
Diversity and Inclusion. Diversity and inclusion are ingrained within Assured Guaranty’s policies and practices, including its Diversity and Inclusion Policy, and integrated throughout the Company. Assured Guaranty is committed to building and sustaining at all levels of the organization a diverse workforce that is representative of its communities, in a manner consistent with its business needs, scale and resources, and fostering an inclusive culture and workplace that embrace the differences within its staff and effectively utilize the many and varied talents of its employees. Responsibility for implementing the goals of diversity and inclusion is shared by board members, who participate in forums, senior management, who serve as mentors and executive sponsors of employee resource groups (ERGs) (described below) and the global workforce,
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who serve on the Diversity and Inclusion Committee (D&I Committee) (described below). To incentivize and hold senior leadership accountable, the Company incorporates environmental and social responsibility considerations (including with respect to diversity and inclusion) in its executive compensation program.
The Company has taken a number of steps to demonstrate its organizational commitment to diversity and inclusion.
Training. In 2021, the Company provided bias awareness training for all of its employees on how to identify and interrupt unconscious bias and the role each employee can play to promote diversity, equity and inclusion. In 2022, the Company provided workshops on inclusive interviewing for managers and others with hiring responsibilities.
Recruiting. The Company added a number of talent acquisition strategies to its recruiting practices in order to deliberately reach and attract a diverse and qualified applicant pool. To cast a wider net, positions are posted on Assured Guaranty’s websites and other public job and recruiting websites. For positions which require the use of a search firm, the Company has instructed its executive recruiters and search firms to present more diverse and qualified applicant pools. The Company’s internal recruiting team also works with organizations that promote the development and advancement of women and underrepresented minorities to help source more diverse applicant pools. The Company does not use artificial intelligence or other software to screen applicants.
Employee-led Diversity and Inclusion Committee. The Company’s employee-led D&I Committee is a critical ally in the Company’s commitment to promoting diversity, fostering inclusion, and addressing racial inequity. The D&I Committee is composed of dedicated employees with different backgrounds, points of view, levels of seniority and tenure with the Company, who provide input into policies and strategies for achieving a diverse workforce and an inclusive culture. The D&I Committee has played a key role in recommending and working to implement strategies and initiatives to achieve its diversity and inclusion goals, such as the mentoring program, ERGs, hosting firm-wide events designed to provide education and facilitate discussion around topics such as bias, gender and race, and investing in organizations that work to create a pipeline of diverse and qualified candidates.
Employee Resource Groups. Based on employee feedback, the Company launched employee resource groups for African Americans, women and working parents to create community and awareness and encourage employees to engage with and support one another. The ERGs also provide mentorship and career development opportunities to members and assist the Company in its efforts to retain, develop and promote diverse professionals and to foster a more inclusive culture. The ERGs are employee-led with the support of executive sponsors; membership in the ERGs is voluntary and open to all employees. Throughout the year, the ERGs sponsored various events, firm-wide as well as focused for group members, including a panel discussion on women in the workforce, a workshop for parents on helping children cope with the stress resulting from the COVID-19 pandemic, and discussions on the business case for, and importance of, diversity and inclusion.
Conversations Around Gender and Race. In 2022, the ERGs and the D&I Committee sponsored several firm-wide presentations and panel discussions designed to facilitate difficult conversations around race, gender, and bias. The chair of the AGL Board and the chair of the Environmental and Social Responsibility Committee each visited the New York office, on separate occasions, to participate in a question and answer discussion about the business case for diversity and inclusion, balancing the goals of diversity and meritocracy, and the Board’s support for the Company’s diversity and inclusion initiatives. Women directors from AGL’s Board as well as AGUK’s Board participated in a panel discussion where they shared insights and advice about careers and balancing professional and personal goals.
The women’s ERG is currently planning Assured Guaranty’s first international women’s conference. Women employees and allies are invited to gather in New York in March 2023 (coinciding with International Women’s Day) to network in person with women colleagues, hear inspiring speakers, participate in round table educational sessions on key professional issues, and to celebrate collective and individual accomplishments.
COVID-19 Response and Hybrid Work. At the start of the global COVID-19 pandemic in 2020, Assured Guaranty initiated its business continuity protocols and instructed its employees to work from home, placing an emphasis on the well-being of its employees and their families. The Company’s investments in technology and the regular testing of its business continuity plan allowed it to quickly shift to remote work. The success of remote work, both at the Company and across the broader labor market, sparked a collective re-evaluation of the nature of office work. The Company surveyed its employees for their feedback while also observing industry trends and peer practices to craft a viable and sustainable remote work policy. Currently, the Company offers employees the option to work remotely for a portion of their time– both as a convenience to employees and to remain competitive as an employer.
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Governance. The AGL Board’s Environmental and Social Responsibility Committee and Compensation Committee, pursuant to their respective charters, provide oversight of the Company’s human capital management strategies, policies, and initiatives, including the attraction, development and retention of personnel, the promotion of diversity, and the fostering of an inclusive culture. The Environmental and Social Responsibility Committee is periodically updated on workforce demographics and tenure, culture and workplace safety, and initiatives of the employee-led D&I Committee and the Corporate Philanthropy Committee. The Compensation Committee, which is advised by an independent compensation consultant, is responsible for the oversight of management development and evaluation of succession planning for senior management, and a review of the Company’s senior management compensation benchmarked against a comparison group.
Board members also support the Company’s D&I Committee programming by participating in panel discussion and presentations sponsored by the Company’s ERGs and D&I Committee, as described above.
Tax Matters
United States Tax Reform
The 2017 Tax Cuts and Jobs Act of 2017 (the TCJA) lowered the corporate U.S. tax rate to 21%, eliminated the alternative minimum tax, limited the deductibility of interest expense and required a one-time tax on a deemed repatriation of untaxed earnings of non-U.S. subsidiaries. In the context of the taxation of U.S. property/casualty insurance companies such as the Company, the TCJA also modifies the loss reserve discounting rules and the proration rules that apply to reduce reserve deductions to reflect the lower corporate income tax rate. In addition, the TCJA included certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections and U.S. persons investing in such companies. For example, the TCJA includes a base erosion and anti-abuse tax (BEAT) that could make affiliate reinsurance between U.S. and non-U.S. members of the Company’s group economically unfeasible. In addition, the TCJA introduced a current tax on global intangible low-taxed income that may result in an increase in U.S. corporate income tax imposed on the Company’s U.S. group members with respect to earnings of their non-U.S. subsidiaries. As discussed in more detail below, the TCJA also revised the rules applicable to passive foreign investment companies (PFICs) and controlled foreign corporations (CFCs). Further, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company. Additionally, tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or a PFIC or has related person insurance income (RPII) are subject to change, possibly on a retroactive basis. The Treasury Department recently issued final and proposed regulations intended to clarify the application of the insurance income exception to the classification of a non-U.S. insurer as a PFIC and provide guidance on a range of issues relating to PFICs, and recently issued proposed regulations that would expand the scope of the RPII rules. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation and Note 14, Income Taxes.
Taxation of AGL and Subsidiaries
Bermuda
Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by AGL or its Bermuda Subsidiaries. AGL, AG Re and AGRO have each obtained from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to AGL, AG Re or AGRO or to any of their operations or their shares, debentures or other obligations, until March 31, 2035. This assurance is subject to the provision that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda, or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any land leased to AGL, AG Re or AGRO. AGL, AG Re and AGRO each pays annual Bermuda government fees, and AG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.
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United States
AGL has conducted and intends to continue to conduct substantially all of its operations outside the U.S. and to limit the U.S. contacts of AGL and its non-U.S. subsidiaries (except AGRO, which elected to be taxed as a U.S. corporation) so that they should not be engaged in a trade or business in the U.S. A non-U.S. corporation, such as AG Re, that is deemed to be engaged in a trade or business in the U.S. would be subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business, unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a non-U.S. corporation would generally be entitled to deductions and credits only if it timely files a U.S. federal income tax return. AGL, AG Re and certain of the other non-U.S. subsidiaries have and will continue to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax. The highest marginal federal income tax rates currently are 21% for a corporation’s effectively connected income and 30% for the “branch profits” tax.
Under the income tax treaty between Bermuda and the U.S. (the Bermuda Treaty), a Bermuda insurance company would not be subject to U.S. income tax on income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the U.S. AG Re currently intends to conduct its activities so that it does not have a permanent establishment in the U.S.
An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if: (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the U.S. or Bermuda or U.S. citizens; and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities of, persons who are neither residents of either the U.S. or Bermuda nor U.S. citizens.
Non-U.S. insurance companies carrying on an insurance business within the U.S. have a certain minimum amount of effectively connected net investment income determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If AG Re or another of the Company’s Bermuda subsidiaries is considered to be engaged in the conduct of an insurance business in the U.S. and is not entitled to the benefits of the Bermuda Treaty in general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Internal Revenue Code of 1986, as amended (the Code), could subject a significant portion of AG Re’s or another of the Company’s Bermuda subsidiary’s investment income to U.S. income tax.
AGL, as a U.K. tax resident, would not be subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business under the income tax treaty between the U.S. and the U.K. (the U.K. Treaty), unless that trade or business is conducted through a permanent establishment in the U.S. AGL intends to conduct its activities so that it does not have a permanent establishment in the U.S.
Non-U.S. corporations not engaged in a trade or business in the U.S., and those that are engaged in a U.S. trade or business with respect to their non-effectively connected income are nonetheless subject to U.S. withholding tax on certain “fixed or determinable annual or periodic gains, profits and income” derived from sources within the U.S. (such as dividends and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The standard non-treaty rate of U.S. withholding tax is currently 30%. The Bermuda Treaty does not reduce the U.S. withholding rate on U.S.-sourced investment income. The U.K. Treaty reduces or eliminates U.S. withholding tax on certain U.S.-sourced investment income, including dividends from U.S. companies to U.K. resident persons entitled to the benefit of the U.K. Treaty.
The U.S. also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers with respect to risks of a U.S. person located wholly or partly within the U.S. or risks of a foreign person engaged in a trade or business in the U.S. which are located within the U.S. The rates of tax applicable to premiums paid are 4% for direct casualty insurance premiums and 1% for reinsurance premiums.
AGRO has elected to be treated as a U.S. corporation for all U.S. federal tax purposes and, as such, AGRO, together with AGL’s U.S. subsidiaries, is subject to taxation in the U.S. at regular corporate rates.
If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.
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United Kingdom
In November 2013, AGL became tax resident in the U.K. AGL remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. The AGL common shares have not changed and continue to be listed on the New York Stock Exchange (NYSE).
As a company that is not incorporated in the U.K., AGL will be considered tax resident in the U.K. only if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. From November 6, 2013, the AGL Board began to manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K.
As a U.K. tax resident company, AGL is subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties.
As a U.K. tax resident, AGL is required to file a corporation tax return with His Majesty’s Revenue & Customs (HMRC). AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The rate of corporation tax is currently 19% (which is due to increase to 25% from April 1, 2023). AGL has also registered in the U.K. to report its value-added tax (VAT) liability. The current standard rate of VAT is 20%.
The dividends AGL receives from its direct subsidiaries should be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The non-U.K. resident subsidiaries intend to operate in such a manner that their profits are outside the scope of the charge under the “controlled foreign companies” regime. Accordingly, Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be attributed to AGL and taxed in the U.K. under the CFC regime. In 2013, Assured Guaranty obtained clearance from HMRC confirming this on the basis of the facts and intentions as they were at the time.
Taxation of Shareholders
Bermuda Taxation
Currently, there is no Bermuda capital gains tax, or withholding or other tax payable on principal, interest or dividends paid to the holders of the AGL common shares.
United States Taxation
This discussion is based upon the Code, the regulations promulgated thereunder and any relevant administrative rulings or pronouncements or judicial decisions, all as in effect on the date of filing and as currently interpreted, and does not take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively. This discussion does not include any description of the tax laws of any state or local governments within the U.S. or any foreign government.
The following summary sets forth the material U.S. federal income tax considerations related to the purchase, ownership and disposition of AGL’s shares. Unless otherwise stated, this summary deals only with holders that are U.S. Persons (as defined below) who purchase and hold their shares and who hold their shares as capital assets within the meaning of section 1221 of the Code. The following discussion is only a discussion of the material U.S. federal income tax matters as described herein and does not purport to address all of the U.S. federal income tax consequences that may be relevant to a particular shareholder in light of such shareholder’s specific circumstances. For example, special rules apply to certain shareholders, such as partnerships, insurance companies, regulated investment companies, real estate investment trusts, dealers or traders in securities, tax exempt organizations, expatriates, persons liable for alternative minimum tax, U.S. accrual method taxpayers subject to special tax accounting rules as a result of any item of gross income with respect to AGL’s shares being taken into account in an applicable financial statement as described in 451(b) of the Code, persons that do not hold their securities in the U.S. dollar, persons who are considered with respect to AGL or any of its non-U.S. subsidiaries as “United States shareholders” for purposes of the CFC rules of the Code (generally, a U.S. Person, as defined below, who owns or is deemed to own 10% or more of the total combined voting power or value of all classes of AGL shares or the shares of any of AGL’s non-U.S. subsidiaries (i.e., 10% U.S. Shareholders)), or persons who hold the common shares as part of a hedging or conversion transaction or as part of a short-sale or straddle. Any such shareholder should consult their tax adviser.
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If a partnership holds AGL’s shares, the tax treatment of the partners will generally depend on the status of the partner and the activities of the partnership. Partners of a partnership owning AGL’s shares should consult their tax advisers.
For purposes of this discussion, the term “U.S. Person” means: (i) a citizen or resident of the U.S.; (ii) a partnership or corporation, created or organized in or under the laws of the U.S., or organized under any political subdivision thereof; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; (iv) a trust if either (x) a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes; or (v) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.
Taxation of Distributions. Subject to the discussions below relating to the potential application of the CFC, RPII and PFIC rules, cash distributions, if any, made with respect to AGL’s shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of AGL (as computed using U.S. tax principles). Dividends paid by AGL to corporate shareholders will not be eligible for the dividends received deduction. To the extent such distributions exceed AGL's earnings and profits, they will be treated first as a return of the shareholder’s basis in the common shares to the extent thereof, and then as gain from the sale of a capital asset.
AGL believes dividends paid by AGL on its common shares to non-corporate holders will be eligible for reduced rates of tax at the rates applicable to long-term capital gains as “qualified dividend income,” provided that AGL is not a PFIC and certain other requirements, including stock holding period requirements, are satisfied.
Classification of AGL or its Non-U.S. Subsidiaries as a CFC. Each 10% U.S. Shareholder (as defined below) of a non-U.S. corporation that is a CFC at any time during a taxable year that owns, directly or indirectly through non-U.S. entities, shares in the non-U.S. corporation on the last day of the non-U.S. corporation’s taxable year on which it is a CFC, must include in its gross income, for U.S. federal income tax purposes, its pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed. “Subpart F income” of a non-U.S. insurance corporation typically includes foreign personal holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income). A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e., constructively)) more than 50% of the total combined voting power of all classes of voting stock of such non-U.S. corporation, or more than 50% of the total value of all stock of such corporation on any day during the taxable year of such corporation. For purposes of taking into account insurance income, a CFC also includes a non-U.S. corporation in which more than 25% of the total combined voting power of all classes of stock or more than 25% of the total value of the stock is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation. A “10% U.S. Shareholder” is a U.S. Person who owns (directly, indirectly through non-U.S. entities or constructively) at least 10% of the total combined voting power or value of all classes of stock of the non-U.S. corporation. The TCJA expanded the definition of 10% U.S. Shareholder to include ownership by value (rather than just vote), so provisions in the Company’s organizational documents that cut back voting power to potentially avoid 10% U.S. Shareholder status will no longer mitigate the risk of 10% U.S. Shareholder status. AGL believes that because of the dispersion of AGL’s share ownership, no U.S. Person who owns shares of AGL directly or indirectly through one or more non-U.S. entities should be treated as owning (directly, indirectly through non-U.S. entities, or constructively), 10% or more of the total voting power or value of all classes of shares of AGL or any of its non-U.S. subsidiaries. However, AGL’s shares may not be as widely dispersed as the Company believes due to, for example, the application of certain ownership attribution rules, and no assurance may be given that a U.S. Person who owns the Company's shares will not be characterized as a 10% U.S. Shareholder. In addition, the direct and indirect subsidiaries of Assured Guaranty US Holdings Inc. (AGUS) are characterized as CFCs and any subpart F income generated will be included in the gross income of the applicable domestic subsidiaries in the AGL group.
The RPII CFC Provisions. The following discussion generally is applicable only if the gross RPII of AG Re or any other non-U.S. insurance subsidiary that either: (i) has not made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. federal tax purposes or (ii) is not a CFC owned directly or indirectly by AGUS (each a “Foreign Insurance Subsidiary” or collectively, with AG Re, the “Foreign Insurance Subsidiaries”) is 20% or more of the Foreign Insurance Subsidiary’s gross insurance income for the taxable year and the 20% Ownership Exception (as defined below) is not met. The following discussion generally would not apply for any taxable year in which the Foreign Insurance Subsidiary’s gross RPII falls below the 20% threshold or the 20% Ownership Exception is met. Although the Company cannot be certain, it believes that each Foreign Insurance Subsidiary has been, in prior years of operations, and will be, for the foreseeable future, either below the 20% threshold or in compliance with the requirements of 20% Ownership Exception for each tax year.
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RPII is any “insurance income” (as defined below) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a “RPII shareholder” (as defined below) or a “related person” (as defined below) to such RPII shareholder. In general, and subject to certain limitations, "insurance income" is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance company. For purposes of inclusion of the RPII of a Foreign Insurance Subsidiary in the income of RPII shareholders, unless an exception applies, the term "RPII shareholder" means any U.S. Person who owns (directly or indirectly through non-U.S. entities) any amount of AGL’s common shares. Generally, the term “related person” for this purpose means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying certain constructive ownership principles. A Foreign Insurance Subsidiary will be treated as a CFC under the RPII provisions if RPII shareholders are treated as owning (directly, indirectly through non-U.S. entities or constructively) 25% or more of the shares of AGL by vote or value.
RPII Exceptions. The special RPII rules do not apply if: (i) at all times during the taxable year less than 20% of the voting power and less than 20% of the value of the stock of AGL (the 20% Ownership Exception) is owned (directly or indirectly through entities) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by a Foreign Insurance Subsidiary or related persons to any such person; (ii) RPII, determined on a gross basis, is less than 20% of a Foreign Insurance Subsidiary’s gross insurance income for the taxable year (the 20% Gross Income Exception); (iii) a Foreign Insurance Subsidiary elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business, and to waive all treaty benefits with respect to RPII and meet certain other requirements; or (iv) a Foreign Insurance Subsidiary elects to be treated as a U.S. corporation and waive all treaty benefits and meet certain other requirements. The Foreign Insurance Subsidiaries do not intend to make either of these elections. Where none of these exceptions applies, each U.S. Person owning or treated as owning any shares in AGL (and therefore, indirectly, in a Foreign Insurance Subsidiary) on the last day of AGL’s taxable year will be required to include in its gross income for U.S. federal income tax purposes its share of the RPII for the portion of the taxable year during which a Foreign Insurance Subsidiary was a CFC under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at that date, but limited by each such U.S. Person’s share of a Foreign Insurance Subsidiary’s current-year earnings and profits as reduced by the U.S. Person’s share, if any, of certain prior-year deficits in earnings and profits. The Foreign Insurance Subsidiaries intend to operate in a manner that is intended to ensure that each qualifies for either the 20% Gross Income Exception or 20% Ownership Exception.
Computation of RPII. For any year in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception, AGL may also seek information from its shareholders as to whether beneficial owners of shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons; to the extent AGL is unable to determine whether a beneficial owner of shares is a U.S. Person, AGL may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses. If a Foreign Insurance Subsidiary meets the 20% Ownership Exception or the 20% Gross Income Exception, RPII shareholders will not be required to include RPII in their taxable income.
Apportionment of RPII to U.S. Holders. Every RPII shareholder who owns shares on the last day of any taxable year of AGL in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception should expect that for such year it will be required to include in gross income its share of a Foreign Insurance Subsidiary's RPII for the portion of the taxable year during which the Foreign Insurance Subsidiary was a CFC under the RPII provisions, whether or not distributed, even though it may not have owned the shares throughout such period. A RPII shareholder who owns shares during such taxable year but not on the last day of the taxable year is not required to include in gross income any part of the Foreign Insurance Subsidiary’s RPII.
Basis Adjustments. A RPII shareholder’s tax basis in its common shares will be increased by the amount of any RPII the shareholder includes in income. The RPII shareholder may exclude from income the amount of any distributions by AGL out of previously taxed RPII income. The RPII shareholder’s tax basis in its common shares will be reduced by the amount of such distributions that are excluded from income.
Uncertainty as to Application of RPII. The RPII provisions are complex and have never been interpreted by the courts or the Treasury Department in final regulations; regulations interpreting the RPII provisions of the Code exist only in proposed form. Further, recently proposed regulations could, if finalized in their current form, substantially expand the definition of RPII to include insurance income of our Foreign Insurance Subsidiaries related to affiliate reinsurance transactions. These regulations would apply to taxable years beginning after the date the regulations are finalized. Although we
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cannot predict whether, when or in what form the proposed regulations might be finalized, the proposed regulations, if finalized in their current form, could limit our ability to execute affiliate reinsurance transactions that would otherwise be undertaken for non-tax business reasons in the future and could increase the risk that gross RPII could constitute 20% or more of the gross insurance income of one or more of our Foreign Insurance Subsidiaries. in a particular taxable year, which could result in such RPII being taxable to U.S. Persons that own or are treated as owning shares of AGL. Accordingly, the meaning of the RPII provisions and the application thereof to the Foreign Insurance Subsidiaries is uncertain. In addition, the Company cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent Internal Revenue Service (IRS) examination. U.S. Persons owning or treated as owning shares of AGL should consult their tax advisors as to the effect of these uncertainties.
Information Reporting. Under certain circumstances, U.S. Persons owning shares (directly, indirectly or constructively) in a non-U.S. corporation are required to file IRS Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, with their U.S. federal income tax returns. Generally, information reporting on IRS Form 5471 is required by: (i) a person who is treated as a RPII shareholder; (ii) a 10% U.S. Shareholder of a non-U.S. corporation that is a CFC at any time during any tax year of the non-U.S. corporation and who owned the stock on the last day of that year; and (iii) under certain circumstances, a U.S. Person who acquires stock in a non-U.S. corporation and as a result thereof owns 10% or more of the voting power or value of such non-U.S. corporation, whether or not such non-U.S. corporation is a CFC. For any taxable year in which AGL determines that neither the 20% Gross Income Exception nor the 20% Ownership Exception applies, AGL will provide to all U.S. Persons registered as shareholders of its shares a completed IRS Form 5471 or the relevant information necessary to complete the form. Failure to file IRS Form 5471 may result in penalties. In addition, U.S. shareholders should consult their tax advisers with respect to other information reporting requirements that may be applicable to them.
U.S. Persons holding the Company’s shares should consider their possible obligation to file FinCEN Form 114, Foreign Bank and Financial Accounts Report, with respect to their shares. Additionally, such U.S. and non-U.S. persons should consider their possible obligations to annually report certain information with respect to the non-U.S. accounts with their U.S. federal income tax returns. Shareholders should consult their tax advisers with respect to these or any other reporting requirement which may apply with respect to their ownership of the Company’s shares.
Tax-Exempt Shareholders. Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includable in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are tax exempt entities are urged to consult their tax advisers as to the potential impact of the unrelated business taxable income provisions of the Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in certain circumstances.
Dispositions of AGL’s Shares. Subject to the discussions below relating to the potential application of the Code section 1248 and PFIC rules, holders of shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other disposition of shares in the same manner as on the sale, exchange or other disposition of any other shares held as capital assets. If the holding period for these shares exceeds one year, any gain will be subject to tax at the marginal tax rate applicable to long term capital gains.
Code section 1248 provides that if a U.S. Person sells or exchanges stock in a non-U.S. corporation and such person owned, directly, indirectly through non-U.S. entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of the CFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). The Company believes that because of the dispersion of AGL’s share ownership, no U.S. shareholder of AGL should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power of AGL; to the extent this is the case this application of Code Section 1248 under the regular CFC rules should not apply to dispositions of AGL’s shares. A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, AGL will provide a completed IRS Form 5471 or the relevant information necessary to complete the Form. Code section 1248 in conjunction with the RPII rules also applies to the sale or exchange of shares in a non-U.S. corporation if the non-U.S. corporation would be treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Ownership Exception or 20% Gross Income Exception applies. Existing proposed regulations do not address whether Code section 1248 would apply if a non-U.S. corporation is not a CFC but the non-U.S. corporation has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a U.S. domestic corporation. The Company believes, however, that this application of Code section 1248 under the RPII rules should not apply to dispositions of AGL’s shares because AGL will
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not be directly engaged in the insurance business. The Company cannot be certain, however, that the IRS will not interpret the proposed regulations in a contrary manner or that the Treasury Department will not amend the proposed regulations to provide that these rules will apply to dispositions of common shares. Prospective investors should consult their tax advisers regarding the effects of these rules on a disposition of common shares.
Passive Foreign Investment Companies. In general, a non-U.S. corporation will be a PFIC during a given year if: (i) 75% or more of its gross income constitutes “passive income” (the 75% test); or (ii) 50% or more of its assets produce passive income (the 50% test) and once characterized as a PFIC will generally retain PFIC status for future taxable years with respect to its U.S. shareholders in the taxable year of the initial PFIC characterization.
If AGL were characterized as a PFIC during a given year, each U.S. Person holding AGL’s shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an "excess distribution" with respect to, their shares, unless such person: (i) is a 10% U.S. Shareholder and AGL is a CFC; or (ii) made a “qualified electing fund election” or “mark-to-market” election. It is uncertain that AGL would be able to provide its shareholders with the information necessary for a U.S. Person to make a qualified electing fund election. In addition, if AGL were considered a PFIC, upon the death of any U.S. individual owning common shares, such individual’s heirs or estate would not be entitled to a “step-up” in the basis of the common shares that might otherwise be available under U.S. federal income tax laws. In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the common shares during the three preceding taxable years (or shorter period during which the taxpayer held common shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the common shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the common shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder's period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period. In addition, a distribution paid by AGL to U.S. shareholders that is characterized as a dividend and is not characterized as an excess distribution would not be eligible for reduced rates of tax as qualified dividend income. A U.S. Person that is a shareholder in a PFIC may also be subject to additional information reporting requirements, including the annual filing of IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC rules, as amended by the TCJA, provide that income derived in the active conduct of an insurance business by a qualifying insurance corporation is not treated as passive income. The PFIC provisions also contain a look-through rule under which a non-U.S. corporation shall be treated as if it “received directly its proportionate share of the income...” and as if it “held its proportionate share of the assets...” of any other corporation in which it owns at least 25% of the value of the stock. A second PFIC look-through rule would treat stock of a U.S. corporation owned by another U.S. corporation which is at least 25% owned (by value) by a non-U.S. corporation as a non-passive asset that generates non-passive income for purposes of determining whether the non-U.S. corporation is a PFIC.
The insurance income exception originally was intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. The Company expects, for purposes of the PFIC rules, that each of AGL’s insurance subsidiaries is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of operations. However, the TCJA limits the insurance income exception to a non-U.S. insurance company that is a qualifying insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or exceed 10% of its assets, is predominantly engaged in an insurance business and satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25% threshold is due to runoff-related or rating-related circumstances) (the Reserve Test). Further, the U.S. Treasury Department and the IRS recently issued final and proposed regulations (the 2020 Regulations) intended to clarify the application of the PFIC provisions to a non-U.S. insurance company and provide guidance on a range of issues relating to PFICs, including the application of the look-through rule, the treatment of income and assets of certain U.S. insurance subsidiaries for purposes of the look-through rule and the extension of the look-through rule to 25% or more owned partnerships. The 2020 Regulations define insurance liabilities for purposes of the Reserve Test, tighten the Reserve Test and the statutory cap on insurance liabilities, and provide guidance on the runoff-related and rating-related circumstances for purposes of the 10% test (including a provision that deems certain financial guaranty insurers that fail the 25% test to meet the rating-related circumstances test). The 2020 Regulations also propose that a non-U.S. insurance company will qualify for the insurance company exception only if a factual requirements test or an active conduct percentage test is satisfied. The factual requirements test will be met if the non-U.S. insurance company’s officers and employees perform its substantial managerial and operational activities on a regular and continuous basis with respect to its core functions and virtually all of the active decision-making functions relevant to underwriting on a contract-by-contract basis (taking into account activities of officers and employees of certain related entities in certain cases). The active conduct percentage test will
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be satisfied if: (1) the total costs incurred by the non-U.S. insurance company with respect to its officers and employees (including officers and employees of certain related entities) for services related to core functions (other than investment activities) equal at least 50% of the total costs incurred for all such services; and (2) the non-U.S. insurer’s officers and employees oversee any part of the non-U.S. insurance company’s core functions, including investment management, that are outsourced to an unrelated party. Services provided by officers and employees of certain related entities are only taken into account in the numerator of the active conduct percentage if the non-U.S. insurance company exercises regular oversight and supervision over such services and compensation arrangements meet certain requirements. The 2020 Regulations also propose that a non-U.S. insurance company with no or a nominal number of employees that relies exclusively or almost exclusively upon independent contractors (other than certain related entities) to perform its core functions will not be treated as engaged in the active conduct of an insurance business. The Company believes that, based on the application of the PFIC look-through rules described above and the Company's plan of operations for the current and future years, AGL should not be characterized as a PFIC. However, as the Company cannot predict the likelihood of finalization of the proposed 2020 Regulations or the scope, nature or impact of the 2020 Regulations on us, or whether the Company’s non-U.S. insurance subsidiaries will be able to satisfy the Reserve Test in future years and the interaction of the PFIC look-through rules is not clear, no assurance may be given that the Company will not be characterized as a PFIC. Prospective investors should consult their tax adviser as to the effects of the PFIC rules.
Foreign tax credit. If U.S. Persons own a majority of AGL’s common shares, only a portion of the current income inclusions, if any, under the CFC, RPII and PFIC rules and of dividends paid by AGL (including any gain from the sale of common shares that is treated as a dividend under section 1248 of the Code) will be treated as foreign source income for purposes of computing a shareholder’s U.S. foreign tax credit limitations. The Company will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the “subpart F income,” RPII and dividends that are foreign source income will constitute either “passive” or “general” income. Thus, it may not be possible for most shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income.
Information Reporting and Backup Withholding on Distributions and Disposition Proceeds. Information returns may be filed with the IRS in connection with distributions on AGL’s common shares and the proceeds from a sale or other disposition of AGL’s common shares unless the holder of AGL’s common shares establishes an exemption from the information reporting rules. A holder of common shares that does not establish such an exemption may be subject to U.S. backup withholding tax on these payments if the holder is not a corporation or non-U.S. Person or fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person’s U.S. federal income tax liability and may entitle the U.S. Person to a refund, provided that the required information is furnished to the IRS.
United Kingdom
The following discussion is intended to be only a general guide to certain U.K. tax consequences of holding AGL common shares, under current law and the current practice of HMRC, either of which is subject to change at any time, possibly with retrospective effect. Except where otherwise stated, this discussion applies only to shareholders who are not (and have not recently been) resident or (in the case of individuals) domiciled for tax purposes in the U.K. who hold their AGL common shares as an investment and who are the absolute beneficial owners of their common shares. This discussion may not apply to certain shareholders, such as dealers in securities, life insurance companies, collective investment schemes, shareholders who are exempt from tax and shareholders who have (or are deemed to have) acquired their shares by virtue of an office or employment. Such shareholders may be subject to special rules.
The following statements do not purport to be a comprehensive description of all the U.K. considerations that may be relevant to any particular shareholder. Any person who is in any doubt as to their tax position should consult an appropriate professional tax adviser.
AGL’s Tax Residency. AGL is not incorporated in the U.K., but from November 6, 2013, the AGL Board has managed its affairs with the intent to maintain its status as a company that is tax resident in the U.K.
Dividends. Under current U.K. tax law, AGL is not required to withhold tax at source from dividends paid to the holders of the AGL common shares.
Capital gains. U.K. tax is not normally charged on any capital gains realized by non-U.K. shareholders in AGL unless, in the case of a corporate shareholder, at or before the time the gain accrues, the shareholding is used in or for the purposes of a trade carried on by the non-resident shareholder through a permanent establishment in the U.K. or for the purposes of that
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permanent establishment. Similarly, an individual shareholder who carries on a trade, profession or vocation in the U.K. through a branch or agency may be liable for U.K. tax on the gain if such shareholder disposes of shares that are, or have been, used, held or acquired for the purposes of such trade, profession or vocation or for the purposes of such branch or agency. This treatment applies regardless of the U.K. tax residence status of AGL.
Stamp Taxes. On the basis that AGL does not currently intend to maintain a share register in the U.K., there should be no U.K. stamp duty reserve tax on a purchase of common shares in AGL. A conveyance or transfer on sale of common shares in AGL will not be subject to U.K. stamp duty, provided that the instrument of transfer is not executed in the U.K. and does not relate to any property situated, or any matter or thing done, or to be done, in the U.K.
Description of Share Capital
The following summary of AGL’s share capital is qualified in its entirety by the provisions of Bermuda law, AGL’s memorandum of association and its Bye-Laws, copies of which are incorporated by reference as exhibits to this Annual Report on Form 10-K.
AGL’s authorized share capital of $5,000,000 is divided into 500,000,000 shares, par value U.S. $0.01 per share, of which 59,019,864 common shares were issued and outstanding as of February 24, 2023. Except as described below, AGL’s common shares have no preemptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL’s common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL's assets, if any remain after the payment of all AGL’s debts and liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a shareholder. See “Acquisition of Common Shares by AGL” below.
Voting Rights and Adjustments
In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL’s shares) of a shareholder are treated as “controlled shares” (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL’s issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL’s Bye-Laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a CFC as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL’s Bye-Laws as a 9.5% U.S. Shareholder). In addition, AGL’s Board may determine that shares held carry different voting rights when it deems it appropriate to do so to: (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. “Controlled shares” includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL’s Bye-Laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.
AGL’s Board is authorized to require any shareholder to provide information for purposes of determining whether any holder’s voting rights are to be adjusted, which may be information on beneficial share ownership, the names of persons having beneficial ownership of the shareholder’s shares, relationships with other shareholders or any other facts AGL’s Board may deem relevant. If any holder fails to respond to this request or submits incomplete or inaccurate information, AGL’s Board may eliminate the shareholder’s voting rights. All information provided by the shareholder will be treated by AGL as confidential information and shall be used by AGL solely for the purpose of establishing whether any 9.5% U.S. Shareholder exists and applying the adjustments to voting power (except as otherwise required by applicable law or regulation).
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Restrictions on Transfer of Common Shares
AGL’s Board may decline to register a transfer of any common shares under certain circumstances, including if they have reason to believe that any adverse tax, regulatory or legal consequences to the Company, any of its subsidiaries or any of its shareholders or indirect holders of shares or its affiliates may occur as a result of such transfer (other than such as AGL’s Board considers de minimis). Transfers must be by instrument unless otherwise permitted by the Companies Act.
The restrictions on transfer and voting restrictions described above may have the effect of delaying, deferring or preventing a change in control of Assured Guaranty.
Acquisition of Common Shares by AGL
Under AGL’s Bye-Laws and subject to Bermuda law, if AGL’s Board determines that any ownership of AGL’s shares may result in adverse tax, legal or regulatory consequences to the Company, any of the Company’s subsidiaries or any of AGL’s shareholders or indirect holders of shares or its affiliates (other than such as AGL’s Board considers de minimis), the Company has the option, but not the obligation, to require such shareholder to sell to AGL or to a third party to whom AGL assigns the repurchase right the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board to represent the shares’ fair market value (as defined in AGL’s Bye-Laws).
Other Provisions of AGL’s Bye-Laws
AGL’s Board and Corporate Action
AGL’s Bye-Laws provide that AGL’s Board shall consist of not less than three and not more than 21 directors, the exact number as determined by the Board. AGL’s Board currently consists of 12 persons who are elected for annual terms.
Shareholders may only remove a director for cause (as defined in AGL’s Bye-Laws) at a general meeting, provided that the notice of any such meeting convened for the purpose of removing a director shall contain a statement of the intention to do so and shall be provided to that director at least two weeks before the meeting. Vacancies on the Board can be filled by the Board if the vacancy occurs in those events set out in AGL’s Bye-Laws as a result of death, disability, disqualification or resignation of a director, or from an increase in the size of the Board.
Generally under AGL’s Bye-Laws, the affirmative votes of a majority of the votes cast at any meeting at which a quorum is present is required to authorize a resolution put to vote at a meeting of the Board, including one relating to a merger, acquisition or business combination. Corporate action may also be taken by a unanimous written resolution of the Board without a meeting. A quorum shall be at least one-half of directors then in office present in person or represented by a duly authorized representative, provided that at least two directors are present in person.
Shareholder Action
At the commencement of any general meeting, two or more persons present in person and representing, in person or by proxy, more than 50% of the issued and outstanding shares entitled to vote at the meeting shall constitute a quorum for the transaction of business. In general, any questions proposed for the consideration of the shareholders at any general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the Bye-Laws.
The Bye-Laws contain advance notice requirements for shareholder proposals and nominations for directors, including when proposals and nominations must be received and the information to be included.
Amendment
The Bye-Laws may be amended only by both a resolution adopted by the Board and by a resolution adopted by the shareholders.
Voting of Non-U.S. Subsidiary Shares
When AGL is required or entitled to vote at a general meeting (for example, an annual meeting) of any of AG Re, AGFOL or any other of its directly held non-U.S. subsidiaries, AGL’s Board is required to refer the subject matter of the vote to AGL’s shareholders and seek direction from such shareholders as to how they should vote on the resolution proposed by the non-U.S. subsidiary. AGL’s Board in its discretion shall require that substantially similar provisions are or will be contained in
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the Bye-Laws (or equivalent governing documents) of any direct or indirect non-U.S. subsidiaries other than AGRO and subsidiaries incorporated in the U.K.
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 Global Code of Ethics, AGL's Bye-Laws and the charters for its Board committees, as well as certain of the Company's environmental and social policies and statements. 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 also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses its web site and may use its social media account 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 as well as the Company’s social media account on LinkedIn, 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.
ITEM 1A. RISK FACTORS
You should carefully consider the following information, together with the information contained in AGL’s other filings with the SEC. The risks and uncertainties discussed below are not the only ones the Company faces. However, these are the risks that the Company’s management believes are material. The Company may face additional risks or uncertainties that are not presently known to the Company or that management currently deems immaterial, and such risks or uncertainties also may impair its business or results of operations. The risks discussed below could result in a significant or material adverse effect on the Company’s financial condition, results of operations, liquidity, or business prospects.
Summary of Risk Factors
The following summarizes some of the risks and uncertainties that may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects or share price. It is provided for convenience and should be read together with the more expansive explanations below this summary.
Risks Related to Economic, Market and Political Conditions and Natural Phenomena
•Developments in the U.S. and global financial markets and economy generally.
•Significant budget deficits and pension funding and revenue shortfalls of certain state and local governments and entities that issue obligations the Company insures.
•Significant risks from large individual or correlated exposures.
•Losses on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations insured by the Company significantly in excess of those currently expected by the Company or recoveries significantly below those currently expected by the Company.
•Downgrades to the U.S. government’s sovereign credit ratings, or to the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities.
•The COVID-19 pandemic, and the governmental and private actions taken in response to the pandemic.
•Changes in attitudes toward debt repayment negatively impacting the Company’s insurance portfolio.
•Persistently low interest rate levels and credit spreads adversely affecting demand for financial guaranty insurance.
•Global climate change adversely affecting the Company’s insurance portfolio and investments.
•Credit losses and interest rate changes adversely affecting the Company’s investments and AUM.
•Expansion of the categories and types of the Company’s investments exposing it to increased credit, interest rate, liquidity and other risks.
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Risks Related to Estimates, Assumptions and Valuations
•Estimates of expected insurance losses to be paid (recovered), including losses with respect to related legal proceedings, are subject to uncertainties and actual amounts may be different, causing the Company to reserve either too little or too much for future losses.
•The valuation of many of the Company’s assets and liabilities and AUM includes methodologies, estimates and assumptions that are subject to differing interpretations and could result in changes to valuations of the Company’s assets and liabilities that may materially adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
Strategic Risks
•Competition in the Company’s industries.
•Strategic transactions not resulting in the benefits anticipated.
•Risks related to the asset management business.
•Alternative investments not resulting in the benefits anticipated.
•A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries.
Operational Risks
•Fluctuations in foreign exchange rates.
•Less predictable, political, credit or legal risks associated with the some of the Company’s non-U.S. operations.
•The loss of the Company’s key executives or its inability to retain other key personnel.
•A cyberattack, security breach or failure in the Company’s or a vendor's information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system.
•Errors in, overreliance on, or misuse of, models.
•Significant claim payments may reduce the Company’s liquidity.
•A sudden need to raise additional capital as a result of insurance losses, whether related to Puerto Rico or otherwise, or as a result of changes in regulatory or rating agency capital requirements applicable to its insurance companies, at a time when additional capital may not be available or may be available only on unfavorable terms.
•Large insurance losses, whether related to Puerto Rico or otherwise, substantially increasing the Company’s insurance subsidiaries’ leverage ratios, and preventing them from writing new insurance.
•The Company’s holding companies' ability to meet their obligations may be constrained.
•The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Risks Related to Taxation
•Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company’s investments.
•Certain of the Company’s non-U.S. subsidiaries may be subject to U.S. tax.
•AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035.
•In certain circumstances, U.S. Persons holding AGL’s shares may be subject to taxation under the U.S. CFC rules, additional U.S. income taxation on their proportionate share of the Company's RPII or unrelated business taxable income rules, and may be subject to adverse tax consequences if AGL is considered to be a PFIC for U.S. federal income tax purposes.
•Changes in U.S. federal income tax law adversely affecting an investment in AGL’s common shares.
•An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
•A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
•Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
•An adverse adjustment under U.K. transfer pricing legislation could adversely impact Assured Guaranty’s tax liability.
•An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their non-U.K. subsidiaries adversely affecting Assured Guaranty's tax liability.
•Assured Guaranty’s financial results may be affected by measures taken in response to the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.
Risks Related to GAAP, Applicable Law and Litigation
•Changes in the fair value of the Company’s insured credit derivatives portfolio, its committed capital securities (CCS), its FG VIEs, its CIVs, and/or the Company’s decision to consolidate or deconsolidate one or more FG VIEs and/or CIVs during a financial reporting period, subjecting its financial condition and results of operations to volatility.
•Changes in industry and other accounting practices.
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•Changes in or inability to comply with applicable law and regulations.
•Legislation, regulation or litigation arising out of the struggles of distressed obligors.
•Certain insurance regulatory requirements and restrictions constraining AGL’s ability to pay dividends and fund share repurchases and other activities.
•Applicable insurance laws may make it difficult to effect a change of control of AGL.
Risks Related to AGL’s Common Shares
•Volatility in the market price of AGL’s common shares.
•Provisions in the Code and AGL’s Bye-Laws reducing or increasing the voting rights of its common shares.
•Provisions in AGL’s Bye-Laws potentially restricting the ability to transfer common share or requiring shareholders to sell their common shares.
Risks Related to Economic, Market and Political Conditions and Natural Phenomena
Developments in the U.S. and global financial markets and economy generally may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
In recent years, the global financial markets and economy generally have been impacted by changes in inflation and interest rates, the COVID-19 pandemic, political events such as trade confrontations between the U.S. and traditional allies and between the U.S. and China as well as the withdrawal of the U.K. from the EU (commonly known as “Brexit”). The global economic and political systems also have been impacted by events in the Middle East and Eastern Europe (including events in the Ukraine), as well as Africa and Southeast Asia, and could be impacted by other events in the future, including natural and man-made events and disasters.
These and other risks could materially and negatively affect the Company’s ability to access the capital markets, the cost of the Company’s debt, the demand for its credit enhancement and asset management products, the amount of losses incurred on transactions it guarantees, the value and performance of its investments (including those that are accounted for as CIVs), the value of its AUM and amount of its related asset management fees (including performance fees), the capital and liquidity position and financial strength and enhancement ratings of its insurance subsidiaries, and the price of its common shares.
Some of the state and local governments and entities that issue obligations the Company insures are experiencing significant budget deficits and pension funding and revenue shortfalls that could result in increased credit losses or impairments and increased rating agency capital charges on those insured obligations.
Some of the state, territorial, and local governments that issue the obligations the Company insures are experiencing significant budget deficits and pension funding and revenue collection shortfalls. Certain territorial or local governments, including ones that have issued obligations insured by the Company, have sought protection from creditors under Chapter 9 of the U.S. Bankruptcy Code, or, in the case of Puerto Rico, the similar provisions of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), as a means of restructuring their outstanding debt. In some instances where local governments were seeking to restructure their outstanding debt, pension and other obligations owed to workers were treated more favorably than senior bond debt owed to the capital markets. If the issuers of the obligations in the Company’s public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its insured public finance obligations.
In addition, obligations supported by revenue streams, which may include both revenue and non-revenue bonds, such as those issued by toll road authorities, municipal utilities, airport authorities or mass transit, may be adversely affected by revenue declines resulting from reduced demand, changing demographics, evolving business practices that began during the COVID-19 pandemic including hybrid work models, telecommuting, video conferencing and other alternative work arrangements, or other causes. These obligations, which may not necessarily benefit from financial support from other tax revenues or governmental authorities, may also experience increased losses if the revenue streams are insufficient to pay scheduled interest and principal payments.
The Company may be subjected to significant risks from large individual or correlated insurance exposures.
The Company is exposed to the risk that issuers of obligations that it insures or other counterparties may default on their financial obligations, whether as a result of insolvency, lack of liquidity, operational failure or other reasons, and the amount of insurance exposure the Company has to some the risks is quite large. The Company seeks to reduce this risk by
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managing exposure to large single risks, as well as concentrations of correlated risks, through tracking its aggregate exposure to single risks in its various lines of insurance business and establishing underwriting criteria to manage risk aggregations. Should the Company's risk assessments prove inaccurate and should the applicable limits prove inadequate, the Company could be exposed to larger than anticipated losses, and could be required by the rating agencies to hold additional capital against insured exposures whether or not downgraded by the rating agencies. The Company’s ultimate exposure to a single risk may exceed its underwriting guidelines (caused by, for example, acquisitions, reassumptions, or amortization of the portfolio faster than the single risk).
The Company is exposed to correlation risk across the various assets the Company insures and in which it invests. During periods of strong macroeconomic performance, stress in an individual transaction generally occurs for idiosyncratic reasons or as a result of issues in a single asset class (so impacting only transactions in that sector). During a broad economic downturn or in the face of a significant natural or man-made event or disaster (such as the COVID-19 pandemic or events in Ukraine), a wider range of the Company’s insurance and investments could be exposed to stress at the same time. This stress may manifest itself in any or all of the following: ratings downgrades of insured risks, which may require more capital in the Company’s insurance subsidiaries; a reduction in the value of the Company’s investments and /or AUM; and actual defaults and losses in its insurance portfolio and / or investments.
Losses on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations insured by the Company significantly in excess of those currently expected by the Company or recoveries significantly below those currently expected by the Company could have a negative effect on the Company’s financial condition, results of operations, capital, business prospects and share price.
The Company has an aggregate $1.4 billion net par exposure as of December 31, 2022 to the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations, and losses on such insured exposures significantly in excess of those currently expected by the Company could have a negative effect on the Company’s financial condition, results of operations, capital, business prospects and share price. Most of the Puerto Rican entities with obligations insured by the Company have defaulted on their debt service payments, and the Company has paid claims on them. The total net expected loss the Company calculates related to such exposures is net of a significant credit for estimated recoveries on claims already paid, and recoveries significantly below those expected by the Company could also have a negative effect on the Company’s financial condition, results of operations, capital, liquidity, business prospects and share prices. Additional information about the Company’s exposure to Puerto Rico and legal actions related to that exposure may be found in, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, Exposure to Puerto Rico.
Downgrades to the U.S. government’s sovereign credit ratings, or to the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in a deterioration in general economic conditions, increased credit losses in the Company’s insured portfolio, impairments or losses in its investment portfolio, and other risks to the Company and its credit ratings that the Company is not able to predict.
In the U.S., debt ceiling and budget deficit concerns, which have increased the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings, could weaken the U.S. dollar, global economy and banking system, cause market volatility, raise the cost of credit, negatively impact the Company’s insured and investment portfolios, and disrupt general economic conditions in ways that the Company is not able to predict, which could materially and adversely affect the Company’s business, financial condition and results of operations. While rating agencies currently permit sub-sovereign and corporate credits in the U.S. to be rated higher than sovereign credits, in the event that the U.S. government is downgraded and if the rating agencies no longer permit sub-sovereign and/or corporate credit ratings to be higher than the U.S. government, the resulting downgrades could result in a material adverse impact to the Company’s credit ratings and its insurance and investment portfolios.
The Company may be exposed to a higher risk of default of U.S. public finance obligations in connection with a U.S. government default. While the Company historically has experienced low levels of defaults in its U.S. public finance insured portfolio, from time-to-time state and local governments that issue some of the obligations the Company insures have reported budget shortfalls that have required them to raise taxes and/or cut spending in order to satisfy their obligations. While there has been support provided by the U.S. federal government designed to provide aid to state and local governments, including during the COVID-19 pandemic, certain state and local governments remain under financial stress. If the issuers of the obligations in the Company’s U.S. public finance insurance portfolio are reliant on financial assistance from the U.S. government in order to meet their obligations, and the U.S. government does not provide such assistance, the Company may experience credit losses or impairments on those obligations.
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A downgrade of the U.S. government may also result in higher interest rates, which could adversely affect the distressed RMBS that are in the Company’s insured portfolio, reduce the market value of the fixed-maturity securities held in the Company’s investment portfolio and dampen municipal bond issuance.
The development, course and duration of the COVID-19 pandemic, and the governmental and private actions taken in response to the pandemic may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
In addition to its human toll, the COVID-19 pandemic and the governmental and private actions taken in response have caused economic and financial disruption on a global scale and may continue to do so. While vaccines and therapeutics have been developed and approved and deployed by governments, the remaining course and duration of the pandemic, and future governmental and private responses to its course, remain unknown. While there has been approximately three years of experience with the pandemic, not all of the direct and indirect consequences of COVID-19 are known yet. The Company believes the most material of these risks include the following, all of which are discussed in more detail in this Risk Factors section:
•Impact on its insurance business, including potential:
◦Increased insurance claims and loss reserves;
◦Increased correlation of risks;
◦Difficulty in meeting applicable capital requirements as well as other regulatory requirements;
◦Reduction in one or more of the financial strength and enhancement ratings of the Company’s insurance subsidiaries;
•Impact on the Company’s asset management business, including potential:
◦Difficulty in attracting third-party funds to manage;
◦Reduction and/or deferral of asset management fees (including performance fees) as occurred with respect to the deferral of CLO management fees in 2020 (although such deferred performance fees have since been received);
◦Impairment of goodwill and other intangible assets associated with the BlueMountain Acquisition;
•Impact of legislative or regulatory responses to the pandemic;
•Losses in the Company’s investments; and
•Operational disruptions and security risks from remote working arrangements.
The Company believes that state, territorial 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 various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims from the impact of the COVID-19 pandemic and the governmental and private actions taken in response. Moreover, state and local governments under financial stress and dependent on U.S. federal government assistance provided in connection with the COVID-19 pandemic may be at risk of experiencing credit losses or impairment on their obligations as a result of cessation of the U.S. federal government’s support. In addition to obligations already internally rated in the low investment grade or BIG categories, the Company believes that its sectors most at risk include: (i) Mass Transit - Domestic; (ii) Toll Roads and Transportation - International; (iii) Hotel / Motel Occupancy Tax; (iv) Stadiums; (v) UK University Housing - International; (vi) Privatized Student Housing: Domestic; and (vii) Commercial Receivables.
The Company continues to provide the services and communications it did prior to the COVID-19 pandemic, and to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades, establish new funds and attract third-party funds to manage. 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.
The COVID-19 pandemic and governmental and private actions taken in response may also exacerbate many of the risks applicable to the Company in ways or to an extent not yet identified by the Company.
Changes in attitudes toward debt repayment could negatively impact the Company’s insurance portfolio.
The likelihood of debt repayment is impacted by both the ability and the willingness of the obligor to repay their debt. Debtors generally understand that debt repayment is not only a legal obligation but is also appropriate, and that a failure to repay their debt will impede their access to debt in the future. To the extent societal attitudes toward the repayment of debt by struggling obligors softens and such obligors believe there to be less of a penalty for nonpayment, some struggling debtors may be more likely to default and, if they default, less likely to agree to repayment plans they view as burdensome. If the issuers of
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the obligations in the Company’s public finance insurance portfolio become unwilling to raise taxes, decrease spending or receive federal assistance in order to repay their debt, the Company may experience increased levels of losses on its public finance obligations, which could adversely affect its financial condition, results of operations, capital, liquidity, business prospects and share price.
Persistently low interest rate levels and credit spreads could adversely affect demand for financial guaranty insurance.
Demand for financial guaranty insurance generally fluctuates with changes in market credit spreads. Credit spreads, which are based on the difference between interest rates on high-quality or “risk free” securities versus those on lower-rated securities, fluctuate due to a number of factors, and are sensitive to the absolute level of interest rates, current credit experience and investors’ risk appetite. When interest rates are low, or when the market is relatively less risk averse, the credit spread between high-quality or insured obligations versus lower-rated obligations typically narrows. As a result, financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively wider credit spreads. Issuers are less likely to use financial guaranties on their new issues when credit spreads are narrow, so (absent other factors) this results in decreased demand or premiums obtainable for financial guaranty insurance.
Global climate change may adversely impact the Company’s insurance portfolio and investments.
Global climate change and climate change regulations may impact asset prices and general economic conditions and may disproportionately impact particular sectors, industries or locations. Due to the significant uncertainty of forecasted data related to the impact of climate change, the Company cannot predict the long-term consequences to the Company resulting from the physical, transition, legal, regulatory and reputational risks associated with climate change. The Company considers environmental risk in its insurance underwriting and surveillance process and its investment process and manages its insurance and investment risks by maintaining a well-diversified portfolio of insurance and investments both geographically and by sector and monitors these measures continuously. While the Company can adjust its investment exposure to sectors and/or geographical areas that face severe risks due to climate change or climate change regulation, the Company has less flexibility in adjusting the existing exposure in its insurance portfolio because the majority of the financial guaranties issued by the Company’s insurance subsidiaries 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 insurance.
Credit losses and changes in interest rates could adversely affect the Company’s investments and AUM.
The Company’s results of operations are affected by the performance of its investments, which primarily consist of fixed-income securities and short-term investments. As of December 31, 2022, fixed-maturity securities and short-term investments held by the Company had a fair value of approximately $8.2 billion. Credit losses on the Company’s investments adversely affect the Company’s financial condition and results of operations by reducing net income and shareholders’ equity. In recent years the Company has increased the amount it invests in alternative investments. In addition, the Company received a significant amount of New Recovery Bonds and CVIs as a result of the 2022 Puerto Rico Resolutions. Alternative investments, Loss Mitigation Securities, Puerto Rico New Recovery Bonds and CVIs may be more susceptible to credit losses than most of the rest of the Company’s fixed-income portfolio.
The impact of changes in interest rates may also adversely affect both the Company’s financial condition and results of operations. For example, if interest rates decline, funds reinvested will have a lower yield than expected, reducing the Company’s future investment income compared to the amount it would earn if interest rates had not declined. However, the value of the Company’s fixed-rate investments would generally increase, resulting in an unrealized gain on investments and improving the Company’s financial condition. Conversely, if interest rates increase, the Company’s results of operations would improve as a result of higher future reinvestment income, but its financial condition would be adversely affected, since value of the fixed-rate investments generally would be reduced.
Credit losses and changes in interest rates could also have an adverse impact on the amount of the Company’s AUM, which could impact results of operations. For example, if there are credit losses in the portfolios managed by AssuredIM or, to a lesser extent, if interest rates increase, AUM will decrease, reducing the amount of management fees earned by the Company.
Interest rates are highly sensitive to many factors, including monetary policies, U.S. and non-U.S. economic and political conditions and other factors beyond the Company’s control. The Company does not engage in active management, or hedging, of interest rate risk in its investment portfolio, and may not be able to mitigate interest rate sensitivity effectively.
Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs) may expose it to increased credit, interest rate, liquidity and other risks.
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The Company is using AssuredIM’s investment knowledge and experience to expand the categories and types of its investments (including those accounted for as CIVs) by both: (a) allocating $750 million of capital in AssuredIM Funds; and (b) expanding the categories and types of its alternative investments not managed by AssuredIM. This expansion of categories and types of investments may increase the credit, interest rate and liquidity risk in the Company’s investments (including those accounted for as CIVs). In addition, the fair value of some of these assets may be more volatile than other investments made by the Company. As a result of the Company’s expansion of the categories and types of its investments, as of December 31, 2022, the U.S. Insurance Subsidiaries had investments in AssuredIM Funds with a fair value of $569 million, which are reported as CIVs, in the Company’s consolidated financial statements. In addition, the Company had $123 million of other non-AssuredIM alternative investments reported in the consolidated financial statements. This expansion also has resulted in the Company investing a portion of its portfolio in assets that are less liquid than some of its other investments, and so may increase the risks described below under “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited”. Expanding the categories and types of Company investments (including those accounted for as CIVs) may also expose the Company to other types of risks, including reputational risks.
Risks Related to Estimates, Assumptions and Valuations
Estimates of expected insurance losses to be paid (recovered), including losses with respect to related legal proceedings, are subject to uncertainties and actual amounts may be different, causing the Company to reserve either too little or too much for future losses.
The financial guaranties issued by the Company’s insurance subsidiaries 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 losses to be paid (recovered) on a policy is subject to significant uncertainty over the life of the insured transaction. Additionally, even after the Company pays a claim on its financial guaranties (or determines no claim is owing), subsequent related litigation may result in additional losses. If the Company’s actual losses exceed its current estimate, the Company’s financial condition, results of operations, capital, liquidity, business prospects, financial strength ratings and ability to raise additional capital may all be adversely affected.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses to be paid (recovered). The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, probability weightings, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, future interest rates, the perceived strength of legal protections, the perceived strength of the Company’s position in any ongoing legal proceedings, governmental actions, negotiations, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. Actual losses will ultimately depend on future events, legal rulings, and/or transaction performance and may be influenced by many interrelated factors that are difficult to predict. As a result, the Company’s current estimates of losses to be paid (recovered), including losses with respect to related legal proceedings, may be subject to considerable volatility and may not reflect the Company’s future ultimate losses paid (recovered).
The Company’s expected loss models and reserve assumptions take into account current and expected future trends, which contemplate the impact of current and possible developments in the performance of the exposure and any related legal proceedings. These factors, which are integral elements of the Company's reserve estimation methodology, are updated on a quarterly basis based on current information. Also, in some instances, the Company may not be able to reasonably estimate the amount or range of loss that could result from an unfavorable outcome of a legal proceeding based on the information available at the stage of the legal proceeding or its estimate may prove to be materially different than the actual results. Loss models and reserve assumptions may be impacted by changes to interest rates due both to discounting and transaction structures that include floating rates, which could impact the calculation of expected losses. Because such information changes over time, sometimes materially, the Company’s projection of losses and its related reserves may also change materially. Much of the recent development in the Company’s loss projections and reserves relate to the Company’s insured Puerto Rico exposures.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, for additional information.
The valuation of many of the Company’s assets and liabilities and AUM includes methodologies, estimates and assumptions that are subject to differing interpretations and could result in changes to valuations of the Company’s assets and liabilities that may materially adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
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The Company carries a significant portion of its assets and liabilities and reports a significant portion of its AUM at fair value. The approaches used by the Company to calculate the fair value of those assets and liabilities it carries at fair value are described under, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement. The determination of fair values is made at a specific point in time, based on available market information and judgments about the assets and liabilities being valued, including estimates of timing and amounts of cash flows and the credit rating of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on estimated fair value amounts.
During periods of market disruption, including periods of rapidly changing credit spreads or illiquidity, it may be difficult to value certain of the Company’s assets and liabilities and AUM, particularly if trading becomes less frequent or market data becomes less observable. An increase in the amount of the Company’s alternative investments in its investment portfolio and/or CIVs may increase the amount of the Company’s assets subject to this risk. During such periods, more assets and liabilities may fall to the Level 3 valuation level, which describes model derived valuations in which one or more significant inputs or significant value drivers are unobservable, thereby resulting in values that may not be indicative of net realizable value or reflective of future fair values. Rapidly changing credit and equity market conditions could materially impact the valuation of assets and liabilities as reported within the financial statements, and period-to-period changes in value could vary significantly.
Strategic Risks
Competition in the Company’s industries may adversely affect its results of operations, business prospects and share price.
As described in greater detail under Item 1, Business — Insurance Segment — Competition, the Company can face competition in its insurance business, either in the form of current or new providers of credit enhancement, such as nonpayment insurance, letters of credit or credit derivatives, or in terms of alternative structures, including uninsured offerings, or pricing competition. Increased competition could have an adverse effect on the Company’s insurance business.
The Company’s Asset Management segment operates in highly competitive markets. The Company competes with many other firms in every aspect of the asset management industry, including raising funds, seeking investments, and hiring and retaining professionals. The Company’s ability to 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. In addition, if the Company’s successful competitors charge lower fees for substantially similar products, the Company may face pressure to lower fees to attract and retain asset management clients, which may reduce the Company’s revenues and /or income.
Some of the Company’s asset management competitors are substantially larger and have considerably greater financial, technical and marketing resources. Certain of these competitors periodically raise significant amounts of capital in investment strategies that are also pursued by the Company. Some of these competitors also may have a lower cost of capital and access to funding sources that are not available to the Company, which may create further competitive disadvantages with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments, allowing them to consider a wider variety of investments and establish broader networks of business relationships than those available to AssuredIM and/or the Company.
Strategic transactions may not result in the benefits anticipated.
From time to time the Company evaluates strategic opportunities and conducts diligence activities with respect to transactions with other financial services companies including transactions involving asset managers, asset management contracts, legacy financial guaranty companies and financial guaranty portfolios, and other financial services companies, and has executed a number of such transactions in the past. For example, the Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. From time to time the Company also evaluates expanding its business by hiring teams of professionals engaged in activities it wishes to pursue and conducts due diligence with respect to such individuals and their current positions. Such strategic transactions related to entities, portfolios or teams may involve some or all of the various risks commonly associated with such strategic transactions, including, among other things: (a) failure to adequately identify and value potential exposures and liabilities associated with a new entity, portfolio or team; (b) difficulty in estimating the value of a new entity, portfolio or team; (c) potential diversion of management’s time and attention; (d) exposure to asset quality issues of a new entity or portfolio; (e) difficulty and expense of integrating the operations, systems and personnel of a new entity; (f) difficulty integrating the culture of a new entity or team; (g) failure to identify legal risks associated with the strategic transaction with an entity, portfolio or team, and (h) in the case of acquisitions of a financial guaranty company or portfolio, concentration of insurance exposures, including insurance exposures which may exceed single risk limits, aggregate risk limits, BIG limits and/or non-U.S. dollar exposure limits, due to the addition of the target insurance portfolio. Such strategic transactions related to entities, portfolios or
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teams may also have unintended consequences on ratings assigned by the rating agencies to the Company or its insurance subsidiaries or on the applicability of laws and regulations to the Company’s existing businesses. These or other factors may cause any past or future strategic transactions relating to financial services entities, portfolios or teams not to result in the benefits to the Company that the Company anticipated when the transaction was agreed. Past or future transactions may also subject the Company to non-monetary consequences that may or may not have been anticipated or fully mitigated at the time of the transaction.
Additionally, if the Company enters into discussions regarding a strategic transaction and a transaction is not consummated, especially if such discussions become known, related portions of the Company’s business may be negatively impacted.
Asset Management may present risks that may adversely affect the Company’s financial condition, results of operations, capital, business prospects and share price.
The expansion of the Company’s asset management business segment and the establishment of AssuredIM has exposed the Company’s financial condition, results of operations, business prospects and share price to some of the risks faced by asset managers generally and the risk of AssuredIM’s investment business more specifically. Asset management services are primarily a fee-based business, and the Company’s asset management and performance fees are based on the amount of its AUM as well as the performance of those assets. Volatility or declines in the markets in which the Company invests as an asset manager, or poor performance of its investments, may negatively affect its AUM and its asset management and performance fees, and may deter future investment by third parties in the Company’s asset management products. The Company’s asset management business is also subject to legal, regulatory, compliance, accounting, valuation and political risks that differ from those involved in the Company’s insurance business. In addition, the asset management business is an intensely competitive business, creating new competitive risks.
The Company had a carrying value as of December 31, 2022, of $157 million for goodwill and other intangible assets established in connection with the acquisition of BlueMountain (now known as AssuredIM LLC). External factors, such as the impact of the war in Ukraine or the COVID-19 pandemic on global financial markets, general macroeconomic factors, and industry conditions, as well as the financial performance of AssuredIM relative to the Company’s expectations at the time of acquisition, could impact the Company’s assessment of the goodwill and other intangible assets carrying value. The Company’s goodwill impairment assessment also is sensitive to the Company’s assumptions of discount rates, market multiples, projections of AUM growth and other factors, which may vary. A change in the Company’s assessment may, in the future, result in an impairment, which could adversely affect the Company’s financial condition, results of operations and share price.
Alternative investments may not result in the benefits anticipated.
The Company and its CIVs have invested in alternative investments, and may over time increase the proportion of the Company’s assets invested in alternative investments. Alternative investments may be riskier than other investments the Company makes, and may not result in the benefits anticipated at the time of the investment. In addition, although the Company uses what it believes to be excess capital to make alternative investments, whether directly or through CIVs, measures of required capital can fluctuate and such assets may not be given much, or any, value under the various rating agency, regulatory and internal capital models to which the Company is or may be subject. Also, alternative investments may be less liquid than most of the Company’s other investments and so may be difficult to convert to cash or investments that do receive more favorable treatment under the capital models to which the Company is subject. See “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”
A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries may adversely affect its business prospects.
The financial strength and financial enhancement ratings assigned by S&P, Moody’s, KBRA and A.M. Best Company, Inc. to each of the Company’s insurance and reinsurance subsidiaries represent such rating agencies’ opinions of the insurer’s financial strength and ability to meet ongoing obligations to policyholders and cedants in accordance with the terms of the financial guaranties it has issued or the reinsurance agreements it has executed. Issuers, investors, underwriters, ceding companies and others consider the Company’s financial strength or financial enhancement ratings an important factor when deciding whether or not to utilize a financial guaranty or purchase reinsurance from one of the Company’s insurance or reinsurance subsidiaries. A downgrade by a rating agency of the financial strength or financial enhancement ratings of one or more of the Company’s insurance subsidiaries could impair the Company’s financial condition, results of operation, capital, liquidity, business prospects and/or share price. The ratings assigned by the rating agencies to the Company’s insurance subsidiaries are subject to review and may be lowered by a rating agency at any time and without notice to the Company.
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The rating agencies have changed their methodologies and criteria from time to time. Factors influencing the rating agencies are beyond management's control and not always known to the Company. In the event of an actual or perceived deterioration in creditworthiness of large risks in the Company’s insurance portfolio, or other large increases in liabilities (including those related to legal proceedings), or a change in a rating agency’s capital model or rating methodology, a rating agency may require the Company to increase the amount of capital it holds to maintain its financial strength and financial enhancement ratings under the rating agencies’ capital adequacy models, or a rating agency may identify an issue that additional capital would not address. The amount of any capital required may be substantial, and may not be available to the Company on favorable terms and conditions or at all, especially if it were known that additional capital was necessary to preserve the Company’s financial strength or financial enhancement ratings. The failure to raise any additional required capital, or successfully address another issue or issues raised by a rating agency, could result in a downgrade of the ratings of the Company’s insurance subsidiaries and thus have an adverse impact on its business, results of operations and financial condition.
The Company periodically assesses the value of each rating assigned to each of its subsidiaries, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its subsidiaries. Rating agencies may choose not to honor the Company’s request, and continue to rate a subsidiary after the Company’s request to drop the rating, as Moody’s did with respect to AGC.
The insurance subsidiaries’ financial strength and financial enhancement ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of one or more of the Company’s insurance subsidiaries were reduced below current levels, the Company expects the number of transactions that would benefit from the Company’s insurance would be reduced; consequently, a downgrade by rating agencies could harm the Company’s new insurance business production.
In addition, a downgrade may have a negative impact on the Company’s insurance subsidiaries in respect of transactions that they have insured or that they have assumed through reinsurance. For example, beneficiaries of financial guaranties issued by the Company’s insurance subsidiaries may have the right to cancel the credit protection provided by them, which would result in the loss of future premium earnings and the reversal of any fair value gains recorded by the Company. In addition, a downgrade of AG Re, AGC or AGRO could result in certain ceding companies recapturing business that they had ceded to these reinsurers.
Operational Risks
Fluctuations in foreign exchange rates may adversely affect the Company’s financial position and results of operations.
The Company’s reporting currency is the U.S. dollar. The functional currency of the Company’s insurance and reinsurance subsidiaries is the U.S. dollar. The Company’s subsidiaries maintain both assets and liabilities in currencies different from their functional currencies, which exposes the Company to changes in currency exchange rates. The investment portfolios of non-U.S. subsidiaries are primarily invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.
The principal currencies creating foreign exchange risk to the Company are the pound sterling and the euro. The Company cannot accurately predict the nature or extent of future exchange rate variability between these currencies or relative to the U.S. dollar. Foreign exchange rates are sensitive to factors beyond the Company’s control.
The Company does not engage in active management, or hedging, of its foreign exchange rate risk. Therefore, fluctuation in exchange rates between the U.S. dollar and the pound sterling or the euro could adversely impact the Company’s financial position, results of operations and cash flows. See Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk — Sensitivity to Foreign Exchange Rate Risk.
Some of the Company’s non-U.S. operations expose it to less predictable political, credit and legal risks.
The Company pursues new business opportunities in non-U.S. markets. The underwriting of obligations of an issuer in a country other than the U.S. involves the same process as that for a U.S. issuer, but additional risks must be addressed, such as the evaluation of currency exchange rates, non-U.S. business and legal issues, and the economic and political environment of the country or countries in which an issuer does business. Changes in such factors could impede the Company’s ability to insure, or increase the risk of loss from insuring, obligations in the non-U.S. countries in which it currently does business and limit its ability to pursue business opportunities in other non-U.S. countries.
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The Company is dependent on key executives and the loss of any of these executives, or its inability to retain other key personnel, could adversely affect its business.
The Company’s success substantially depends upon its ability to attract, motivate and retain qualified employees and upon the ability of its senior management and other key employees to implement its business strategy. The Company believes there are only a limited number of available qualified executives in the insurance business lines in which the Company competes, and that there is strong competition for qualified asset management executives, including portfolio managers. The Company relies substantially upon the services of Dominic J. Frederico, President and Chief Executive Officer, and other executives.
Beginning in 2021, there has been a dramatic increase in U.S. workers leaving their positions generally in what has been referred to as the “great resignation,” and the market to build, retain and replace talent has become even more highly competitive. Although the Company has designed its executive compensation with the goal of retaining and creating incentives for its executive officers and other key employees, including portfolio managers, the Company may not be successful in retaining their services. The loss of the services of any of these individuals or other key members of the Company’s management team could adversely affect the implementation of its business strategy, including the Company’s development of its asset management business.
The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in the Company’s or a vendor’s information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system, could adversely affect the Company’s business.
The Company relies upon information technology and systems, including technology and systems provided by or interfacing with those of third parties, to support a variety of its business processes and activities. In addition, the Company receives and stores confidential information, including personally identifiable information, in connection with certain loss mitigation and due diligence activities related to its structured finance insurance and asset management businesses, along with information regarding employees and directors and asset management clients, among others. Information technology security threats and events are increasing in frequency and sophistication. The Company’s data systems and those of third parties on which it relies will continue to be vulnerable to security and data privacy breaches due to, and continue to be the target of, cyberattacks, viruses, malware, ransomware, other malicious codes, hackers, unauthorized access, or other computer-related penetrations, and other external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct. Over time, the frequency and sophistication of such threats continue to increase and often become further heightened in connection with geopolitical tensions. Like other global companies, the Company has an increasing challenge of attracting and retaining highly qualified security personnel to assist in combating these security threats. A breach of these systems could, for example, result in lost business, reputational harm, the disclosure or misuse of confidential or proprietary information, incorrect reporting, legal costs and regulatory penalties, including under the EU’s General Data Protection Regulation, the California Consumer Privacy Act and similar laws and regulations.
The Company’s business operations rely on the continuous availability of its computer systems as well as those of certain third parties. In addition to disruptions caused by cyberattacks or data privacy breaches, such systems may be adversely affected by natural and man-made catastrophes. The Company’s failure to maintain business continuity in the wake of such events, particularly if there were an interruption for an extended period, could prevent the timely completion of critical processes across its operations, including, for example, claims processing, treasury and investment operations and payroll. These failures could result in additional costs, loss of business, fines and litigation.
The Company began operating remotely in accordance with its business continuity plan, and instituted mandatory work-from-home policies at all of its global offices, in March 2020. The Company has shifted to a hybrid work-from-home and work-from-office paradigm. This shift to working from home at least part of the time has made the Company more dependent on internet and communications access and capabilities and has heightened the risk of cybersecurity attacks to its operations.
The Company and its subsidiaries are subject to numerous data privacy and protection laws and regulations in a number of jurisdictions, particularly with regard to personally identifiable information. The Company’s failure to comply with these requirements, even absent a security breach, could result in penalties, reputational harm or difficulty in obtaining desired consents from regulatory authorities.
The Board oversees the risk management process and engages with Company cybersecurity and data privacy risk issues, including reinforcing related policies, standards and practices, and the expectation that employees will comply with these policies. The Audit Committee of the Board of Directors has specific responsibility for overseeing information technology
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matters, including cybersecurity and data privacy risk, and the Risk Oversight Committee of the Board addresses cybersecurity and data privacy matters as part of its enterprise risk management responsibilities.
Errors in, overreliance on or misuse of models may result in financial loss, reputational harm or adverse regulatory action.
The Company uses models for numerous purposes in its business. For example, it uses models to project future cash flows associated with pricing models, calculating insurance expected losses to be paid (recoveries), evaluating risks in its insurance and investments, valuing assets and liabilities and projecting liquidity needs. It also uses models to determine and project capital requirements under its own risk model as well as under regulatory and rating agency requirements. While the Company has a model validation function and has adopted procedures to protect its models, the models may not operate properly (including as a result of errors or damage) and may rely on assumptions that are inherently uncertain and may prove to have been incorrect.
Significant claim payments may reduce the Company’s liquidity.
Claim payments and payments made in connection with related legal proceedings reduce the Company’s invested assets and result in reduced liquidity and net investment income, even if the Company is reimbursed in full over time and does not experience ultimate loss on the claim. In the years after the financial crisis that began in 2008, many of the larger claims paid by the Company were with respect to insured U.S. RMBS securities. More recently, the Company has been paying large claims related to certain insured Puerto Rico exposures, which it has been doing since 2016. The Company had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.4 billion and $3.6 billion, respectively, as of December 31, 2022 and December 31, 2021, all of which was rated BIG under the Company’s rating methodology. For a discussion of the Company’s Puerto Rico risks, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. For a discussion of the Company’s plans to fund large claim payments associated with the anticipated resolution of these exposures, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Insurance Subsidiaries.
The Company plans for future claim payments. If the amount of future claim payments is significantly more than that projected by the Company, the Company’s ability to make other claim payments and its financial condition, financial strength ratings and business prospects and share price could be adversely affected.
The Company may face a sudden need to raise additional capital as a result of insurance losses, whether related to Puerto Rico or otherwise, substantially in excess of the stress scenarios for which it plans, or as a result of changes in regulatory or rating agency capital requirements applicable to its insurance companies, which additional capital may not be available or may be available only on unfavorable terms.
The Company’s capital requirements depend on many factors, primarily related to its in-force book of insurance business and rating agency capital requirements for its insurance companies. Failure to raise additional capital if and as needed may result in the Company being unable to write new insurance business and may result in the ratings of the Company and its insurance subsidiaries being downgraded by one or more rating agency. The Company’s access to external sources of financing, as well as the cost of such financing, is dependent on various factors, including the market supply of such financing, the Company’s long-term debt ratings and insurance financial strength and enhancement ratings and the perceptions of its financial strength and the financial strength of its insurance subsidiaries. The Company’s debt ratings are in turn influenced by numerous factors, such as financial leverage, balance sheet strength, capital structure and earnings trends. If the Company’s need for capital arises because of significant insurance losses substantially in excess of the stress scenarios for which it plans, the occurrence of such losses may make it more difficult for the Company to raise the necessary capital.
Future capital raises for equity or equity-linked securities could also result in dilution to the Company’s shareholders. In addition, some securities that the Company could issue, such as preferred stock or securities issued by the Company's operating subsidiaries, may have rights, preferences and privileges that are senior to those of its common shares.
Large insurance losses, whether related to Puerto Rico or otherwise, could increase substantially the Company’s insurance subsidiaries’ leverage ratios, which may prevent them from writing new insurance.
Insurance regulatory authorities impose capital requirements on the Company’s insurance subsidiaries. These capital requirements, which include leverage ratios and surplus requirements, may limit the amount of insurance that the subsidiaries may write. A material reduction in the statutory capital and surplus of an insurance subsidiary, whether resulting from underwriting or investment losses, a change in regulatory capital requirements or another event, or a disproportionate increase
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in the amount of risk in force, could increase a subsidiary’s leverage ratio. This in turn could require that subsidiary to obtain reinsurance for existing business or add to its capital base (neither of which may be available, or may be available only on terms that the Company considers unfavorable). Failure to maintain regulatory capital levels could limit that insurance subsidiary’s ability to write new business.
The Company’s holding companies’ ability to meet their obligations may be constrained.
Each of AGL, AGUS and AGMH is a holding company and, as such, has no direct operations of its own. None of the holding companies expect to have any significant operations or assets other than its ownership of the stock of its subsidiaries. The Company expects that while it is building its asset management business, dividends and other payments from the insurance companies will be the primary source of funds for AGL, AGUS and AGMH to meet ongoing cash requirements, including operating expenses, intercompany loan payments, any future debt service payments and other expenses, to pay dividends to their respective shareholders, to fund any acquisitions, and, in the case of AGL, to repurchase its common shares. The insurance subsidiaries’ ability to pay dividends and make other payments depends, among other things, upon their financial condition, results of operations, cash requirements, 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. Additionally, in recent years AGM and AGC have sought and been granted permission from their insurance regulators to make discretionary payments to their corporate parents in excess of the amounts permitted by right under the insurance laws and related regulations. There can be no assurance that such regulators will permit discretionary payments in the future. Accordingly, if the insurance subsidiaries are unable to pay sufficient dividends and other permitted payments at the times or in the amounts that are required, that would have an adverse effect on the ability of AGL, AGUS and AGMH to satisfy their ongoing cash requirements and on their ability to pay dividends to shareholders or repurchase common shares or fund other activities, including acquisitions.
The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Each of AGL, AGUS and AGMH requires liquidity, either in the form of cash or in the ability to easily sell investment assets for cash, in order to meet its payment obligations, including, without limitation, its operating expenses, interest and principal payments on debt and dividends on common shares, and to make capital investments in operating subsidiaries. Such cash is also used by AGL to repurchase its common shares. The Company’s operating subsidiaries require substantial liquidity to meet their respective payment and/or collateral posting obligations, including under financial guaranty insurance policies or reinsurance agreements. They also require liquidity to pay operating expenses, reinsurance premiums, dividends to AGUS or AGMH for debt service and dividends to AGL, as well as, where appropriate, to make capital investments in their own subsidiaries. In addition, the Company may require substantial liquidity to fund any future acquisitions. The Company cannot give any assurance that the liquidity of AGL and its subsidiaries will not be adversely affected by adverse market conditions, changes in insurance regulatory law, insurance claim payments and related litigation substantially in excess of those projected by the Company in its stress scenarios, or changes in general economic conditions.
AGL anticipates that its liquidity needs will be met by the ability of its operating subsidiaries to pay dividends or to make other payments; external financings; investment income from its invested assets; and current cash and short-term investments. The Company expects that its subsidiaries’ need for liquidity will be met by the operating cash flows of such subsidiaries; external financings; investment income from their invested assets; and proceeds derived from the sale of their investments, significant portions of which are in the form of cash or short-term investments. The value of the Company’s investments may be adversely affected by changes in interest rates, credit risk and capital market conditions that therefore may adversely affect the Company’s potential ability to sell investments quickly and the price which the Company might receive for those investments. Part of the Company’s investment strategy is to invest more of its excess capital in alternative investments, which may be particularly difficult to sell at adequate prices, or at all.
The Company’s sources of liquidity are subject to market, regulatory or other factors that may impact the Company’s liquidity position at any time. As discussed above, AGL’s insurance subsidiaries are subject to regulatory and rating agency restrictions limiting their ability to declare and to pay dividends and make other payments to AGL. As further noted above, external financing may or may not be available to AGL or its subsidiaries in the future on satisfactory terms.
Risks Related to Taxation
Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company’s investments.
The TCJA included provisions that could result in a reduction of supply, such as the termination of advance refunding bonds. Any such lower volume of municipal obligations could impact the amount of such obligations that could benefit from
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insurance. In addition, the reduction of the U.S. corporate income tax rate to 21% could make municipal obligations less attractive to certain institutional investors such as banks and property and casualty insurance companies, resulting in lower demand for municipal obligations.
Further, future changes in U.S. federal, state or local laws that materially adversely affect the tax treatment of municipal securities or the market for those securities may lower volume and demand for municipal obligations and also may adversely impact the value and liquidity of the Company’s investments, a significant portion of which is invested in tax-exempt instruments.
Certain of the Company’s non-U.S. subsidiaries may be subject to U.S. tax.
The Company manages its business so that AGL and its non-U.S. subsidiaries (other than AGRO) operate in such a manner that none of them should be subject to U.S. federal tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks, and U.S. withholding tax on certain U.S. source investment income). However the Company cannot be certain that the IRS will not contend successfully that AGL or any of its non-U.S. subsidiaries (other than AGRO) is/are engaged in a trade or business in the U.S., in which case each such company could be subject to U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such U.S. business. See Item 1. Business — Tax Matters — Taxation of AGL and Subsidiaries— United States.
AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035, which may adversely affect the Company’s future results of operations and on an investment in the Company.
The Bermuda Minister of Finance, under Bermuda’s Exempted Undertakings Tax Protection Act 1966, as amended, has given AGL, AG Re and AGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or AGRO, or any of AGL’s or its subsidiaries’ operations, stocks, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, the Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035.
U.S. Persons who hold 10% or more of AGL’s shares directly or through non-U.S. entities may be subject to taxation under the U.S. CFC rules.
If AGL and/or a non-U.S. subsidiary is considered a CFC, a U.S. Person that is treated as owning 10% or more of AGL’s shares may be required to include in income for U.S. federal income tax purposes its pro rata share of certain income of AGL and its non-U.S. subsidiaries for a taxable year, even if such income is not distributed and may be subject to U.S. federal income tax on a portion of any gain upon a sale or other disposition of its shares at ordinary income tax rates.
No assurance may be given that a U.S. Person who owns the Company’s shares will not be characterized as owning 10% or more of AGL and/or its non-U.S. subsidiaries under the CFC rules, in which case such U.S. Person may be subject to taxation under such rules. See Item 1. Business — Tax Matters, — Taxation of Shareholders ─ United States Taxation ─ Classification of AGL or its Non-U.S. Subsidiaries as a CFC.
U.S. Persons who hold shares may be subject to U.S. income taxation at ordinary income rates on their proportionate share of the Company’s RPII.
If any Foreign Insurance Subsidiary generates RPII (broadly defined as insurance and related investment income attributable to the insurance of a U.S. shareholder and certain related persons to such shareholder) and certain exceptions are not met, each U.S. Person owning AGL shares (directly or indirectly through foreign entities) may be required to include in income for U.S. federal income tax purposes its pro rata share of the Foreign Insurance Subsidiary’s RPII, regardless of whether such income is distributed and may be subject to U.S. federal income tax on a portion of any gain upon a sale or other disposition of its shares at ordinary tax rates (even if an exception to the RPII rules applies).
The Company believes that each of its Foreign Insurance Subsidiaries should qualify for an exception to the RPII rules and the rules that subject gain on sale or disposition of shares to ordinary tax rates would not apply to the disposition of AGL shares. However, the Company cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond its control and rules regarding the treatment of gain on disposition of shares have not been interpreted or finalized. Recently proposed regulations could, if finalized in their current form, substantially expand the definition of RPII to include insurance income of our Foreign Insurance Subsidiaries related to affiliate reinsurance
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transactions. If these proposed regulations are finalized in their current form, it could limit our ability to execute affiliate reinsurance transactions that would otherwise be undertaken for non-tax business reasons in the future and could increase the risk that gross RPII could constitute 20% or more of the gross insurance income of one or more of our Foreign Insurance Subsidiaries in a particular taxable year, which could result in such RPII being taxable to U.S. Persons that own or are treated as owning shares of AGL. U.S. Persons owning or treated as owning shares of AGL should consult their tax advisors as to the effect of these uncertainties. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — The RPII CFC Provisions; Disposition of AGL Shares.
U.S. tax-exempt shareholders may be subject to the unrelated business taxable income rules with respect to certain insurance income of the Foreign Insurance Subsidiaries.
U.S. tax-exempt shareholders may be required to treat insurance income includable under the CFC or RPII rules as unrelated business taxable income. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — Tax-Exempt Shareholders.
U.S. Persons who hold AGL’s shares will be subject to adverse tax consequences if AGL is considered to be PFIC for U.S. federal income tax purposes.
If AGL is considered a PFIC for U.S. federal income tax purposes, a U.S. Person who owns any shares of AGL will be subject to adverse tax consequences that could materially adversely affect its investment, including subjecting the investor to both a greater tax liability than might otherwise apply and an interest charge or other unfavorable rules (either a mark-to-market or current inclusion regime). The Company believes that AGL was not a PFIC for U.S. federal income tax purposes for taxable years through 2022 and, based on the application of certain PFIC look-through rules and the Company’s plan of operations for the current and future years, should not be a PFIC in the future. See Item 1. Business — Tax Matters — Taxation of Shareholders — United States Taxation — Passive Foreign Investment Companies.
Changes in U.S. federal income tax law may adversely affect an investment in AGL’s common shares.
Although the Company is currently unable to predict the ultimate impact of the TCJA on its business, shareholders and results of operations, it is possible that the TCJA may increase the U.S. federal income tax liability of the U.S. members of its group that cede risk to non-U.S. group members and may affect the timing and amount of U.S. federal income taxes imposed on certain U.S. shareholders. Furthermore, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company.
Further, U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the U.S. is a PFIC, or whether U.S. Persons would be required to include in their gross income the “subpart F income” of a CFC or RPII CFC are subject to change, possibly on a retroactive basis. The Company cannot be certain if, when, or in what form any future regulations or pronouncements may be implemented or made, or whether such guidance will have a retroactive effect. See Item 1. Business — Tax Matters — United States Tax Reform.
An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
If AGL were to issue equity securities in the future, including in connection with any strategic transaction, or if previously issued securities of AGL were to be sold by the current holders, AGL may experience an “ownership change” within the meaning of Section 382 of the Code. In general terms, an ownership change would result from transactions increasing the aggregate ownership of certain holders in AGL’s shares by more than 50 percentage points over a testing period (generally three years). If an ownership change occurred, the Company’s ability to use certain tax attributes, including certain built-in losses, credits, deductions or tax basis and/or the Company’s ability to continue to reflect the associated tax benefits as assets on AGL’s balance sheet, may be limited. The Company cannot give any assurance that AGL will not undergo an ownership change at a time when these limitations could materially adversely affect the Company’s financial condition.
A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
AGL is not incorporated in the U.K. and, accordingly, is only resident in the U.K. for U.K. tax purposes if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. AGL believes it is entitled to take advantage of the benefits of income tax treaties to which the U.K. is a party on the basis that it is has established central management and control in the U.K. In 2013, AGL obtained confirmation that there was a low risk of challenge to its residency status from HMRC on the facts as they were at that time. The Board intends to
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manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K. for U.K. tax purposes and to qualify for the benefits of income tax treaties to which the U.K. is a party. However, the concept of central management and control is a case-law concept that is not comprehensively defined in U.K. statute. In addition, it is a question of fact. Moreover, tax treaties may be revised in a way that causes AGL to fail to qualify for benefits thereunder. Accordingly, a change in relevant U.K. tax law or in tax treaties to which the U.K. is a party, or in AGL’s central management and control as a factual matter, or other events, could adversely affect the ability of Assured Guaranty to manage its capital in the efficient manner that it contemplated in establishing U.K. tax residence.
Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
As a U.K. tax resident, AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to applicable exemptions.
•With respect to income, the dividends that AGL receives from its subsidiaries should be exempt from U.K. corporation tax under the exemption contained in section 931D of the Corporation Tax Act 2009.
•With respect to capital gains, if AGL were to dispose of shares in its direct subsidiaries or if it were deemed to have done so, it may realize a chargeable gain for U.K. tax purposes. Any tax charge would be based on AGL’s original acquisition cost. It is anticipated that any such future gain should qualify for exemption under the substantial shareholding exemption in Schedule 7AC to the Taxation of Chargeable Gains Act 1992. However, the availability of such exemption would depend on facts at the time of disposal, in particular the “trading” nature of the relevant subsidiary. There is no statutory definition of what constitutes “trading” activities for this purpose and in practice reliance is placed on the published guidance of HMRC.
A change in U.K. tax law or its interpretation by HMRC, or any failure to meet all the qualifying conditions for relevant exemptions from U.K. corporation tax, could affect Assured Guaranty’s financial results of operations or its ability to provide returns to shareholders.
An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their non-U.K. subsidiaries could adversely impact Assured Guaranty’s tax liability.
Under the U.K. “controlled foreign company” regime, the income profits of non-U.K. resident companies may, in certain circumstances, be attributed to controlling U.K. resident shareholders for U.K. corporation tax purposes. The non-U.K. resident members of the Assured Guaranty group intend to operate and manage their levels of capital in such a manner that their profits would not be taxed on AGL under the U.K. CFC regime. In 2013, Assured Guaranty obtained clearance from HMRC that none of the profits of the non-U.K. resident members of the Assured Guaranty group should be subject to U.K. tax as a result of attribution under the CFC regime on the facts as they were at the time. However, a change in the way in which Assured Guaranty operates or any further change in the CFC regime, resulting in an attribution to AGL of any of the income profits of AGL’s non-U.K. resident subsidiaries for U.K. corporation tax purposes, could adversely affect Assured Guaranty’s financial results of operations.
An adverse adjustment under U.K. transfer pricing legislation or the imposition of diverted profits tax could adversely impact Assured Guaranty’s tax liability.
If any arrangements between U.K. resident companies in the Assured Guaranty group and other members of the Assured Guaranty group (whether resident in or outside the U.K.) are found not to be on arm's length terms and as a result a U.K. tax advantage is being obtained, an adjustment will be required to compute U.K. taxable profits as if such arrangement were on arm's length terms. Any transfer pricing adjustment could adversely affect Assured Guaranty’s results of operations.
Since January 1, 2016, the U.K. has implemented a country-by-country reporting (CBCR) regime whereby large multi-national enterprises are required to report details of their operations and intra-group transactions in each jurisdiction. The U.K. CBCR legislation includes power to introduce regulations requiring public disclosure of U.K. CBCR reports, although this power has not yet been exercised. It is possible that Assured Guaranty’s approach to transfer pricing may become subject to greater scrutiny from the tax authorities in the jurisdictions in which the group operates in consequence of the implementation of a CBCR regime in the U.K. (or other jurisdictions).
The diverted profits tax (DPT), which is currently levied at 25% (and due to increase to 31% from April 1, 2023), is an anti-avoidance measure, aimed at protecting the U.K. tax base against the diversion of profits away from the U.K., tax charge. In particular, DPT may apply to profits generated by economic activities carried out in the U.K., that are not taxed in the U.K.
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by reason of arrangements between companies in the same multinational group and involving a low-tax jurisdiction, including co-insurance and reinsurance. It is currently unclear whether DPT would constitute a creditable tax for U.S. foreign tax credit purposes. If any member of the Assured Guaranty group is liable for DPT, this could adversely affect the Company’s results of operations.
Assured Guaranty’s financial results may be affected by measures taken in response to the OECD BEPS project.
In May 2019, the OECD published a “Programme of Work” designed to address the tax challenges created by an increasingly digitalized economy. The Programme is divided into two pillars. The first pillar focuses on the allocation of group profits between jurisdictions based on a new nexus rule that looks to the jurisdiction of the customer or user (the so-called “market jurisdiction”) as a supplement to the traditional “permanent establishment” concept. The second pillar addresses the remaining BEPS risk of profit shifting to entities in low tax jurisdictions by introducing a global minimum tax rate. Possible measures to implement such rate include the imposition of source-based taxation (including withholding tax) on certain payments to low tax jurisdictions and an effective extension of a “controlled foreign company” regime whereby parent companies would be subject to a “top-up” tax on the profits of all their subsidiaries in low tax jurisdictions. The OECD published detailed blueprints of its proposals on October 14, 2020 and public consultations were held virtually in January 2021. Following agreement on the principles of the two pillar solution by the finance ministers of the G7 nations in June 2021 and by the OECD/G20 Inclusive Framework in July 2021, final political agreement on the two pillar framework was published on October 8, 2021 to which most of the member jurisdictions of the OECD/G20 Inclusive Framework have currently agreed. The agreement provided that regulated financial services are excluded from the application of Pillar One. The agreement also provided that the proposals under Pillar Two would apply to multinational groups with revenues exceeding EUR 750 million and would consist of a globally coordinated set of rules, including an Income Inclusion Rule and Undertaxed Payment Rule, which would operate with reference to a minimum tax rate of 15% (determined on a country-by-country basis). However, the ultimate impact of the proposals remains subject to agreement on certain design elements of the two pillars within the OECD/G20 Inclusive Framework. It is intended that Pillar Two will be implemented into law by participating jurisdictions before an intended effective date in 2023; to this end, model rules for Pillar Two were released on December 20, 2021, but further work on this aspect of the Programme of Work remains, including with respect to domestic implementation in participating jurisdictions, detailed guidance and administrative aspects of the rules. As such, the proposals, in particular in relation to Pillar Two, are broad in scope and remain subject to further work, and it is therefore not possible to determine their impact at this time. They could adversely affect Assured Guaranty’s tax liability.
Risks Related to GAAP, Applicable Law and Litigation
Changes in the fair value of the Company’s insured credit derivatives portfolio, its CCS, and its FG VIEs, CIVs and/or the Company’s decision to consolidate or deconsolidate one or more FG VIEs and/or CIVs during a financial reporting period, may subject its financial condition and results of operations to volatility.
The Company is required to mark-to-market certain derivatives that it insures, including CDS that are considered derivatives under GAAP as well as its CCS. Although there is no cash flow effect from this “marking-to-market,” net changes in the fair value of these derivatives are reported in the Company’s consolidated statements of operations and therefore affect its financial condition and results of operations. If a credit derivative is held to maturity and no credit loss is incurred, any unrealized gains or losses previously reported would be reversed as the transaction reaches maturity. The Company also expects fluctuations in the fair value of its put option under its CCS to reverse over time. For discussion of the Company’s fair value methodology for credit derivatives, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement.
The Company is required to consolidate certain variable interest entities (VIEs) with respect to which it has provided financial guaranties, certain AssuredIM Funds in which it invests, and certain AssuredIM-managed CLOs and CLO warehouses in which it invests, if it concludes that it is the primary beneficiary of that FG VIE, AssuredIM Fund, CLO or CLO warehouse, respectively. Substantially all of the assets and liabilities of the consolidated FG VIEs and CIVs are reported at fair value. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs and, if circumstances change, may consolidate a VIE that was not previously consolidated or deconsolidate a VIE that had previously been consolidated, and such consolidation or deconsolidation would impact its financial condition and results of operations in the period in which such action is taken. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
The required treatment under GAAP of the Company’s insured credit derivatives portfolio, its CCS and its VIEs causes its financial condition and results of operations as reported under GAAP to be more volatile than would be suggested by the actual performance of its business operations. Due to the complexity of fair value accounting and the application of GAAP
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requirements, future amendments or interpretations of relevant accounting standards may cause the Company to modify its accounting methodology in a manner which may have an adverse impact on its financial results.
Change in industry and other accounting practices could adversely affect the Company’s financial condition, results of operations, business prospects and share price.
Changes in or the issuance of new accounting standards, as well as any changes in the interpretation of current accounting guidance, could adversely affect the Company’s financial condition, results of operations, business prospects and share price. See, Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for a discussion of the future application of accounting standards.
Changes in or inability to comply with applicable law and regulations could adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price.
The Company’s businesses are subject to detailed insurance, asset management and other financial services laws and government regulation in the jurisdictions in which it operates across the globe. In addition to the insurance, asset management and other regulations and laws specific to the industries in which it operates, regulatory agencies in jurisdictions in which the Company operates across the globe have broad administrative power over many aspects of the Company’s business, which may include ethical issues, money laundering, privacy, recordkeeping and marketing and sales practices. Future legislative, regulatory, judicial or other legal changes in the jurisdictions in which the Company does business may adversely affect the Company’s financial condition, results of operations, capital, liquidity, business prospects and share price by, among other things, limiting the types of risks it may insure, lowering applicable single or aggregate risk limits related to its insurance business, increasing required reserves or capital for its insurance subsidiaries, providing insured obligors with additional avenues for avoiding or restructuring the repayment of their insured liabilities, increasing the level of supervision or regulation to which the Company’s operations may be subject, imposing restrictions that make the Company’s products less attractive to potential buyers and investors, lowering the profitability of the Company’s business activities, requiring the Company to change certain of its business practices and exposing it to additional costs (including increased compliance costs).
Compliance with applicable laws and regulations is time consuming and personnel-intensive. If the Company fails to comply with applicable insurance or investment advisory laws and regulations it could be exposed to fines, the loss of insurance or investment advisory licenses, limitations on the right to originate new business and restrictions on its ability to pay dividends. If an insurance subsidiary’s surplus declines below minimum required levels, the insurance regulator could impose additional restrictions on the insurance subsidiary or initiate insolvency proceedings.
Legislation, regulation or litigation arising out of the struggles of distressed obligors may adversely impact the Company’s legal rights as creditor as well as its investments and the investments it manages.
Borrower distress or default, whether or not the relevant obligation is insured by one of the Company’s insurance subsidiaries, may result in legislation, regulation or litigation that may impact the Company’s legal rights as creditor or its investments or the investments it manages. For example, the default by the Commonwealth of Puerto Rico on much of its debt has resulted in both legislation (including the enactment of PROMESA) and litigation that is continuing to impact the Company’s rights as creditor, most directly in Puerto Rico but also elsewhere in the U.S. municipal market.
The Company is, and may be in the future, involved in litigation, both as a defendant and as a plaintiff, in the ordinary course of its insurance and asset management business and other business operations. The outcome of such litigation could materially impact the Company’s loss reserves and results of operations and cash flows. For a discussion of material litigation, see, Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure; Note 4, Expected Loss to be Paid (Recovered); and Note 18, Commitments and Contingencies.
AGL’s ability to pay dividends and fund share repurchases and other activities may be constrained by certain insurance regulatory requirements and restrictions.
AGL is subject to Bermuda regulatory requirements that affect its ability to pay dividends on common shares and to make other payments. Under the Bermuda Companies Act 1981, as amended, AGL may declare or pay a dividend only if it has reasonable grounds for believing that it is, and after the payment would be, able to pay its liabilities as they become due, and if the realizable value of its assets would not be less than its liabilities. While AGL currently intends to pay dividends on its common shares, investors who require dividend income should carefully consider these risks before investing in AGL.
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AGL is dependent on dividends from its subsidiaries, including dividends from its insurance subsidiaries, for resources to pay holders of its common shares, fund share repurchases and pursue other activities. The ordinary dividends that AGL’s insurance subsidiaries may pay without regulatory approval are subject to legal and regulatory limitations. See “– Regulatory – State Dividend Limitations”, “– International Regulation – Bermuda – Restrictions on Dividends and Distributions”, “– International Regulation – United Kingdom Insurance and Financial Services Regulation – Restrictions on Dividend Payments” and “– International Regulation – France – Restrictions on Dividend Payments”. As a result, absent relief from the relevant regulator(s), the Company’s insurance subsidiaries may be required to retain capital in the insurance companies that is substantially in excess of what the Company believes is necessary to support its insurance businesses, reducing the Company’s ability to productively use or return to shareholders such excess capital. In addition, if, pursuant to insurance laws and regulations, AGL’s insurance subsidiaries are not permitted to pay ordinary dividends or make other permitted payments to AGL at the times or in sufficient amounts AGL requires to fund its activities, and if AGL’s other operating subsidiaries were unable to provide such funds, AGL’s ability to pay dividends to shareholders or fund share repurchases or pursue other activities could be adversely affected. See “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.”
Applicable insurance laws may make it difficult to effect a change of control of AGL.
Before a person can acquire control of a U.S., U.K. or French insurance company, prior written approval must be obtained from the relevant regulator commissioner of the state or country where the insurer is domiciled. In addition, once a person controls a Bermuda insurance company, the Authority may object to such a person who is not, or is no longer, a fit and proper person to exercise such control. Because a person acquiring 10% or more of AGL’s common shares would indirectly control the same percentage of the stock of its insurance subsidiaries, the insurance change of control laws of Maryland, New York, the U.K., France and Bermuda would likely apply to such a transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and in particular unsolicited transactions, that some or all of its shareholders might consider to be desirable. While AGL’s Bye-Laws limit the voting power of any shareholder to less than 10%, the Company cannot provide assurances that the applicable regulatory bodies would agree that a shareholder who owned 10% or more of its common shares did not control the applicable insurance subsidiaries, notwithstanding the limitation on the voting power of such shares.
Risks Related to AGL’s Common Shares
The market price of AGL’s common shares may be volatile, and the value of an investment in the Company may decline.
The market price of AGL��s common shares has experienced, and may continue to experience, significant volatility. Numerous factors, including many over which the Company has no control, may have a significant impact on the market price of its common shares. These risks include those described or referred to in this “Risk Factors” section as well as, among other things: (a) investor perceptions of the Company, its prospects and that of the financial guaranty and asset management industries and the markets in which the Company operates; (b) the Company’s operating and financial performance; (c) the Company’s access to financial and capital markets to raise additional capital, refinance its debt or obtain other financing; (d) the Company’s ability to repay debt; (e) the Company’s dividend policy; (f) the amount of share repurchases authorized by the Company; (g) future sales of equity or equity-related securities; (h) changes in earnings estimates or buy/sell recommendations by analysts; and (i) general financial, economic and other market conditions.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of AGL’s common shares, regardless of AGL-specific factors.
Furthermore, future sales or other issuances of AGL equity may adversely affect the market price of its common shares.
Provisions in the Code and AGL’s Bye-Laws may reduce or increase the voting rights of its common shares.
Under the Code, AGL’s Bye-Laws and contractual arrangements, certain shareholders have their voting rights limited to less than one vote per share, resulting in other shareholders having voting rights in excess of one vote per share. Moreover, the relevant provisions of the Code and AGL’s Bye-Laws may have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership.
More specifically, pursuant to the relevant provisions of the Code, if, and so long as, the common shares of a shareholder are treated as “controlled shares” (as determined under section 958 of the Code) of any U.S. Person and such
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controlled shares constitute 9.5% or more of the votes conferred by AGL’s issued shares, the voting rights with respect to the controlled shares of such U.S. Person (a 9.5% U.S. Shareholder) are limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in AGL’s Bye-Laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. For these purposes, “controlled shares” include, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code).
In addition, the Board may limit a shareholder’s voting rights where it deems appropriate to do so to: (1) avoid the existence of any 9.5% U.S. Shareholders; and (2) avoid certain material adverse tax, legal or regulatory consequences to the Company or any of the Company’s subsidiaries or any shareholder or its affiliates. AGL’s Bye-Laws provide that shareholders will be notified of their voting interests prior to any vote taken by them.
As a result of any such reallocation of votes, the voting rights of a holder of AGL common shares might increase above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting in such holder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934. In addition, the reallocation of votes could result in such holder becoming subject to the short swing profit recovery and filing requirements under Section 16 of the Exchange Act.
AGL also has the authority under its Bye-Laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the Bye-Laws. If a shareholder fails to respond to a request for information or submits incomplete or inaccurate information in response to a request, the Company may, in its sole discretion, eliminate such shareholder’s voting rights.
Provisions in AGL’s Bye-Laws may restrict the ability to transfer common shares, and may require shareholders to sell their common shares.
AGL’s Board may decline to approve or register a transfer of any common shares: (1) if it appears to the Board, after taking into account the limitations on voting rights contained in AGL’s Bye-Laws, that any adverse tax, regulatory or legal consequences to AGL, any of its subsidiaries or any of its shareholders may occur as a result of such transfer (other than such as the Board considers to be de minimis); or (2) subject to any applicable requirements of or commitments to the NYSE, if a written opinion from counsel supporting the legality of the transaction under U.S. securities laws has not been provided or if any required governmental approvals have not been obtained.
AGL’s Bye-Laws also provide that if the Board determines that share ownership by a person may result in adverse tax, legal or regulatory consequences to the Company, any of the subsidiaries or any of the shareholders (other than such as the Board considers to be de minimis), then AGL has the option, but not the obligation, to require that shareholder to sell to AGL or to third parties to whom AGL assigns the repurchase right for fair market value the minimum number of common shares held by such person which is necessary to eliminate such adverse tax, legal or regulatory consequences.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Management believes its office space is adequate for its current and anticipated needs. The Company’s properties include the following:
•Hamilton, Bermuda:
◦approximately 8,700 square feet of office space that serves as the principal executive offices of AGL and AG Re. The lease expires in April 2026 and is renewable at the option of the Company.
•New York, U.S.:
◦103,500 square feet of office space that serves as the primary offices of the U.S. Insurance Subsidiaries. The lease expires in February 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent;
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◦approximately 52,000 square feet of office space that serves as the primary offices of AssuredIM. This lease expires in December 2032; and
◦78,600 square feet of office space that previously served as the primary offices of AssuredIM. The lease expires in April 2024. As of December 31, 2022, this space is subleased to other tenants for a substantial portion of its remaining lease term.
•London, U.K.:
◦approximately 7,000 square feet of office space that serves as the primary office of AGUK. The lease expires in September 2029, with an option, subject to certain conditions, to renew for five years at a fair market rent; and
◦approximately 8,000 square feet of office space that previously served as the primary office of AssuredIM LLC. The lease expires in March 2024. As of December 31, 2022, this space is subleased to another tenant for its remaining term.
•Other: The Company leases other office space in San Francisco, California; London, England; and Paris, France.
ITEM 3. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is provided in the “Legal Proceedings” and “Litigation” sections of Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, the “Recovery Litigation” section of Note 4, Expected Loss to be Paid (Recovered), and the “Puerto Rico Litigation” section of Note 3, Outstanding Exposure, and is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Information About Our Executive Officers
The table below sets forth the names, ages, positions and business experience of the executive officers of AGL.
| Name | Age | Position(s) | ||||||||||||
| Dominic J. Frederico | 70 | President and Chief Executive Officer; Deputy Chairman | ||||||||||||
| Robert A. Bailenson | 56 | Chief Financial Officer | ||||||||||||
| Ling Chow | 52 | General Counsel and Secretary | ||||||||||||
| David A. Buzen | 63 | Chief Investment Officer and Head of Asset Management | ||||||||||||
| Stephen Donnarumma | 60 | Chief Credit Officer | ||||||||||||
| Jorge A. Gana | 52 | Chief Risk Officer | ||||||||||||
| Holly Horn | 62 | Chief Surveillance Officer | ||||||||||||
Dominic J. Frederico has been a director of AGL since the Company’s 2004 initial public offering and the President and Chief Executive Officer of AGL since December 2003. Mr. Frederico served as Vice Chairman of ACE Limited from 2003 until 2004 and served as President and Chief Operating Officer of ACE Limited and Chairman of ACE INA Holdings, Inc. from 1999 to 2003. Mr. Frederico was a director of ACE Limited from 2001 through May 2005. From 1995 to 1999 Mr. Frederico served in a number of executive positions with ACE Limited. Prior to joining ACE Limited, Mr. Frederico spent 13 years working for various subsidiaries of American International Group, Inc.
Robert A. Bailenson has been Chief Financial Officer of AGL since June 2011. Mr. Bailenson has been with Assured Guaranty and its predecessor companies since 1990. Mr. Bailenson became Chief Accounting Officer of AGC in 2003, of AGL in May 2005, and of AGM in July 2009, and served in such capacities until 2019. He was Chief Financial Officer and Treasurer of AG Re from 1999 until 2003 and was previously the Assistant Controller of Capital Re Corp., the Company’s predecessor.
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Ling Chow has been General Counsel and Secretary of AGL since January 1, 2018. She is responsible for legal affairs and corporate governance at the Company, including its litigation and other legal strategies relating to distressed credits, and its corporate, compliance, regulatory and disclosure efforts. She is also responsible for the Company’s human resources function. Ms. Chow began her tenure at the Company in 2002 as a transactional attorney, working on the insurance of structured finance and derivative transactions. She previously served as Deputy General Counsel and Assistant Secretary of AGL from May 2015 and as Assured Guaranty’s U.S. General Counsel from June 2016. Prior to that, Ms. Chow served as Deputy General Counsel of Assured Guaranty’s U.S. subsidiaries in several capacities from 2004. Before joining Assured Guaranty, Ms. Chow was an associate at law firms in New York City, where she was responsible for transactional work associated with public and private mergers and acquisitions, venture capital investments, and private and public securities offerings.
David A. Buzen has been the Chief Investment Officer (CIO) and Head of Asset Management of the Company’s U.S. Insurance Subsidiaries and Chief Executive Officer and CIO of AssuredIM since August 2020. Previously, Mr. Buzen served as Deputy CIO of BlueMountain (now AssuredIM LLC). Prior to that, he was the Senior Managing Director, Alternative Investments, where he was responsible for leading the Company’s efforts to enter the asset management business. Mr. Buzen joined Assured Guaranty in 2016 after the acquisition of CIFG Holding Inc., where he was President and CEO. Prior to his years at CIFG, Mr. Buzen was Chief Financial Officer of Churchill Financial, a commercial finance and asset management company after heading DEPFA Bank’s municipal reinvestment and U.S. financial guarantee businesses. Earlier, he served as Chief Operating Officer of ACE Financial Solutions, an operating division of ACE Limited. Before that, he was the Chief Financial Officer of Capital Re Corp., a company that was acquired by ACE Limited in 1999 and which owned the company now known as Assured Guaranty Corp. until Assured Guaranty’s 2004 IPO. He began his career in the financial guaranty industry at Ambac Financial Group.
Stephen Donnarumma has been the Chief Credit Officer of AGC since 2007, and of AGM since its 2009 acquisition. Mr. Donnarumma joined Assured Guaranty in 1993 and has held a number of positions over the years, including Deputy Chief Credit Officer of AGL, Chief Operating Officer and Chief Underwriting Officer of AG Re, Chief Risk Officer of AGC, and Senior Managing Director, Head of Mortgage and Asset-backed Securities of AGC. Prior to joining Assured Guaranty, Mr. Donnarumma was with Financial Guaranty Insurance Company from 1989 until 1993, where his responsibilities included underwriting domestic and international financial guaranty transactions. Prior to that, he served as a Director of Credit Risk Analysis at Fannie Mae from 1987 until 1989. Mr. Donnarumma was also an analyst with Moody’s Investors Services from 1985 until 1987.
Jorge A. Gana has been Chief Risk Officer of AGL and Chair of the U.S. Risk Management and Portfolio Risk Management Committees since January 1, 2023. Mr. Gana also maintains primary responsibility for the environmental aspect of Assured Guaranty’s ESG efforts. Prior to that, Mr. Gana served as Deputy Chief Risk Officer of AGM and AGC. Mr. Gana joined Assured Guaranty in 2005 as a Director in structured finance. Over the years, Mr. Gana has held a number of positions at Assured Guaranty, including Managing Director, Structured Finance at AGC, Senior Managing Director of Workouts and Government & Corporate Affairs at AGM and AGC, and chair of AGM's and AGC's Workout Committees. Mr. Gana continues to serve as a voting member of AGM's and AGC's Credit and Workout Committees. Prior to joining Assured Guaranty, Mr. Gana served as a Director of Global Commercial Asset Securitization for XLCA (now Syncora). Prior to XLCA, Mr. Gana worked at Natexis Banques Populaires (now Natixis) and at Banco Santander in global capacities dealing with credit and risk, managing investment advisorportfolios, originating complex transactions, and issuing repackaged debt. Mr. Gana also worked for the Chile Economic Development Agency, New York Office, and as Editor of the Chile Economic Report until 1996.
Holly L. Horn has been Chief Surveillance Officer of AGL and the Company’s US Insurance Subsidiaries since January 2022. Prior to that, Ms. Horn served as AGM’s and AGC’s Chief Surveillance Officer, Public Finance where she was responsible for ongoing surveillance, monitoring and loss mitigation of municipal risks insured by the Company across all sectors of the municipal market. She joined AGM in 2003 as a director in the health care underwriting group, where she was responsible for analyzing and recommending the insurability of health care credits. She also served as a director in AGM’s health care surveillance group. Ms. Horn began her public finance career at Inova Health System, a nationally ranked integrated health care delivery system, and subsequently served as a senior manager for the national health care strategy practice at Ernst & Young.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
AGL’s common shares are listed on the NYSE under the symbol “AGO.” On February 24, 2023, the approximate number of shareholders of record at the close of business on that date was 82.
AGL is a holding company whose principal source of liquidity is dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to AGL and AGL’s ability to pay dividends to its shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of AGL’s Board and will be dependent upon the Company’s profits and financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as the Board deems relevant. AGL paid quarterly cash dividends in the amount of $0.25 and $0.22 per common share in 2022 and 2021, respectively. For more information concerning AGL’s dividends, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources and Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity.
Issuer’s Purchases of Equity Securities
In 2022, the Company repurchased a total of 8,847,981 common shares for approximately $503 million at an average price of $56.79 per share.
From time to time, the Board authorizes the repurchase of additional common shares under a program without an expiration date that it initiated on January 18, 2013. Most recently, on August 3, 2022, the Board authorized the repurchase of an additional $250 million of its common shares. As of February 28, 2023, the Company was authorized to purchase $201 million of its common shares. The Company expects future common share repurchases under the current authorization to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase authorization may be modified, extended or terminated by the Board at any time. It does not have an expiration date. See Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity for additional information about share repurchases and authorizations.
The following table reflects purchases of AGL common shares made by the Company during the fourth quarter of 2022.
| 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) | ||||||||||||||||||||||
| October 1 - October 31 | 648,249 | $ | 52.97 | 648,249 | $ | 268,933,146 | ||||||||||||||||||||
| November 1 - November 30 | 576,084 | $ | 60.11 | 571,992 | $ | 234,542,994 | ||||||||||||||||||||
| December 1 - December 31 | 493,770 | $ | 63.34 | 493,175 | $ | 203,303,329 | ||||||||||||||||||||
| Total | 1,718,103 | $ | 58.35 | 1,713,416 | ||||||||||||||||||||||
____________________
(1) After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through February 28, 2023, the Company has repurchased a total of 141 million common shares for approximately $4.7 billion, excluding commissions, at an average price of $33.09 per share. The repurchase program has no expiration date and the Board has previously increased the authorization periodically.
(2) Excludes commissions.
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Performance Graph
Set forth below are a line graph and a table comparing the dollar change in the cumulative total shareholder return on AGL’s common shares from December 31, 2017 through December 31, 2022 as compared to the cumulative total return of the Standard & Poor’s 500 Stock Index, the cumulative total return of the Standard & Poor’s 500 Financials Sector GICS Level 1 Index and the cumulative total return of the Russell Midcap Financial Services Index. The Company added the Russell Midcap Financial Services Index in 2018 because it believes that this index, which includes the Company, provides a useful comparison to other companies in the financial services sector, and excludes companies that are included in the Standard & Poor's 500 Financials Sector GICS Level 1 Index but are many times larger than the Company. The chart and table depict the value on December 31 of each year from 2017 through 2022 of a $100 investment made on December 31, 2017, with all dividends reinvested:
| Assured Guaranty | S&P 500 Index | S&P 500 Financials Sector GICS Level 1 Index | Russell Midcap Financial Services Index | ||||||||||||||||||||
| 12/31/2017 | $ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | |||||||||||||||
| 12/31/2018 | 114.96 | 95.61 | 86.96 | 89.96 | |||||||||||||||||||
| 12/31/2019 | 149.59 | 125.70 | 114.87 | 120.14 | |||||||||||||||||||
| 12/31/2020 | 98.82 | 148.81 | 112.85 | 126.08 | |||||||||||||||||||
| 12/31/2021 | 160.44 | 191.48 | 152.20 | 171.28 | |||||||||||||||||||
| 12/31/2022 | 202.48 | 156.77 | 136.11 | 149.87 | |||||||||||||||||||
___________________
Source: Calculated from total returns published by Bloomberg.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, the following discussion and analysis of the Company’s financial condition and results of operations should be read in its entirety with the Company’s consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. The following discussion and analysis of the Company’s financial condition and results of operations contains forward looking statements that involve risks and uncertainties. See “Forward Looking Statements” for more information. The Company’s actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the headings “Risk Factors” and “Forward Looking Statements.”
Discussion related to the results of operations for the Company’s comparison of 2021 results to 2020 results have been omitted in this Form 10-K. The Company’s comparison of 2021 results to 2020 results is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Business
The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company’s Corporate division and other activities (including FG VIEs and CIVs) are presented separately.
In the Insurance segment, the Company provides credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. In the Asset Management segment, the Company provides investment advisory services, which include the management of CLOs and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. Assured Investment Management managesThe Corporate division consists primarily of interest expense on the debt of AGUS and AGMH (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, and Note 2, Segment Information.
Economic Environment
Real gross domestic product (GDP) increased 2.1% in 2022, compared to an increase of 5.9% in 2021, according to the second estimate released by the U.S. Bureau of Economic Analysis (BEA). Additionally, the BEA second estimate reported real GDP increased at an annual rate of 2.7% in the fourth quarter of 2022. At the end of December 2022, the U.S. unemployment rate, seasonally adjusted, stood at 3.5%, lower than where it started the year at 3.9%, and down from the COVID-19 pandemic high of 14.7% in April 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default.
According to the U.S. Bureau of Labor Statistics, the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending December 2022, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 6.5%, as compared to 8.2% for the 12-month period ending September 2022. According to the U.K.’s Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose 9.2% in the 12 months to December 2022, up from 8.8% in September 2022. The CPIH 12-month rate started the year at 4.8%. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $19.8 billion of net par outstanding as of December 31, 2022, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally.
With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, the FOMC decided at its meeting in March 2022 to start again raising the target range for the federal funds rate and has continued to do so since then. In addition, the FOMC stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through December 2022, the FOMC raised the target range for the federal funds rate seven
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times, from 0% to 0.25% where it started the year to 4.25% to 4.50% at its mid-December 2022 meeting. Although acknowledging that a disinflationary process has begun, at the conclusion of its January 31-February 1, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 4.5% to 4.75%, its eighth consecutive increase, stating that it anticipates that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
The level and direction of interest rates and credit spreads impact the Company in numerous ways. On the one hand, higher interest rates may present a more challenging environment for distressed RMBS the Company insures to the extent it causes housing prices to decline. Data released for the November 2022 S&P CoreLogic Case-Shiller Indices show the recent trend of home prices declining across the U.S., with the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reporting a seasonally adjusted month-over-month decrease of 0.3%, and the 10-City and 20-City Composites both posting decreases of 0.5%. The National Association of Realtors reported existing-home sales in 2022 declined 17.8% from 2021 as 2022’s rapidly escalating interest rate environment weighed on the residential real estate market. Higher interest rates may also reduce the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, dampen municipal bond issuance and negatively impact the finances of some of the obligors whose payments the Company insures.
On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it can charge for those products. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.00% for 2022, higher than the 1.54% average of 2021. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 90 bps in 2022. This represented an increase from an average of 70 bps in 2021 but remained well below the 121 bps average in 2020, which included a period of instability following the onset of the COVID-19 pandemic. Despite the significant increase in MMD rate for 2022, the pace of credit spread widening was more modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat at 8.0% of the par amount of new issuances sold for 2022 versus 8.2% in 2021. The Company believes that a widening of credit spreads in 2023, should it occur, could permit it to increase its premium rates on new business. In addition, over time, higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.
Key Business Strategies
The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM, 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: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.
Insurance
The Company seeks to grow the insurance business through new business production, acquisitions of remaining other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (legacy monoline insurers) or reinsurance of their insured portfolios, 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 markets: public finance (including infrastructure) and structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic 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.
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The low interest rate environment and tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. After the onset of the COVID-19 pandemic in early 2020, credit spreads initially widened as a result of market concerns about the impact of the COVID-19 pandemic on some municipal credits, thereby improving demand for financial guaranty insurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that, if credit spreads widen in 2023, demand for bond insurance may improve. See Part I, Item 1, Business — Insurance – Competition.
In certain segments of the infrastructure and structured finance creditmarkets 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 infrastructure and special situation investments,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. The timing of new business production in the infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.
U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (dollars in billions) | |||||||||||||||||
| Par: | |||||||||||||||||
| New municipal bonds issued | $ | 359.7 | $ | 456.7 | $ | 451.8 | |||||||||||
| Total insured | $ | 28.8 | $ | 37.5 | $ | 34.2 | |||||||||||
| Insured by Assured Guaranty | $ | 17.0 | $ | 22.6 | $ | 19.7 | |||||||||||
| Number of issues: | |||||||||||||||||
| New municipal bonds issued | 7,902 | 11,819 | 11,857 | ||||||||||||||
| Total insured | 1,420 | 2,198 | 2,140 | ||||||||||||||
| Insured by Assured Guaranty | 648 | 1,076 | 982 | ||||||||||||||
| Bond insurance market penetration based on: | |||||||||||||||||
| Par | 8.0 | % | 8.2 | % | 7.6 | % | |||||||||||
| Number of issues | 18.0 | % | 18.6 | % | 18.0 | % | |||||||||||
| Single A par sold | 30.2 | % | 26.6 | % | 28.3 | % | |||||||||||
| Single A transactions sold | 59.0 | % | 56.6 | % | 54.3 | % | |||||||||||
| $25 million and under par sold | 21.9 | % | 21.3 | % | 20.9 | % | |||||||||||
| $25 million and under transactions sold | 21.4 | % | 21.7 | % | 21.0 | % | |||||||||||
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(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP 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, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, 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 and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights.
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For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations.
After over five years of negotiations, 2022 has been a turning point for resolving a substantial portion of the Company’s Puerto Rico exposure in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico) as discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.
As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In the twelve-month period ended December 31, 2022, the Company has reduced its total Puerto Rico exposure, all rated BIG, by $2.2 billion (from $3.6 billion as of December 31, 2021 to $1.4 billion as of December 31, 2022). The Company believes the consummations of the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts.
In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, New Recovery Bonds and CVIs.
Under the GO/PBA Plan and in connection with its direct exposure the Company received (including amounts received in connection with the second election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
•$605 million of New GO Bonds (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and
•$258 million of CVIs (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the original notional value, net of ceded reinsurance.
Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $47 million in cash and $98 million in notional amount of CVIs.
In connection with the resolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received (including amounts received in connection with the election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$251 million in cash,
•$807 million of Toll Bonds (see Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and
•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.
The Company has sold some of the New Recovery Bonds and CVIs it received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The fair value of such securities held by the Company as of December 31, 2022, is included in the line items “fixed-maturity securities, available-for-sale, at fair value”, “fixed-maturity securities, trading, at fair value”, and “financial guaranty variable interest entities’ assets, at fair value” on the consolidated balance sheets.
The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, Puerto Rico Electric Power Authority (PREPA). For information about PREPA developments, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure and the Insured Portfolio section below.
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The Company is and has for several years been working with the servicers of some of the RMBS transactions 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.
The Company also purchases attractively priced obligations, including BIG obligations, that it has insured and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The fair value of Loss Mitigation Securities as of December 31, 2022 (excluding the value of the Company’s insurance) was $508 million, with a track record dating backpar of $778 million.
In some instances, the terms of the Company’s policy give it the option to 2003. Assured Investmentpay 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 underwrites assets and structures investments while leveragingAlternative Investments
AssuredIM is a technology-enabled risk platform, which aimsdiversified asset manager that serves as investment adviser to maximize returns for its clients.
CLOs, opportunity and liquid strategies, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of December 31, 2019, Assured Investment Management2022, AssuredIM is a top-twentytop 25 CLO manager by AUM, as published by CreditFlux,Creditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending strategies. Over time, the Company seeks to broaden and diversify its Asset Management business through strategic combinations.
The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is led bypursuing strategies that would provide it with an experienced CLOavenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and loan research team. Assured Investment Management and its affiliates have issued 37 CLOs since inception,there can be no assurances that such discussions will result in bothany transaction. Please see Part I, Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in 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.benefits anticipated.”
The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded assets under managementAUM and unfunded capital commitments (together, AUM) and investment advisory service revenues.management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn Management Feesmanagement fees and Performance Allocations/Fees.performance fees. For a discussion of the AUM metric, AUM, please see “--“— Results of Operations by Segment --— Asset Management Segment.”
pay under applicable regulations. The Company intends to initially invest $500allocated $750 million of capital to invest in fundsAssuredIM Funds plus $550 million aggregate of investment assets of the U.S. Insurance Subsidiaries’ to be managed by Assured Investment Management plus additional amounts in other accounts managed by Assured Investment Management.AssuredIM under an IMA. The Company intends to usehas used these capital investments to (a)allocations to: (i) launch new products (CLOs and/orand opportunity funds) on the Assured Investment Management platformAssuredIM platform; and (b)(ii) enhance the returns of its own investment portfolio.
Adding distributed gains from inception through December 31, 2022 to the original $750 million allocation, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through their jointly owned investment subsidiary, AGAS. As of December 31, 2019, the Company2022, AGAS had invested approximately $79committed $755 million of the $500to AssuredIM Funds, including $219 million it intendsthat has yet to initially invest in Assured Investment Management funds.be funded. This capital was invested in three new investment vehicles, withcommitted to several funds, each vehicle dedicated to a single strategy including CLOs, asset-backed finance and healthcare structured capital. Thesecapital, and asset-based finance.
Under the IMA with AssuredIM, AGM and AGC have together invested $250 million in municipal obligation strategies and $300 million to CLO strategies. All of these strategies are consistent with the investment strengths of Assured Investment ManagementAssuredIM and itsthe Company’s plans to continue to grow its structured financeinvestment strategies.
Capital Management
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From 2013 through February 27, 2020,28, 2023, the Company has repurchased 106.6141 million common shares for approximately $3,256 million,$4.7 billion, representing 55%approximately 73% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 26, 2020,23, 2022 and August 3, 2022, the Board authorized the repurchase of an additional $350 million and $250 million, respectively, of share repurchases.its common shares. As of February 27, 2020, $40828, 2023, the Company was authorized to purchase $201 million remained under the aggregate share repurchase authorization.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 free funds available at the parent company, other potential uses for such free funds, market conditions, the Company'sCompany’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time and it does not have an expiration date. See Item 8, Financial Statements and Supplementary Data, Note 21, Shareholders'19, Shareholders’ Equity, for additional information about the Company'sCompany’s repurchases of its common shares.
Summary of Share Repurchases
| Amount | Number of Shares | Average price per share | |||||||||||||||
| (in millions, except per share data) | |||||||||||||||||
| 2013-2021 | $ | 4,158 | 132.027 | $ | 31.50 | ||||||||||||
| 2022 | 503 | 8.848 | 56.79 | ||||||||||||||
| 2023 (through February 28, 2023) | 2 | 0.036 | 62.23 | ||||||||||||||
| Cumulative repurchases since the beginning of 2013 | $ | 4,663 | 140.911 | 33.09 | |||||||||||||
| Amount | Number of Shares | Average price per share | ||||||||
| (in millions, except per share data) | ||||||||||
| 2013-2018 | $ | 2,716 | 94.556 | $ | 28.73 | |||||
| 2019 | 500 | 11.164 | 44.79 | |||||||
| 2020 (through February 27, 2020) | 40 | 0.844 | 47.41 | |||||||
| Cumulative repurchases since the beginning of 2013 | $ | 3,256 | 106.564 | $ | 30.56 | |||||
| Year Ended December 31, | ||||||||||||||||
| 2019 | 2018 | As of December 31, 2019 | As of December 31, 2018 | |||||||||||||
| (per share) | ||||||||||||||||
| Net income attributable to AGL | $ | 1.60 | $ | 1.73 | ||||||||||||
| Adjusted operating income | 1.56 | 1.58 | ||||||||||||||
| Shareholders' equity attributable to AGL | $ | 21.44 | $ | 16.26 | ||||||||||||
| Adjusted operating shareholders' equity | 19.24 | 15.29 | ||||||||||||||
| Adjusted book value | 35.06 | 27.07 | ||||||||||||||
The Company also considers the appropriate mix of debt and equity in its capital structure, and may repurchase somestructure. On May 26, 2021, the Company issued $500 million of its3.15% Senior Notes due in 2031 for net proceeds of $494 million. On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt from time to time. For example, in 2019, 2018 and 2017, AGUS purchased $3 million,as follows: all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and $28$100 million of par, respectively,the $230 million of AGMH's outstanding Junior Subordinated Debentures, which resultedAGMH’s 6.25% Notes due in 2102. On August 20, 2021, the Company issued $400 million of 3.6% Senior Notes due in 2051 for net proceeds of $395 million. On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows: all $100 million of AGMH’s 5.60% Notes due in 2103; the remaining $130 million of AGMH 6.25% Notes due in 2102; and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt.
In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of $1approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.
Since the second quarter of 2017, AGUS has purchased $154 million in 2019, $34 million in 2018 and $9 million in 2017.principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies”, and Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.
Executive Summary
The primary drivers of volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs, and CCS, as well as loss and LAE, foreign exchange gains (losses), the level of refundings of insured obligations, changes in the value of the Company’s alternative investments, the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds and amount of AUM 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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Financial Performance of Assured Guaranty
Financial Results
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||
| GAAP | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 124 | $ | 389 | $ | 362 | |||||||||||
| Net income (loss) attributable to AGL per diluted share | $ | 1.92 | $ | 5.23 | $ | 4.19 | |||||||||||
| Weighted average diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Non-GAAP | |||||||||||||||||
| Adjusted operating income (loss) (1) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
| Adjusted operating income per diluted share | $ | 4.14 | $ | 6.32 | $ | 2.97 | |||||||||||
| Weighted average diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (6) | $ | 30 | $ | (12) | |||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.10) | $ | 0.41 | $ | (0.14) | |||||||||||
| Components of total adjusted operating income (loss) | |||||||||||||||||
| Insurance segment | $ | 413 | $ | 722 | $ | 429 | |||||||||||
| Asset Management segment | (6) | (19) | (50) | ||||||||||||||
| Corporate division | (134) | (263) | (111) | ||||||||||||||
| Other (2) | (6) | 30 | (12) | ||||||||||||||
| Adjusted operating income (loss) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
| Insurance Segment | |||||||||||||||||
| Gross written premiums (GWP) | $ | 360 | $ | 377 | $ | 454 | |||||||||||
| Present value of new business production (PVP) (1) | 375 | 361 | 390 | ||||||||||||||
| Gross par written | 22,047 | 26,656 | 23,265 | ||||||||||||||
| Asset Management Segment | |||||||||||||||||
| AUM: | |||||||||||||||||
| Inflows - third party | $ | 1,385 | $ | 2,971 | $ | 1,618 | |||||||||||
| Inflows - intercompany | 270 | 243 | 1,257 | ||||||||||||||
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| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Amount | Per Share | Amount | Per Share | |||||||||||||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||||||||||||
| Shareholders’ equity attributable to AGL | $ | 5,064 | $ | 85.80 | $ | 6,292 | $ | 93.19 | ||||||||||||||||||
| Adjusted operating shareholders’ equity (1) | 5,543 | 93.92 | 5,991 | 88.73 | ||||||||||||||||||||||
| Adjusted book value (1) | 8,379 | 141.98 | 8,823 | 130.67 | ||||||||||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | 17 | 0.28 | 32 | 0.47 | ||||||||||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | 11 | 0.19 | 23 | 0.34 | ||||||||||||||||||||||
| Common shares outstanding (3) | 59.0 | 67.5 | ||||||||||||||||||||||||
____________________
(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), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details.
(2) Relates to the effect of consolidating FG VIEs and CIVs.
(3) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases.
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Consolidated Results of Operations
Consolidated Results of Operations
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Net earned premiums | $ | 494 | $ | 414 | $ | 485 | |||||||||||
| Net investment income | 269 | 269 | 297 | ||||||||||||||
| Asset management fees | 93 | 88 | 89 | ||||||||||||||
| Net realized investment gains (losses) | (56) | 15 | 18 | ||||||||||||||
| Fair value gains (losses) on credit derivatives | (11) | (58) | 81 | ||||||||||||||
| Fair value gains (losses) on CCS | 24 | (28) | (1) | ||||||||||||||
| Fair value gains (losses) on FG VIEs | 22 | 23 | (10) | ||||||||||||||
| Fair value gains (losses) on CIVs | 17 | 127 | 41 | ||||||||||||||
| Foreign exchange gains (losses) on remeasurement | (112) | (23) | 39 | ||||||||||||||
| Fair value gains (losses) on trading securities | (34) | — | — | ||||||||||||||
| Commutation gains (losses) | 2 | — | 38 | ||||||||||||||
| Other income (loss) | 15 | 21 | 38 | ||||||||||||||
| Total revenues | 723 | 848 | 1,115 | ||||||||||||||
| Expenses: | |||||||||||||||||
| Loss and LAE (benefit) | 16 | (220) | 203 | ||||||||||||||
| Interest expense | 81 | 87 | 85 | ||||||||||||||
| Loss on extinguishment of debt | — | 175 | — | ||||||||||||||
| Amortization of deferred acquisition cost (DAC) | 14 | 14 | 16 | ||||||||||||||
| Employee compensation and benefit expenses | 258 | 230 | 228 | ||||||||||||||
| Other operating expenses | 167 | 179 | 197 | ||||||||||||||
| Total expenses | 536 | 465 | 729 | ||||||||||||||
| Income (loss) before income taxes and equity in earnings (losses) of investees | 187 | 383 | 386 | ||||||||||||||
| Equity in earnings (losses) of investees | (39) | 94 | 27 | ||||||||||||||
| Income (loss) before income taxes | 148 | 477 | 413 | ||||||||||||||
| Less: Provision (benefit) for income taxes | 11 | 58 | 45 | ||||||||||||||
| Net income (loss) | 137 | 419 | 368 | ||||||||||||||
| Less: Noncontrolling interests | 13 | 30 | 6 | ||||||||||||||
| Net income (loss) attributable to Assured Guaranty Ltd. | $ | 124 | $ | 389 | $ | 362 | |||||||||||
| Effective tax rate | 7.2 | % | 12.2 | % | 10.9 | % | |||||||||||
Net income attributable to AGL in 2022 was lower compared with 2021 primarily due to the following:
•loss and LAE in 2022 compared with a benefit in 2021,
•losses on equity method alternative investments in 2022 compared with gains in 2021,
•realized and unrealized losses on the investment portfolio reported in realized gains (losses) on investments and fair value gains (losses) on trading securities compared with gains in 2021,
•lower fair value gains on CIVs, and
•higher foreign exchange remeasurement losses in 2022.
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These decreases were offset in part by:
•losses on extinguishment of debt in 2021 that did not recur in 2022,
•higher net earned premiums mainly attributable to accelerations on certain Puerto Rico exposures, and
•fair value gains on CCS in 2022 compared with losses in 2021.
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%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, the French subsidiary taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda subsidiaries, unless subject to U.S. tax by election or as a U.S. CFC. The effective tax rate in 2022 was lower than in 2021 due primarily to differences in the portion of income generated by various jurisdictions as well as the Company’s ability to utilize foreign tax credits.
Adjusted Operating Income
Adjusted operating income in 2022 was $267 million, compared with $470 million in 2021. The decrease was primarily attributable to lower Insurance segment adjusted operating income due to losses in equity method alternative investments and benefits in Puerto Rico expected losses in 2021 that did not recur in 2022, offset by a lower corporate division loss due to a 2021 loss on extinguishment of debt that did not recur in 2022. See “— Results of Operations —Reconciliation to GAAP” for the reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Book Value and Adjusted Book Value
Shareholders’ equity attributable to AGL as of December 31, 2022 decreased compared with December 31, 2021, as net income was offset by other comprehensive loss, share repurchases and dividends. Adjusted operating shareholders’ equity and adjusted book value also decreased primarily due to share repurchases, and dividends and foreign exchange remeasurement losses, offset in part, in the case of adjusted book value, by new business development and favorable loss development.
On a per share basis, shareholders’ equity attributable to AGL was $85.80 as of December 31, 2022, which was lower than shareholders’ equity attributable to AGL of $93.19 as of December 31, 2021, primarily due to unrealized losses on the investment portfolio caused largely by rising interest rates.
On a per share basis, adjusted operating shareholders’ equity increased to $93.92 as of December 31, 2022, from $88.73 as of December 31, 2021, and adjusted book value increased to $141.98 as of December 31, 2022 from $130.67 as of December 31, 2021, primarily due to the accretive effect of the share repurchase program, and in the case of adjusted book value, net premiums written and favorable loss development. See “— Non-GAAP Financial Measures” for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value.
Other EventsMatters
The Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, and have identified no material direct exposure to Ukraine or Russia. In fact, the Company’s direct insurance exposure to eastern Europe generally is limited to approximately $300 million in net par outstanding as of December 31, 2022, comprising $237 million net par exposure to the sovereign debt of Poland and $63 million net par exposure to a referendumtoll road in Hungary. The Company rates the toll road exposure BIG.
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Inflation
By some key measures, consumer price inflation in the U.S. and the U.K. was heldhigher in 2022 than it has been in decades, and interest rates generally increased. Consumer price inflation in the U.K. in which a majority voted to exitimpacts the EU, known as “Brexit”. TheCompany directly by increasing exposure for certain index-linked U.K. government served noticedebt with par that accretes with increasing inflation, and also increasing projected future installment premiums on the portion of such exposure that pays at least some of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the European Council on March 29, 2017 of its desireextent it makes it more difficult for obligors to withdrawmake their debt payments, and may be accompanied by higher interest rates that could impact the Company in accordance with Article 50several ways.
After acknowledging the need to combat inflation, the FOMC of the Treaty on European Union. As described above in Part 1, Item 1, Business, Regulation,Federal Reserve Board decided at its March 2022 meeting to start again raising the U.K. parliament has approved a withdrawal agreement withtarget federal funds rate, and raised the EU and the U.K. left the EU onrate seven times from March 2022 through December 2022. At its January 31 2020. There is a transition period under- February 1, 2023 meeting, the terms ofFOMC raised the withdrawal agreement which will end on December 31, 2020. Negotiationsfederal funds target rate by 25 bps to 4.5% to 4.75%, its eighth consecutive increase, stating that it anticipates that ongoing increases 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. Given the lack of clarity on the ultimate post-Brexit relationship between the U.K. and the EU, the Company cannot fully determine what, if any, impact Brexit may have on its business or operations, both inside and outside the U.K., but it has identified the following issues:
Higher interest rates impact the Company believes that,in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit enhancement products more attractive in the eventmarket and increase the level of premiums it can charge for that product. However, despite the U.K.increases in interest rates in 2022, the pace of credit spread widening was more modest and EU fail to agree onmarket penetration of municipal bond insurance in the U.K.'s future relationship withU.S. public finance market remained relatively flat in 2022 versus 2021. Over time, higher interest rates also increase the EU during the transition period, those other EEA states outside the U.K. will permitamount the Company to continue to service existing business in their states, there can be no assurance that this will occur, nor canearn on its largely fixed-maturity investment portfolio. Higher interest rates may present a more challenging environment for distressed RMBS the Company fully determineinsures to the extent it causes housing prices to decline, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact on its business and operations if it does not occur. As noted above, mostthe finances of the new transactionssome insured by AGE UK since 2008 have been in the U.K.obligors.
LIBOR Sunset
The Company has outstanding exposure to LIBOR in three areasthe following areas:
Outstanding Insured Financial Guaranty Portfolio
The Company has insured net part outstanding on December 31, 2022 to obligors that the Company is aware have assets, liabilities or hedges that reference U.S. dollar LIBOR or sterling LIBOR. In each case, the transactions are generally governed by documentation entered into prior to the announcement that the publication of its operations: (i) issuersLIBOR would cease. These obligors, not the Company, are responsible for any financial cost of the transition away from LIBOR. The Company is impacted if such costs result in payment defaults of obligations the Company insures or increase the amount of losses the Company is required to pay for insured transactions already in payment default.
U.S. Dollar LIBOR. The Company projects that in June 2023 it will have obligations,approximately $2.8 billion of insured net par outstanding to obligors that the Company is aware have assets, andliabilities or hedges that reference LIBOR, and someU.S. dollar LIBOR. Of the $2.8 billion of insured net par, approximately $0.9 billion is currently rated BIG by the Company. As part of its insured portfolio surveillance process, the Company’s surveillance team evaluates the potential impact of the obligationstransition from U.S. dollar LIBOR on the Company’s insured exposures. The Company is generally in contact with relevant parties to insured
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transactions most likely to be impacted by the transition from U.S. dollar LIBOR. In many instances it is difficult to amend the relevant documentation, so the enactment of AIRLA is very helpful. While most of the parties relevant to the Company’s exposure to U.S. dollar LIBOR have not yet expressly committed to a course of action, AIRLA provides a replacement rate and a safe harbor from liability as a result of the transition from U.S. LIBOR.
Sterling LIBOR. The Company also had $16 million of insured net par outstanding at December 31, 2022 to one obligor that the Company insuresis aware has assets, liabilities or hedges that reference sterling LIBOR. The documentation for this transaction was recently amended and will instead reference Sterling Overnight Interbank Average Rate (SONIA) effective March 17, 2023.
Loss Mitigation and Other Securities
Certain securities, primarily Loss Mitigation Securities, with a fair value of approximately $504 million on December 31, 2022 that reference U.S. dollar LIBOR, (ii)are generally governed by documentation entered into prior to the announcement that the publication of LIBOR would cease. The transition away from U.S. dollar LIBOR may impact the fair value and total amounts eventually received from such investments.
The Company’s subsidiary AGUS has $150 million of debentures outstanding that bear a floating rate of interest tied to U.S. dollar LIBOR. In 2022, the Company's wholly owned subsidiaries AGUS andCompany paid $6 million of interest on those debentures. In addition, the Company’s subsidiary AGMH currently pay, orhas $300 million of debentures outstanding ($154 million of which are held by AGUS) that will convert to a floating interest rate tied to U.S. dollar LIBOR and (iii) CCS from which the Company benefits also pay interest tied to LIBOR. See Item 8, Financial Statements and Supplementary Data, Noteafter December 15, Long-Term Debt and Credit Facilities.2036.
Committed Capital Securities
The Company has reviewed its insured portfoliobenefits from $400 million of CCS that pay a rate tied to identify insured transactions that it believes may be vulnerableU.S. dollar LIBOR. In 2022, the amount the Company paid on the CCS was $11 million.
CLOs
Certain CLOs issued and owned by the Company’s CIVs pay interest historically tied to the transition fromU.S. dollar LIBOR. The review focused on insured issues that are scheduledrelevant operative documents generally included from the outset 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 reviewed the language governing the setting of interest rates in the event of unavailability of LIBOR in the governing documents of all 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 rateswere amended or executed after the sunsetplanned cessation of LIBOR. The Company has also reviewed relevantU.S. dollar LIBOR was announced to include robust fallback language in the documents relatingwith alternative procedures 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 committedtransition to a course of action.new benchmark rate based on SOFR.
Income Taxes
The U.S. Internal Revenue Service and Department of the Treasury issued final and proposed regulations on July 10, 2019
in October 2020 relating to the tax treatment of PFICs. The proposedfinal regulations provide guidance on various passive foreign investment company rules, including changes resulting fromare not expected to have a material impact to the Tax Act. Management is currently in the process of evaluating the impact toCompany’s business operation or its shareholders and the proposed regulations are continuing to be evaluated.
Impact of COVID-19
The emergence and continuation of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Due to the nature of the Company’s business, operations.COVID-19 and its global impact, directly and indirectly affected certain sectors in the insured portfolio.
believes are due at least in part to credit stress arising specifically from COVID-19, and has already received reimbursement for most of those claims.
The Company began operating remotely in accordance with its business continuity plan in March 2020 in response to the COVID-19 pandemic, instituting mandatory remote work policies in its offices in Bermuda, U.S., U.K. and France. By the end of February 2022, the Company had reopened all of its offices, choosing a hybrid remote and office work model in response to employee feedback and as part of its commitment to providing a safe and healthy workplace. Whether its employees are working remotely or in a hybrid remote and office work model, the Company continues to provide the services and communications it normally would. For more information, see Part I, Item 1A, Risk Factors, Operational Risks captioned “The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in the Company’s or a vendor’s information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system, could adversely affect the Company’s business.”
Results of Operations
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. The inputs into the Company’s estimates and assumptions consider the economic implications of COVID-19. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the Consolidated Financial Statements.
Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially different in the future to reflect changes in these estimates and assumptions from time to time.
The accounting policies that the Company believes are most dependent on the application of judgment, estimates and assumptions are listed below. See Item 8, Financial Statements and Supplementary Data, Note 1, Business Segmentsand Basis of Presentation, for the Company’s significant accounting policies which includes a reference to the note where further details regarding the significant estimates and assumptions are provided, as well as Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further details regarding sensitivity analysis.
•Expected loss to be paid (recovered)
•Fair value of certain assets and liabilities, primarily:
◦Investments
◦Assets and liabilities of CIVs
◦Assets and liabilities of FG VIEs
◦Credit derivatives
•Recoverability of goodwill and other intangible assets
•Credit impairment of financial instruments
•Revenue recognition
•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities)
In addition, the valuation of AUM, which is the basis for calculating certain asset management fees, is based on estimates and assumptions. AUM valuations are often performed by independent pricing services based on observable and unobservable inputs. 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 AssuredIM, 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, see “— Results of Operations by Segment — Asset Management Segment”.
Results of Operations by Segment
The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company'sCompany’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 fourth quarter 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 Asset Management segment operates under the name "Assured Investment Management." The following describes the components of each segment, along with the Corporate division and Other categories. The Insurance
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and Asset Management segments and the Corporate division are presented without giving effect to the consolidation of the FG VIEs and investment vehicles that are not subsidiaries of Assured Guaranty. See Item 8. Financial Statement and Supplementary Data, Note 14, Variable Interest Entities.
The Company analyzes the operating performance of each segment using "adjustedeach segment’s adjusted operating income." See “-- Non-GAAP Financial Measures -- Adjusted Operating Income” below for definition of "adjusted operating income" (formerly knownincome as non-GAAP operating income) anddescribed in Item 8, Financial Statements and Supplementary Data, Note 4,2, 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.
| Year Ended December 31, | |||||||||||
| 2019 | �� | 2018 | 2017 | ||||||||
| (in millions) | |||||||||||
| Adjusted operating income (loss) by segment: | |||||||||||
| Insurance | $ | 512 | $ | 582 | $ | 732 | |||||
| Asset management | (10 | ) | — | — | |||||||
| Corporate | (111 | ) | (96 | ) | (83 | ) | |||||
| Other | — | (4 | ) | 12 | |||||||
| Adjusted operating income (loss) | 391 | 482 | 661 | ||||||||
| Reconciling items from adjusted operating income to net income (loss) attributable to AGL: | |||||||||||
| Plus pre-tax adjustments: | |||||||||||
| Realized gains (losses) on investments | 22 | (32 | ) | 40 | |||||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (10 | ) | 101 | 43 | |||||||
| Fair value gains (losses) on CCS | (22 | ) | 14 | (2 | ) | ||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 22 | (32 | ) | 57 | |||||||
| Total pre-tax adjustments | 12 | 51 | 138 | ||||||||
| Plus tax effect on pre-tax adjustments | (1 | ) | (12 | ) | (69 | ) | |||||
| Net income (loss) attributable to AGL | $ | 402 | $ | 521 | $ | 730 | |||||
Insurance Segment Results
Insurance Segment Results
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Revenues | |||||||||||
| Net earned premiums and credit derivative revenues | $ | 511 | $ | 580 | $ | 734 | |||||
| Net investment income | 383 | 396 | 423 | ||||||||
| Bargain purchase gain and settlement of pre-existing relationships | — | — | 58 | ||||||||
| Commutation gains (losses) | 1 | (16 | ) | 328 | |||||||
| Other income (loss) | 22 | 32 | 16 | ||||||||
| Total revenues | 917 | 992 | 1,559 | ||||||||
| Expenses | |||||||||||
| Loss expense | 86 | 70 | 352 | ||||||||
| Amortization of deferred acquisition cost (DAC) | 18 | 16 | 19 | ||||||||
| Employee compensation and benefit expenses | 137 | 134 | 127 | ||||||||
| Other operating expenses | 83 | 82 | 88 | ||||||||
| Total expenses | 324 | 302 | 586 | ||||||||
| Equity in net earnings of investees | 2 | 1 | — | ||||||||
| Adjusted operating income (loss) before income taxes | 595 | 691 | 973 | ||||||||
| Provision (benefit) for income taxes | 83 | 109 | 241 | ||||||||
| Adjusted operating income (loss) | $ | 512 | $ | 582 | $ | 732 | |||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| GWP | |||||||||||
| Public Finance—U.S. | $ | 198 | $ | 320 | $ | 190 | |||||
| Public Finance—non-U.S. | 417 | 115 | 105 | ||||||||
| Structured Finance—U.S. | 57 | 167 | (1 | ) | |||||||
| Structured Finance—non-U.S. | 5 | 10 | 13 | ||||||||
| Total GWP | $ | 677 | $ | 612 | $ | 307 | |||||
| PVP (1): | |||||||||||
| Public Finance—U.S. | $ | 201 | $ | 391 | $ | 196 | |||||
| Public Finance—non-U.S. | 211 | 94 | 66 | ||||||||
| Structured Finance—U.S. | 45 | 166 | 12 | ||||||||
| Structured Finance—non-U.S. | 6 | 12 | 15 | ||||||||
| Total PVP | $ | 463 | $ | 663 | $ | 289 | |||||
| Gross Par Written (1): | |||||||||||
| Public Finance—U.S. | $ | 16,337 | $ | 19,572 | $ | 15,957 | |||||
| Public Finance—non-U.S. | 6,347 | 3,817 | 1,376 | ||||||||
| Structured Finance—U.S. | 1,581 | 902 | 489 | ||||||||
| Structured Finance—non-U.S. | 88 | 333 | 202 | ||||||||
| Total gross par written | $ | 24,353 | $ | 24,624 | $ | 18,024 | |||||
| Average rating on new business written | A | A- | A- | ||||||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Segment revenues | |||||||||||||||||
| Net earned premiums and credit derivative revenues | $ | 508 | $ | 438 | $ | 504 | |||||||||||
| Net investment income | 278 | 280 | 310 | ||||||||||||||
| Fair value gains (losses) on trading securities | (34) | — | — | ||||||||||||||
| Commutation gains (losses) | 2 | — | 38 | ||||||||||||||
| Foreign exchange gains (losses) on remeasurement and other income (loss) (1) | 3 | 15 | 22 | ||||||||||||||
| Total segment revenues | 757 | 733 | 874 | ||||||||||||||
| Segment expenses | |||||||||||||||||
| Loss expense (benefit) | 12 | (221) | 204 | ||||||||||||||
| Interest expense | 1 | — | — | ||||||||||||||
| Amortization of DAC | 14 | 14 | 16 | ||||||||||||||
| Employee compensation and benefit expenses | 148 | 142 | 143 | ||||||||||||||
| Other operating expenses | 84 | 98 | 83 | ||||||||||||||
| Total segment expenses | 259 | 33 | 446 | ||||||||||||||
| Equity in earnings (losses) of investees | (51) | 144 | 61 | ||||||||||||||
| Segment adjusted operating income (loss) before income taxes | 447 | 844 | 489 | ||||||||||||||
| Less: Provision (benefit) for income taxes | 34 | 122 | 60 | ||||||||||||||
| Segment adjusted operating income (loss) | $ | 413 | $ | 722 | $ | 429 | |||||||||||
____________________
(1) Other income (loss) consists of recurring items such as ancillary fees on financial guaranty policies for commitments and consents, and if applicable, other revenue items on |
| GWP | PVP (1) | ||||||||||||||||||
| Financial Guaranty | Financial Guaranty | Credit Derivatives | Total | Gross Par Written (1) | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Public Finance—U.S. | $ | 123 | $ | 118 | $ | 67 | $ | 185 | $ | 7,559 | |||||||||
| Public Finance—non-U.S. | 50 | 38 | 12 | 50 | 3,345 | ||||||||||||||
| Structured Finance—U.S. | 157 | 156 | — | 156 | 349 | ||||||||||||||
| Structured Finance—non-U.S. | — | — | — | — | 19 | ||||||||||||||
| Total | $ | 330 | $ | 312 | $ | 79 | $ | 391 | $ | 11,272 | |||||||||
Net Earned Premiums and Credit Derivative Revenues
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Financial guaranty insurance: | |||||||||||
| Public finance | |||||||||||
| Scheduled net earned premiums | $ | 278 | $ | 300 | $ | 315 | |||||
| Accelerations: | |||||||||||
| Refundings | 115 | 139 | 269 | ||||||||
| Terminations | 10 | 14 | 2 | ||||||||
| Total accelerations | 125 | 153 | 271 | ||||||||
| Total public finance | 403 | 453 | 586 | ||||||||
| Structured finance | |||||||||||
| Scheduled net earned premiums | 78 | 97 | 102 | ||||||||
| Accelerations | 7 | 6 | 15 | ||||||||
| Total structured finance | 85 | 103 | 117 | ||||||||
| Specialty insurance and reinsurance | 6 | 4 | 2 | ||||||||
| Total net earned premiums | 494 | 560 | 705 | ||||||||
| Credit derivative revenues | 17 | 20 | 29 | ||||||||
| Total net earned premiums and credit derivative revenues | $ | 511 | $ | 580 | $ | 734 | |||||
Net earned premiums decreaseddue to accelerations are attributable to changes in 2019the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of
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municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policies under the 2022 Puerto Rico Resolutions.
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.
Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net earned premiums: | |||||||||||||||||
| Financial guaranty insurance: | |||||||||||||||||
| Public finance | |||||||||||||||||
| Scheduled net earned premiums (1) | $ | 256 | $ | 290 | $ | 292 | |||||||||||
| Accelerations: | |||||||||||||||||
| Refundings | 179 | 56 | 123 | ||||||||||||||
| Terminations | — | 1 | 6 | ||||||||||||||
| Total accelerations | 179 | 57 | 129 | ||||||||||||||
| Total public finance | 435 | 347 | 421 | ||||||||||||||
| Structured finance | |||||||||||||||||
| Scheduled net earned premiums (1) | 58 | 66 | 67 | ||||||||||||||
| Terminations | — | 2 | — | ||||||||||||||
| Total structured finance | 58 | 68 | 67 | ||||||||||||||
| Specialty insurance and reinsurance | 4 | 3 | 2 | ||||||||||||||
| Total net earned premiums | 497 | 418 | 490 | ||||||||||||||
| Credit derivative revenues: | |||||||||||||||||
| Scheduled net earned premiums | 9 | 13 | 13 | ||||||||||||||
| Accelerations | 2 | 7 | 1 | ||||||||||||||
| Total credit derivative revenues | 11 | 20 | 14 | ||||||||||||||
| Total net earned premiums and credit derivative revenues | $ | 508 | $ | 438 | $ | 504 | |||||||||||
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues increased in 2022 compared with 20182021 primarily due to a reductionrefundings of $133 million related to the 2022 Puerto Rico Resolutions discussed in accelerations due to refundingsItem 8, Financial Statements and terminations andSupplementary Data, Note 3, Outstanding Exposure, offset in part by the scheduled decline in structured finance par outstanding. Atoutstanding and the effect of other refundings and terminations on scheduled net earned premiums. As of December 31, 2019, $3.82022, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.
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Gross Written Premiums and New Business Production
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| GWP | |||||||||||||||||
| Public Finance—U.S. | $ | 248 | $ | 231 | $ | 294 | |||||||||||
| Public Finance—non-U.S. | 75 | 89 | 142 | ||||||||||||||
| Structured Finance—U.S. | 37 | 51 | 18 | ||||||||||||||
| Structured Finance—non-U.S. | — | 6 | — | ||||||||||||||
| Total GWP | $ | 360 | $ | 377 | $ | 454 | |||||||||||
| PVP (1): | |||||||||||||||||
| Public Finance—U.S. | $ | 257 | $ | 235 | $ | 292 | |||||||||||
| Public Finance—non-U.S. | 68 | 79 | 82 | ||||||||||||||
| Structured Finance—U.S. | 43 | 42 | 14 | ||||||||||||||
| Structured Finance—non-U.S. (2) | 7 | 5 | 2 | ||||||||||||||
| Total PVP | $ | 375 | $ | 361 | $ | 390 | |||||||||||
| Gross Par Written (1): | |||||||||||||||||
| Public Finance—U.S. | $ | 19,801 | $ | 23,793 | $ | 21,198 | |||||||||||
| Public Finance—non-U.S. | 624 | 1,117 | 1,434 | ||||||||||||||
| Structured Finance—U.S. | 1,077 | 1,316 | 380 | ||||||||||||||
| Structured Finance—non-U.S. (2) | 545 | 430 | 253 | ||||||||||||||
| Total gross par written | $ | 22,047 | $ | 26,656 | $ | 23,265 | |||||||||||
| Average rating on new business written | 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.”
(2) 2022 PVP and gross par written include the present value of future premiums and exposure, respectively, associated with 2017:a financial guarantee written by the Company that, under GAAP, is accounted for under ASC 460, Net earnedGuarantees.
GWP relates to insurance and reinsurance contracts for both financial guaranty and specialty business. Financial guaranty insurance and reinsurance GWP includes: (i) amounts collected upfront on new business written; (ii) the present value of future contractual or expected premiums decreasedon new business written (discounted at risk-free rates); and (iii) the effects of changes in 2018 compared with 2017the estimated lives of certain transactions in the in-force book of business. Specialty business GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore are not included in GWP.
The non-GAAP financial measure, PVP, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, for all contracts regardless of form or accounting model. See “— Non-GAAP Financial Measures” below.
U.S. public finance GWP increased in 2022 to $248 million from $231 million in 2021, and the corresponding PVP increased in 2022 to $257 million from $235 million in 2021. The increase was primarily due to reduced refundinga higher proportion of secondary market transactions. The Company’s direct par written represented 59% of the total U.S. municipal market insured issuance in 2022, compared with 60% in 2021, and the Company’s penetration of all municipal issuance was 4.7% in 2022, compared with 5.0% in 2021.
In 2022, non-U.S. public finance GWP and PVP included restructuring of several existing transactions that resulted in additional GWP and PVP, without an increase in gross par, and several large transactions involving secondary market guarantees for institutional investors and banks, and a U.K. water utility liquidity guarantee.
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Structured finance GWP and PVP in 2022 were primarily attributable to large insurance securitization transactions and pooled corporate obligations. PVP also includes a guarantee of rental income cash flows, for which no GWP is reported under GAAP.
Business activity due to a reduction in the insured portfolio as well as fewer advanced refunding bonds, caused by changes in tax law enacted in 2017. At December 31, 2018, $3.6 billion of net deferred premium revenue remainedinfrastructure and structured finance sectors typically has long lead times and therefore may vary from period to be earned over the life of the insurance contracts. The SGI Transaction contributed $375 million of net unearned premium reserve on June 1, 2018.period.
Net investment income is a function of the yield earnedthat the Company earns on available-for-sale fixed-maturity securities and short-term investments, and the size of the investmentsuch portfolio. The investment yield on fixed-maturity securities is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Net investment incomesecurities in this portfolio.
CVIs issued by Puerto Rico and received as part of the 2022 Puerto Rico Resolutions are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the Insurance segment represents income earnedconsolidated statements on the available for sale portfolio, short term investments and other invested assets, other than equity method investments. operations. The fair value of such instruments as of December 31, 2022 was $303 million.
Equity method investments in the Insurance segment include investments that the insurance companies' investmentsU.S. Insurance Subsidiaries make in Assured Investment Management funds,AssuredIM Funds, as well as other directalternative investments. The income (loss) on such investments is presented as a separate line item, "equityreported in “equity in earnings (losses) of investees” and typically represents the change in NAV of AssuredIM Funds and the Company’s share of earnings of its other investees." The
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Income from fixed-maturity securities managed by third parties | $ | 272 | $ | 293 | $ | 296 | |||||
| Income from internally managed securities | 120 | 112 | 136 | ||||||||
| Gross investment income | 392 | 405 | 432 | ||||||||
| Investment expenses | (9 | ) | (9 | ) | (9 | ) | |||||
| Net investment income | $ | 383 | $ | 396 | $ | 423 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net investment income | |||||||||||||||||
| Externally managed | $ | 186 | $ | 202 | $ | 231 | |||||||||||
| Loss Mitigation Securities and other | 66 | 58 | 69 | ||||||||||||||
| Managed by AssuredIM (1) | 22 | 16 | 8 | ||||||||||||||
| Intercompany loans | 10 | 10 | 10 | ||||||||||||||
| Investment income | 284 | 286 | 318 | ||||||||||||||
| Investment expenses | (6) | (6) | (8) | ||||||||||||||
| Net investment income | $ | 278 | $ | 280 | $ | 310 | |||||||||||
| Fair value gains (losses) on trading securities | $ | (34) | $ | — | $ | — | |||||||||||
| Equity in earnings (losses) of investees | |||||||||||||||||
| AssuredIM Funds | $ | (10) | $ | 80 | $ | 42 | |||||||||||
| Other | (41) | 64 | 19 | ||||||||||||||
| Equity in earnings (losses) of investees | $ | (51) | $ | 144 | $ | 61 | |||||||||||
____________________
(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.
Net investment income decreasedwas consistent in 2022 compared with 2018 primarily due to a decrease in the average asset balances in the investment portfolio, which was partially offset by the acceleration of income related to the settlement of an insured obligation in June 2019 that was held in the loss mitigation portfolio.2021. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.51%3.55% as of December 31, 20192022 and 3.86%2.93% as of December 31, 2018, respectively. Excluding the internally2021. Externally managed portfolio,portfolio’s pre-tax book yield was 3.21%3.09% as of December 31, 20192022, compared with 3.24%2.92% as of December 31, 2018.2021.
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a private equity fund.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Foreign exchange gain (loss) on remeasurement (1) | $ | 3 | $ | (5 | ) | $ | 5 | ||||
| Fair value gains (losses) on equity investments (2) | — | 27 | — | ||||||||
| Other | 19 | 10 | 11 | ||||||||
| Total other income (loss) | $ | 22 | $ | 32 | $ | 16 | |||||
Economic Loss Development
The insured portfolio includes policies accounted for under three separateseveral different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of assumptionsmethodologies and methodologies used in calculating thesignificant estimates for expected loss to be paid for all contracts, the loss estimation process(recovered), see Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered). For the accounting policies for measurement and recognition under GAAP for each type of contract, see the Notesnotes listed below in Item 8, Financial Statements and Supplementary Data.
•Note 5 for contracts accounted for as insurance;
•Note 6 for expected loss to be paidcontracts accounted for as credit derivatives;
•Note 78 for contracts accounted for as insuranceFG VIEs; and
•Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities
In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments,payments; expected recoveries from issuers or excess spread,spread; cessions to reinsurers,reinsurers; expected recoveries/payables forstemming from breaches of representation &and warranties (R&W); and, the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.
Current risk freerisk-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. The weighted average discount rates used to discount expected losses (recoveries) were 4.08%, 1.02% and 0.60% as of December 31, 2022, 2021 and 2020, respectively.
The composition of economic loss development (benefit) by accounting model and by sector are presented in the tables that follow, and the drivers of economic loss development (benefit) are discussed below.
Net Expected Loss to be Paid (Recovered) and
Net Economic Loss Development (Benefit)
| Net Expected Loss to be Paid (Recovered) | Net Economic Loss Development (Benefit) | |||||||||||||||||||||||||||||||
| As of December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Accounting Model | 2022 | 2021 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Insurance | $ | 205 | $ | 364 | $ | (112) | $ | (281) | $ | 142 | ||||||||||||||||||||||
| FG VIEs | 314 | (1) | 42 | (17) | (20) | 1 | ||||||||||||||||||||||||||
| Credit derivatives | 3 | 5 | 4 | 14 | 2 | |||||||||||||||||||||||||||
| Total | $ | 522 | $ | 411 | $ | (125) | $ | (287) | $ | 145 | ||||||||||||||||||||||
| Net exposure rated BIG | $ | 5,976 | $ | 7,440 | ||||||||||||||||||||||||||||
____________________
(1) The increase in expected loss to be paid for FG VIEs primarily relates to Puerto Rico Trusts that were consolidated as a result of the 2022 Puerto Rico Resolutions. Prior to the 2022 Puerto Rico Resolutions, all Puerto Rico Exposures were accounted for as insurance. See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).
91
| Net Expected Loss to be Paid (Recovered) | Net Economic Loss Development (Benefit) | ||||||||||||||||||
| As of December 31, | Year Ended December 31, | ||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2017 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Insurance | $ | 683 | $ | 1,110 | $ | 14 | $ | (9 | ) | $ | 353 | ||||||||
| FG VIEs | 58 | 75 | (29 | ) | (13 | ) | (6 | ) | |||||||||||
| Credit derivatives | (4 | ) | (2 | ) | 14 | 17 | (34 | ) | |||||||||||
| Total | $ | 737 | $ | 1,183 | $ | (1 | ) | $ | (5 | ) | $ | 313 | |||||||
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 197 | $ | 19 | $ | 187 | $ | 403 | ||||||||||||||||||
| Non-U.S. public finance | 12 | (2) | (1) | 9 | ||||||||||||||||||||||
| Public finance | 209 | 17 | 186 | 412 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 150 | (143) | 59 | 66 | ||||||||||||||||||||||
| Other structured finance | 52 | 1 | (9) | 44 | ||||||||||||||||||||||
| Structured finance | 202 | (142) | 50 | 110 | ||||||||||||||||||||||
| Total | $ | 411 | $ | (125) | $ | 236 | $ | 522 | ||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 305 | $ | (182) | $ | 74 | $ | 197 | ||||||||||||||||||
| Non-U.S. public finance | 36 | (22) | (2) | 12 | ||||||||||||||||||||||
| Public finance | 341 | (204) | 72 | 209 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 148 | (100) | 102 | 150 | ||||||||||||||||||||||
| Other structured finance | 40 | 17 | (5) | 52 | ||||||||||||||||||||||
| Structured finance | 188 | (83) | 97 | 202 | ||||||||||||||||||||||
| Total | $ | 529 | $ | (287) | $ | 169 | $ | 411 | ||||||||||||||||||
Effect of changes in the risk-free rates included in economic loss development (benefit) was a benefit of $115 million and $33 million in 2022 and 2021, respectively.
2022 Net Economic Loss Development (Benefit)
| Net Expected Loss to be Paid (Recovered) | Net Economic Loss Development (Benefit) | ||||||||||||||||||
| As of December 31, | Year Ended December 31, | ||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2017 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| U.S. public finance | $ | 531 | $ | 832 | $ | 224 | $ | 70 | $ | 554 | |||||||||
| Non-U.S. public finance | 23 | 32 | (9 | ) | $ | (14 | ) | $ | (5 | ) | |||||||||
| Structured finance | |||||||||||||||||||
| U.S. RMBS | 146 | 293 | (234 | ) | (69 | ) | (181 | ) | |||||||||||
| Other structured finance | 37 | 26 | 18 | 8 | (55 | ) | |||||||||||||
| Structured finance | 183 | 319 | (216 | ) | (61 | ) | (236 | ) | |||||||||||
| Total | $ | 737 | $ | 1,183 | $ | (1 | ) | $ | (5 | ) | $ | 313 | |||||||
| Risk-Free Rates used in Expected Loss for U.S. Dollar Denominated Obligations | Economic Loss Development (Benefit) Attributable to Changes in Risk Free Rates | ||||||||||
| As of December 31, | Year Ended December 31, | ||||||||||
| Range | Weighted Average | (in millions) | |||||||||
| 2019 | 0.0 | % | - | 2.45% | 1.94 | % | $ | (11 | ) | ||
| 2018 | 0.0 | % | - | 3.06% | 2.74 | % | (17 | ) | |||
| 2017 | 0.0 | % | - | 2.78% | 2.38 | % | 25 | ||||
Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.8$3.8 billion as of December 31, 20192022, compared with $6.4$5.4 billion as of December 31, 2018.2021. The Company projectsprojected that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2019 will be $5312022 was $403 million, compared with $832$197 million as of December 31, 2018.2021. 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 December 31, 2019 that credit was $819 million compared with $586 million at December 31, 2018. Economiceconomic loss development on U.S. exposures in 20192022 was $224$19 million, which was primarily attributable to certain Puerto Rico exposures.and health care exposures, partially offset by the effect of changes in discount rates. In 2022, the Company had net recovered losses of $187 million in the U.S. public finance sector related primarily to the claims paid on $2.0 billion net par under the 2022 Puerto Rico Resolutions, net of recoveries, which were in the form of cash, New Recovery Bonds and CVIs. See Item 8, Financial Statements and Supplementary Data, Note 5,3, Outstanding Insurance Exposure, for details about significant developments that have taken place ina discussion of Puerto Rico.Rico developments.
U.S. RMBS: The net benefit attributable to U.S. RMBS of $234$143 million was mainly related to a $58 million benefit related to changes in discount rates, a $49 million benefit related to improvement in thetransaction performance, ofa $30 million benefit related to higher recoveries on charged-off second lien U.S. RMBS transactions.
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Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $7.1$5.4 billion as of both December 31, 2017 compared with $7.4 billion as of2021 and December 31, 2016.2020. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 20172021 would be $1,157$197 million, compared with $871$305 million as of December 31, 2016. Economic loss development2020. The economic benefit on U.S. exposures in 20172021 was $554$182 million, which was primarily attributable to certain Puerto Rico exposures. In the fourth quarter of 2021, the Company sold a portion of its salvage and subrogation recoverables associated with certain matured Puerto Rico GO and PREPA exposures on which the Company had previously paid claims. This sale resulted in proceeds of $383 million, including $56 million that was settled in January 2022. The Company has continued to make such sales, and received an additional $133 million in proceeds in connection with additional such sales in 2022. Also in the fourth quarter of 2021, the Company increased its assumptions for the value of the remaining CVIs and New Recovery Bonds received under the GO/PBA Plan and HTA Plan. During 2021, the Company also incorporated refinements in certain terms of the Puerto Rico support agreements.
The economic benefit of $22 million for non-U.S. public finance exposures during 2021 was mainly due to the impact of higher Euro Interbank Offered Rate (Euribor), the restructuring of certain exposures and an improved performance outlook for certain road exposures.
U.S. RMBS: The net benefit attributable to U.S. RMBS was $181of $100 million and was mainly related to an R&W litigation settlement, and improveda $72 million benefit related to higher recoveries on charged-off second lien U.S. RMBS recoveries.loans, a $28 million benefit related to improvement in transaction performance, a $23 million benefit related to assumed recovery on certain deferred principal balances in first lien loans, and a benefit of $18 million related to changes in discount rates, partially offset by loss of $41 million related to lower excess spread.
Other Structured Finance: The net benefiteconomic loss development attributable to structured finance, (excludingexcluding U.S. RMBS)RMBS, was $55$17 million, which was primarily dueattributable to a benefit from a litigation settlement related to two life insurance transactions.LAE for certain transactions and deterioration of certain aircraft RVI exposures.
Insurance Segment Loss and LAEExpense
The primary differences between net economic loss development and the amount reported as loss“loss and LAE (benefit)” in the consolidated statements of operations are that loss and LAE: (1)LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty insurance contracts, (2)contracts; (ii) eliminates loss and LAE related to consolidated FG VIEsVIEs; and (3)(iii) does not include estimated losses on credit derivatives.
For financial guaranty insurance contracts, each transaction'stransaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in 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.
While expected loss to be paid (recovered) 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 the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.
The amount of Insurance segment loss expense, 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. The following table presents the Insurance segment loss and LAE, net of reinsurance.expense.
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Insurance Segment
Loss and LAEExpense (Benefit)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| U.S. public finance | $ | 128 | $ | (146) | $ | 225 | |||||||||||
| Non-U.S. public finance | — | (9) | 5 | ||||||||||||||
| Structured finance: | |||||||||||||||||
| U.S. RMBS | (120) | (84) | (36) | ||||||||||||||
| Other structured finance | 4 | 18 | 10 | ||||||||||||||
| Structured finance | (116) | (66) | (26) | ||||||||||||||
| Total Insurance segment loss expense (benefit) | $ | 12 | $ | (221) | $ | 204 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| U.S. public finance | $ | 247 | $ | 90 | $ | 553 | |||||
| Non-U.S. public finance | (7 | ) | (7 | ) | (4 | ) | |||||
| Structured finance | |||||||||||
| U.S. RMBS | (176 | ) | (19 | ) | (142 | ) | |||||
| Other structured finance | 22 | 6 | (55 | ) | |||||||
| Structured finance | (154 | ) | (13 | ) | (197 | ) | |||||
| Total loss and LAE (benefit) | $ | 86 | $ | 70 | $ | 352 | |||||
The primary componentsdifference between public finance loss expense and economic development in 2022 was primarily attributable to the release of unearned premium reserve on policies that were extinguished under the Insurance segment2022 Puerto Rico Resolutions. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were as follows:
exposures. For additional information on the expected timing of net expected losses to be expensed see Item 8, Financial Statements and Supplementary Data, Note 7,5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Losses.Insurance.
The decrease in other operating expenses to $84 million in 2022 from $98 million in 2021 was primarily attributable to the write-off of a $16 million intangible asset attributable to Municipal Assurance Corp. (MAC) insurance licenses in 2021 that did not recur in 2022. MAC was merged with and Amortizationinto AGM on April 1, 2021. See Item 8, Financial Statements and Supplementary Data, Note 11, Goodwill and Other Intangible Assets, for additional information.
Financial Strength Ratings
Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of DAC
| S&P | KBRA | Moody’s | A.M. Best Company, Inc. | ||||||||||||||||||||
| AGM | AA (stable) (7/8/22) | AA+ (stable) (10/21/22) | A1 (stable) (3/18/22) | — | |||||||||||||||||||
| AGC | AA (stable) (7/8/22) | AA+ (stable) (10/21/22) | (1) | — | |||||||||||||||||||
| AG Re | AA (stable) (7/8/22) | — | — | — | |||||||||||||||||||
| AGRO | AA (stable) (7/8/22) | — | — | A+ (stable) (7/22/22) | |||||||||||||||||||
| AGUK | AA (stable) (7/8/22) | AA+ (stable) (10/21/22) | A1 (stable) (3/18/22) | — | |||||||||||||||||||
| AGE | AA (stable) (7/8/22) | AA+ (stable) (10/21/22) | — | — | |||||||||||||||||||
____________________
(1) AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. On March 18, 2022, Moody’s upgraded the financial strength rating of AGC to A2 (stable) from A3 (stable).
Ratings are subject to continuous rating agency review and benefit expenses increased in 2019 compared with 2018 primarily duerevision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to higher bonuseach of its companies, and share-based compensation expenses, which were offset by higher deferred costs as a result of increased new business production. Other operating expensessuch assessment may request that a rating agency add or drop a rating from certain of its companies. There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL’s insurance subsidiaries in the future or cease to rate one or more of AGL’s insurance subsidiaries, either voluntarily or at the request of that subsidiary.
For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “—Liquidity and amortization of DAC increased in 2019 compared with 2018 primarily due to higher professional fees and amortization of DAC resulting from increased premium earned for specific underwriting years, which were partially offset by lower acquisition related expenses, which related to the SGI Transaction in 2018.
Asset Management Segment Results
Asset Management Segment Results
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Segment revenues | |||||||||||||||||
| Management fees (1) | $ | 85 | $ | 76 | $ | 59 | |||||||||||
| Performance fees | 21 | 1 | 1 | ||||||||||||||
| Foreign exchange gains (losses) on remeasurement and other income (loss) | 6 | 6 | 6 | ||||||||||||||
| Total segment revenues | 112 | 83 | 66 | ||||||||||||||
| Segment expenses | |||||||||||||||||
| Employee compensation and benefit expenses | 80 | 67 | 67 | ||||||||||||||
| Interest expense | 1 | 1 | — | ||||||||||||||
| Other operating expenses (1) (2) | 38 | 40 | 61 | ||||||||||||||
| Total segment expenses | 119 | 108 | 128 | ||||||||||||||
| Segment adjusted operating income (loss) before income taxes | (7) | (25) | (62) | ||||||||||||||
| Less: Provision (benefit) for income taxes | (1) | (6) | (12) | ||||||||||||||
| Segment adjusted operating income (loss) | $ | (6) | $ | (19) | $ | (50) | |||||||||||
_____________________
| Year Ended December 31, 2019 | |||
| (in millions) | |||
| Revenues | |||
| Management fees: | |||
| CLOs | $ | 3 | |
| Opportunity funds | 2 | ||
| Wind-down funds | 13 | ||
| Total management fees | 18 | ||
| Performance fees | 4 | ||
| Total asset management fees | 22 | ||
| Total revenues | 22 | ||
| Expenses | |||
| Restructuring expenses | 7 | ||
| Amortization of intangible assets | 3 | ||
| Employee compensation and benefit expenses | 17 | ||
| Other operating expenses | 7 | ||
| Total expenses | 34 | ||
| Adjusted operating income (loss) before income taxes | (12 | ) | |
| Provision (benefit) for income taxes | (2 | ) | |
| Adjusted operating income (loss) | $ | (10 | ) |
(1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the consolidated statement of operations such reimbursable expenses are shown gross as revenues.
(2) Includes amortization of intangible assets of $11 million in 2022, $12 million in 2021 and $13 million in 2020.
Management and Performance Fees
Management fees fromare generated by CLOs, opportunity funds, liquid strategies, and certain of the wind-down funds. CLO fees are the net management fees that Assured Investment ManagementAssuredIM retains after rebating the portion of these fees that pertains to the CLO equityEquity that is held directly by Assured Investment Management funds. Gross management fees from CLOs, before rebates to Assured Investment Management funds, were $11 million for the fourth quarter of 2019.
AssuredIM Funds. Management fees from opportunity funds forand liquid strategies include funds that were launched since the quarter are attributable to aBlueMountain Acquisition in which the Insurance segment’s U.S. Insurance Subsidiaries invest as well as with two previously established opportunity fund. During the fourth quarter of 2019, thefunds in their harvest periods. The Company launched two newalso generates fees from legacy hedge and opportunity funds with capitalnow subject to an orderly wind-down.
Management Fees
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| CLOs | $ | 48 | $ | 48 | $ | 23 | |||||||||||
| Opportunity funds and liquid strategies | 35 | 20 | 11 | ||||||||||||||
| Wind-down funds | 2 | 8 | 25 | ||||||||||||||
| Total management fees | $ | 85 | $ | 76 | $ | 59 | |||||||||||
Fees from opportunity funds increased primarily due to higher third party AUM in healthcare funds. Fees from the Company's insurance subsidiarieswind-down funds decreased as distributions to investors continued. As of $142December 31, 2022, AUM of the wind-down funds was $182 million which are expected to earn management fees beginning in 2020.compared with $582 million as of December 31, 2021.
Performance fees and increased compensation expenses in 2022 were primarily derived from the achievement of performance criteria of two funds currently in wind-down. Funds that do not hit high-water marks or return hurdles are not eligible to receive performance fees for the year. Distributions to investors in the wind-down funds are expected to continue, at least throughout 2020.
Expenses
Expenses primarily consist of employee compensation and benefits, which included $7 million in restructuring expenses as the Company repositioned Assured Investment Management and right-sized the asset management business. Remainingalso include other operating expenses primarily consist of depreciationsuch as rent, professional fees, placement fees, and amortization related to the leases held by Assured Investment Management in New York and London.depreciation. Amortization of finite-lived intangible assets which mainly consist of Assured Investment Management'sAssuredIM’s CLO and investment management contracts and its CLO distribution network as discussed below.
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Goodwill and Intangible Assets
As of December 31, 2022, the Company had $117 million in goodwill and $40 million in finite-lived intangible assets associated with the BlueMountain Acquisition. To date, there have been no impairments of goodwill or finite-lived intangible assets. Amortization expense associated with the finite-lived intangible assets was $3$11 million, during$12 million and$13 million for the fourth quarter of 2019.years ended December 31, 2022, 2021 and 2020, respectively.
Assets Under Management
The Company uses AUM as a metric to measure progress in its Asset Management segment. Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM. However, the Company believes that AUM is a useful metric for assessing the relative size and scope of the Company’s asset management business. The Company uses measures of its AUM in its decision makingdecision-making process and intends to useuses 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'sAssuredIM’s CLOs, including CLO equityEquity that may be held by Assured Investment Management funds.AssuredIM Funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji). BlueMountain, which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM FujiFuji-advised CLOs, but rather has entered into afollowing the sale, AssuredIM sub-advises and continues to provide personnel and other services agreement and a secondment agreement withto BM Fuji pursuant to which BlueMountain provides certain services associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and actsa personnel and services agreement, consistent with past practices; and
•the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments. Changes in the capacityNAV attributable to movements in fund value of service provider.certain private equity funds are reported on a quarter lag.
The Company'sCompany’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 ManagementAssuredIM 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 ManagementAssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in Assured Investment Management's funds.AssuredIM Funds. For CLOs, this also includes CLO equityEquity that may be held by Assured Investment Management's funds.AssuredIM Funds.
“Intercompany assets under management” or “Intercompany AUM” refers to the assets Assured Investment ManagementAssuredIM manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners'partners’ investments of BlueMountainAssuredIM (or its affiliates) into the funds.AssuredIM 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.funds.
“Fee earning assets under management” or “Fee Earning AUM” refers to assets where Assured Investment ManagementAssuredIM 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 ManagementAssuredIM does not collect fees or has elected to waive or rebate fees to investors. Assured Investment ManagementAssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with Assured Investment ManagementAssuredIM and/or the Company. Further, to the extent that the Company'sCompany’s wind-down and/or opportunity funds are invested in Assured Investment ManagementAssuredIM managed CLOs, Assured Investment ManagementAssuredIM may rebate any management fees and/or performance compensationfees 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.AssuredIM.
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Roll Forward of Assets Under Management
| CLOs | Opportunity Funds | Wind-Down Funds | Total | ||||||||||||
| (in millions) | |||||||||||||||
| Rollforward: | |||||||||||||||
| AUM, October 1, 2019 | $ | 11,844 | $ | 923 | $ | 5,528 | $ | 18,295 | |||||||
| Inflows | 977 | 165 | — | 1,142 | |||||||||||
| Outflows: | |||||||||||||||
| Redemptions | — | — | (171 | ) | (171 | ) | |||||||||
| Distributions | (92 | ) | (43 | ) | (1,126 | ) | (1,261 | ) | |||||||
| Total outflows | (92 | ) | (43 | ) | (1,297 | ) | (1,432 | ) | |||||||
| Net flows | 885 | 122 | (1,297 | ) | (290 | ) | |||||||||
| Change in fund value | 29 | (22 | ) | (185 | ) | (178 | ) | ||||||||
| AUM, end of period (1) | $ | 12,758 | $ | 1,023 | $ | 4,046 | $ | 17,827 | |||||||
| 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 | |||||||||||
| CLOs (1) | Opportunity Funds (2) | Liquid Strategies (3) | Wind-Down Funds | Total | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| AUM, December 31, 2021 | $ | 14,699 | $ | 1,824 | $ | 389 | $ | 582 | $ | 17,494 | |||||||||||||||||||
| Inflows - third party | 1,049 | 315 | 21 | — | 1,385 | ||||||||||||||||||||||||
| Inflows - intercompany | 165 | — | 105 | — | 270 | ||||||||||||||||||||||||
| Outflows: | |||||||||||||||||||||||||||||
| Redemptions | — | — | — | — | — | ||||||||||||||||||||||||
| Distributions | (525) | (290) | (252) | (399) | (1,466) | ||||||||||||||||||||||||
| Total outflows | (525) | (290) | (252) | (399) | (1,466) | ||||||||||||||||||||||||
| Net flows | 689 | 25 | (126) | (399) | 189 | ||||||||||||||||||||||||
| Change in value | (238) | 35 | (15) | (1) | (219) | ||||||||||||||||||||||||
| AUM, December 31, 2022 | $ | 15,150 | $ | 1,884 | $ | 248 | $ | 182 | $ | 17,464 | |||||||||||||||||||
_____________________
(1) CLOs inflows and outflows include $105 million in 2022 related to the transfer of assets between two CLO funds. (2) Opportunity funds inflows in 2022 are primarily related to the healthcare strategy fund. Distributions from opportunity funds include $115 million related to the AssuredIM Funds created prior to the BlueMountain Acquisition. As of December 31, 2022, AUM related to these funds was $68 million. (3) Liquid strategies’ inflows and outflows in 2022 relate to the transfer of assets between funds. Year Ended December 31, 2021
97 Components of Assets Under Management
_____________________ (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Division Results
Corporate Division Results
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Revenues | $ | 4 | $ | 2 | $ | 9 | |||||||||||
| Expenses | |||||||||||||||||
| Interest expense | 89 | 96 | 95 | ||||||||||||||
| Loss on extinguishment of debt | — | 175 | — | ||||||||||||||
| Employee compensation and benefit expenses | 30 | 21 | 18 | ||||||||||||||
| Other operating expenses | 24 | 20 | 19 | ||||||||||||||
| Total expenses | 143 | 312 | 132 | ||||||||||||||
| Equity in earnings (losses) of investees | — | — | (6) | ||||||||||||||
| Adjusted operating income (loss) before income taxes | (139) | (310) | (129) | ||||||||||||||
| Less: Provision (benefit) for income taxes | (5) | (47) | (18) | ||||||||||||||
| Adjusted operating income (loss) | $ | (134) | $ | (263) | $ | (111) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Revenues | |||||||||||
| Net investment income | $ | 4 | $ | 6 | $ | 2 | |||||
| Other income (loss) (1) | (1 | ) | (34 | ) | (10 | ) | |||||
| Total revenues | 3 | (28 | ) | (8 | ) | ||||||
| Expenses | |||||||||||
| Interest expense | 94 | 97 | 100 | ||||||||
| Employee compensation and benefit expenses | 17 | 18 | 16 | ||||||||
| Other operating expenses | 22 | 14 | 13 | ||||||||
| Total expenses | 133 | 129 | 129 | ||||||||
| Adjusted operating income (loss) before income taxes | (130 | ) | (157 | ) | (137 | ) | |||||
| Provision (benefit) for income taxes | (19 | ) | (61 | ) | (54 | ) | |||||
| Adjusted operating income (loss) | $ | (111 | ) | $ | (96 | ) | $ | (83 | ) | ||
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acquisition of AGMH in 2009.
Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $10 million in both 2022 and 2021, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies, Intercompany Loans Payable”, for additional information.
Other (Effect of FG VIEs and CIVs)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Effect of consolidating: | |||||||||||
| FG VIEs | $ | — | $ | (4 | ) | $ | 11 | ||||
| Investment vehicles | — | — | — | ||||||||
| VIE consolidation effect | $ | — | $ | (4 | ) | $ | 11 | ||||
The types of variable interest entities (VIEs) the Company consolidates when it is deemed to be the primary beneficiary include (1)primarily include: (i) entities whose debt obligations the insurance subsidiaries insure,insure; (ii) custodial trusts established in connection with the consummation of the 2022 Puerto Rico Resolutions; and (2)(iii) investment vehicles such as collateralized financing entities, CLO warehouses and investment funds managed by the Asset Management subsidiaries, in which the insurance company subsidiaries have a variable interest (consolidated investment vehicles).AssuredIM Funds. The Company eliminates the effects of intercompany transactions between consolidatedits FG VIEs and CIVs, and its insurance and asset management subsidiaries, as well as intercompany transactions between consolidated VIEs.CIVs.
Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows. The consolidated investment vehicles have no net effect onflows, and includes: (i) the net income attributable toestablishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs; (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees and (iv) establishing noncontrolling interest for amounts not owned by the Company. The economic interesteffect of the Company holdsU.S. Insurance Subsidiaries’ ownership interests in consolidated fundsCIVs is presented in the Insurance segment. segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“assets of CIVs,” “liabilities of CIVs,” and redeemable and non-redeemable noncontrolling interest) on a consolidated basis.
The ownership intereststable below reflects the effect of consolidating FG VIEs and CIVs on the consolidated statements of operations. The amounts represent: (i) the revenues and expenses of the Company'sFG VIEs and the CIVs; and (ii) the consolidation adjustments and eliminations between consolidated funds,FG VIEs or CIVs and the operating and investment subsidiaries.
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Effect of Consolidating FG VIEs and CIVs on the Consolidated Statements of Operations
Increase (Decrease)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Effect on Financial Statement Line Item | (in millions) | |||||||||||||||||||
| Fair value gains (losses) on FG VIEs (1) | $ | 22 | $ | 23 | $ | (10) | ||||||||||||||
| Fair value gains (losses) on CIVs | 17 | 127 | 41 | |||||||||||||||||
| Equity in earnings (losses) of investees (2) | 12 | (50) | (28) | |||||||||||||||||
| Other (3) | (44) | (34) | (12) | |||||||||||||||||
| Effect on income before tax | 7 | 66 | (9) | |||||||||||||||||
| Less: Tax provision (benefit) | — | 6 | (3) | |||||||||||||||||
| Effect on net income (loss) | 7 | 60 | (6) | |||||||||||||||||
| Less: Effect on noncontrolling interests (4) | 13 | 30 | 6 | |||||||||||||||||
| Effect on net income (loss) attributable to AGL | $ | (6) | $ | 30 | $ | (12) | ||||||||||||||
| By Type of VIE | ||||||||||||||||||||
| FG VIEs | $ | 4 | $ | (1) | $ | (14) | ||||||||||||||
| CIVs | (10) | 31 | 2 | |||||||||||||||||
| Effect on net income (loss) attributable to AGL | $ | (6) | $ | 30 | $ | (12) | ||||||||||||||
____________________
(1) Changes in fair value of the FG VIEs’ assets and liabilities that are attributable to whichfactors other than (i) changes in the Company has no economic rights, are reflected as either redeemable or nonredeemable noncontrolling interestsCompany’s own credit risk on FG VIE liabilities with recourse, and (ii) unrealized gains and losses on available-for-sale fixed maturity securities.
(2) Represents the elimination of the equity in earnings (losses) of investees of AGAS and the other subsidiaries’ investments in the consolidated fundsAssuredIM Funds.
(3) Includes net earned premiums, net investment income, asset management fees, foreign exchange gains (losses) on remeasurement, other income (loss), loss and LAE (benefit) and other operating expenses.
(4) Represents the proportion of consolidated AssuredIM Funds’ income that is not attributable to AGAS’ or any other subsidiaries’ ownership interest.
The net effect of consolidating CIVs in the Company's consolidated financial statements. See2021 included a $31 million gain on consolidation as described in Item 8, Financial Statements and Supplementary Data, Note 14,8, Financial Guaranty Variable Interest Entities for additional information.and Consolidated Investment Vehicles.
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Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 124 | $ | 389 | $ | 362 | |||||||||||
| Less pre-tax adjustments: | |||||||||||||||||
| Realized gains (losses) on investments | (56) | 15 | 18 | ||||||||||||||
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (18) | (64) | 65 | ||||||||||||||
| Fair value gains (losses) on CCS | 24 | (28) | (1) | ||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (110) | (21) | 42 | ||||||||||||||
| Total pre-tax adjustments | (160) | (98) | 124 | ||||||||||||||
| Less tax effect on pre-tax adjustments | 17 | 17 | (18) | ||||||||||||||
| Adjusted operating income (loss) | $ | 267 | $ | 470 | $ | 256 | |||||||||||
Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $-, $6 and $(3)) included in adjusted operating income | $ | (6) | $ | 30 | $ | (12) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Net income (loss) attributable to AGL | $ | 402 | $ | 521 | $ | 730 | |||||
| Less pre-tax adjustments: | |||||||||||
| Realized gains (losses) on investments | 22 | (32 | ) | 40 | |||||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (10 | ) | 101 | 43 | |||||||
| Fair value gains (losses) on CCS (1) | (22 | ) | 14 | (2 | ) | ||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 22 | (32 | ) | 57 | |||||||
| Total pre-tax adjustments | 12 | 51 | 138 | ||||||||
| Less tax effect on pre-tax adjustments | (1 | ) | (12 | ) | (69 | ) | |||||
| Adjusted operating income (loss) | $ | 391 | $ | 482 | $ | 661 | |||||
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Gross realized gains on sales of available-for-sale securities | $ | 3 | $ | 20 | $ | 27 | |||||||||||
| Gross realized losses on sales of available-for-sale securities | (45) | (5) | (5) | ||||||||||||||
| Net foreign currency gains (losses) | (4) | 2 | 6 | ||||||||||||||
| Change in allowance for credit losses and intent to sell | (21) | (7) | (17) | ||||||||||||||
| Other net realized gains (losses) | 11 | 5 | 7 | ||||||||||||||
| Net realized investment gains (losses) | $ | (56) | $ | 15 | $ | 18 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Gross realized gains on available-for-sale securities | $ | 63 | $ | 20 | $ | 95 | |||||
| Gross realized losses on available-for-sale securities | (5 | ) | (12 | ) | (12 | ) | |||||
| Net realized gains (losses) on other invested assets | (1 | ) | (1 | ) | — | ||||||
| OTTI | (35 | ) | (39 | ) | (43 | ) | |||||
| Net realized investment gains (losses) | $ | 22 | $ | (32 | ) | $ | 40 | ||||
Gross realized losses on sales of available-for-sale securities in 2022 were primarily attributable to sales of Puerto Rico New Recovery Bonds. Other net realized gains mainly consisted of the following in each year presented:
Non-Credit ImpairmentImpairment-Related Unrealized Fair Value Gains (Losses) on Credit Derivatives
Changes in the fair value of credit derivatives occur because of changes in the Company'sCompany’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-economicNon-credit impairment-related 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 doesthey do 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.
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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. 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 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 yearssince 2009 and, as of December 31, 2019,2022, 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 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement, for additional information.
During 2019,2022, non-credit impairmentimpairment-related unrealized fair value gainslosses were generated primarily as a result of price improvements on the underlying collateral of the Company's CDS. These unrealized fair value gains werewider asset spreads, partially offset by unrealized fair value losses resulting from wider implied net spreads driven by the decreased marketincreased cost to buy protection inon AGC, as the market cost of AGC’s namecredit protection increased during the period.period, and changes in discount rates. 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,increased, the implied spreads that the Company (or another comparable entity) would expect to receive on these transactions increased.decreased.
During 2018,2021, non-credit impairment fair value gains were primarily generated by CDS terminations, run-off of CDS par and price improvements on the underlying collateral of the Company’s CDS. In addition, unrealized fair value gains were generated by the increase in credit given to the primary insurer on one of the Company's second-to-pay CDS policies during the period. The unrealized fair value gains were partially offset byimpairment-related unrealized fair value losses resulting from wider implied net spreads driven bywere generated primarily as a result of the decreased cost to buy protection in AGC’s name,on AGC, as the market cost of AGC’s credit protection decreased during the period.
Fair Value Gains (Losses) on CCS
Fair value gains on CCS in 2022 were primarily driven by an increase in LIBOR during the year. Fair value losses on CCS in 2019 and 20172021 were primarily due to a tightening indriven by tightened market spreads during the year. Fair value gains on CCS in 2018 were primarily due to a widening in market spreads during 2018. Fair value(losses) of CCS isare heavily affected by, and in part fluctuatesfluctuate with, changes in market spreads and 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 yearsperiods primarily relate to remeasurement of long-dated premiums receivable, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and, to a lesser extent, the euro relative to the U.S. dollar. Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves were $(110) million and $(21) million in 2022 and 2021, respectively. Approximately 74% and 78% of gross premiums receivable, net of commissions payable at December 31, 2022 and December 31, 2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Premiums on European infrastructure and structured finance transactions typically are paid, in whole or in part , on an installment basis, whereas premiums on U.S. public finance transactions are often paid upfront.
The following table presents the foreign exchange rates as of balance sheet dates.
Foreign Exchange Rates
U.S. Dollar Per Foreign Currency
| As of December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Pound sterling | $1.208 | $1.353 | $1.367 | ||||||||||||||||||||||||||||||||
| Euro | $1.071 | $1.137 | $1.222 | ||||||||||||||||||||||||||||||||
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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.
The Company believes its presentation of non-GAAP financial measures along with the effect of VIE consolidation, 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.
GAAP requires the Company to consolidate certain entities where it is deemed to be the primary beneficiary which include:
•FG VIEs, and investment vehicles. Thewhich the Company does not own such FG VIEs and where its exposure is limited to its obligation under the financial guaranty insurance contract, and
•CIVs in which certain subsidiaries invest and which are managed by AssuredIM.
The Company discloses the effect of FG VIE and CIV consolidation that is capturedembedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment results. The economic effectsegment.
Management of its consolidated investment vehicles is also captured in its Insurance segment results through the insurance subsidiaries' economic interest in such vehicles. ManagementCompany and theAGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV 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 these core financial measures in its decision makingdecision-making process for and in its calculation of certain components of management compensation. Wherever possible,The financial measures that the Company has separately discloseduses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE consolidation. and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; (4) PVP, and (5) gross third-party assets raised.
Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measuremeasures 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.
Adjusted operating income, further adjusted for the effect of FG VIE and CIV 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 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 underwritingoperating results and financial condition of the Company and presents the results of operations of the Company excluding the fair value adjustments on credit derivatives and CCS that are not expected to result in economic gain or loss, as well as other adjustments described below. Management further adjusts adjusted operating income by removing VIE consolidation to arrive at its core operating income measure.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-impairmentnon-credit impairment-related 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'sCompany’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'sCompany’s credit spreads, price indications on the Company'sCompany’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.
See “— Results of Operations — Reconciliation to GAAP”, for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Adjusted Operating Shareholders’ Equity and Adjusted Book Value
Management believes that adjusted operating shareholders’ equity is a useful measure because it presents the equity of the Company excludingexcludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss, along with other adjustments described below. Management further adjusts adjusted operating shareholders’ equity by removing VIE consolidation to arrive at its core operating shareholders' equity and core adjusted book value.loss.
1) Elimination of non-credit-impairmentnon-credit impairment-related 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'sCompany’s credit spreads, price indications on the Company'sCompany’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 shouldwould 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 FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in adjustedAdjusted book value per share, further adjusted for FG VIE and CIV 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.
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2) Addition of the net present value of estimated net future revenue. See below.
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
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| After-Tax | Per Share | After-Tax | Per Share | ||||||||||||||||||||
| (dollars in millions, except share amounts) | |||||||||||||||||||||||
| Shareholders’ equity attributable to AGL | $ | 5,064 | $ | 85.80 | $ | 6,292 | $ | 93.19 | |||||||||||||||
| Less pre-tax adjustments: | |||||||||||||||||||||||
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (71) | (1.21) | (54) | (0.80) | |||||||||||||||||||
| Fair value gains (losses) on CCS | 47 | 0.80 | 23 | 0.34 | |||||||||||||||||||
| Unrealized gain (loss) on investment portfolio | (523) | (8.86) | 404 | 5.99 | |||||||||||||||||||
| Less taxes | 68 | 1.15 | (72) | (1.07) | |||||||||||||||||||
| Adjusted operating shareholders’ equity | 5,543 | 93.92 | 5,991 | 88.73 | |||||||||||||||||||
| Pre-tax adjustments: | |||||||||||||||||||||||
| Less: Deferred acquisition costs | 147 | 2.48 | 131 | 1.95 | |||||||||||||||||||
| Plus: Net present value of estimated net future revenue | 157 | 2.66 | 160 | 2.37 | |||||||||||||||||||
| Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed | 3,428 | 58.10 | 3,402 | 50.40 | |||||||||||||||||||
| Plus taxes | (602) | (10.22) | (599) | (8.88) | |||||||||||||||||||
| Adjusted book value | $ | 8,379 | $ | 141.98 | $ | 8,823 | $ | 130.67 | |||||||||||||||
| Gain (loss) related to FG VIE and CIV consolidation included in: | |||||||||||||||||||||||
| Adjusted operating shareholders’ equity (net of tax provision of $4 and $5) | $ | 17 | $ | 0.28 | $ | 32 | $ | 0.47 | |||||||||||||||
| Adjusted book value (net of tax provision of $3 and $3) | 11 | 0.19 | 23 | 0.34 | |||||||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||
| After-Tax | Per Share | After-Tax | Per Share | ||||||||||||
(dollars in millions, except per share amounts) | |||||||||||||||
| Shareholders’ equity Attributable to AGL | $ | 6,639 | $ | 71.18 | $ | 6,555 | $ | 63.23 | |||||||
| Less pre-tax adjustments: | |||||||||||||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (56 | ) | (0.60 | ) | (45 | ) | (0.44 | ) | |||||||
| Fair value gains (losses) on CCS | 52 | 0.56 | 74 | 0.72 | |||||||||||
| Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | 486 | 5.21 | 247 | 2.39 | |||||||||||
| Less taxes | (89 | ) | (0.95 | ) | (63 | ) | (0.61 | ) | |||||||
| Adjusted operating shareholders’ equity | 6,246 | 66.96 | 6,342 | 61.17 | |||||||||||
| Pre-tax adjustments: | |||||||||||||||
| Less: Deferred acquisition costs | 111 | 1.19 | 105 | 1.01 | |||||||||||
| Plus: Net present value of estimated net future revenue | 192 | 2.05 | 204 | 1.96 | |||||||||||
| Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed | 3,296 | 35.34 | 3,005 | 28.98 | |||||||||||
| Plus taxes | (588 | ) | (6.30 | ) | (524 | ) | (5.04 | ) | |||||||
| Adjusted book value | $ | 9,035 | $ | 96.86 | $ | 8,922 | $ | 86.06 | |||||||
| Gain (loss) related to VIE consolidation included in adjusted operating shareholders' equity (net of tax provision of $2 and $1) | $ | 7 | $ | 0.07 | $ | 3 | $ | 0.03 | |||||||
| Gain (loss) related to VIE consolidation included in adjusted book value (net of tax benefit of $1 and $4) | $ | (4 | ) | $ | (0.05 | ) | $ | (15 | ) | $ | (0.15 | ) | |||
Net Present Value of Estimated Net Future Revenue
Management believes that this amount is a useful measure because it enables an evaluation of the present value of estimated net future estimated revenue for contracts other than financialnon-financial guaranty insurance contracts (such as specialty insurance and reinsurance contracts and credit derivatives). There is no corresponding GAAP financial measure.contracts. 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, for contracts without expected economic losses, and istaxes.
Future installment premiums are discounted at 6%. Estimated netthe 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 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.
105
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 forin the CompanyInsurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as premium supplements and additional installment premiumpremiums and fees on existing contracts as to which(which may result from supplements or fees or from the issuer has the right to call thenot calling an insured obligation but has not exercised such right, whether in insurance or credit derivative contractthe Company projected would be called), regardless of form, which management believes GAAP gross written premiums and the netchanges in fair value of credit derivative premiums received and receivable portion of net realized gains and other settlements on credit derivatives (Credit Derivative Realized Gains (Losses)) 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 in each case, at 6%.the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk freerisk-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 future earned or writteninstallment premiums and Credit Derivative Realized Gains (Losses) 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.
Reconciliation of GWP to PVP
| Year Ended December 31, 2022 | |||||||||||||||||||||||||||||
| Public Finance | Structured Finance | ||||||||||||||||||||||||||||
| U.S. | Non - U.S. | U.S. | Non - U.S. | Total | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| GWP | $ | 248 | $ | 75 | $ | 37 | $ | — | $ | 360 | |||||||||||||||||||
| Less: Installment GWP and other GAAP adjustments (1) | 40 | 75 | 30 | — | 145 | ||||||||||||||||||||||||
| Upfront GWP | 208 | — | 7 | — | 215 | ||||||||||||||||||||||||
| Plus: Installment premiums and other (2) | 49 | 68 | 36 | 7 | 160 | ||||||||||||||||||||||||
| PVP | $ | 257 | $ | 68 | $ | 43 | $ | 7 | $ | 375 | |||||||||||||||||||
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||
| Public Finance | Structured Finance | ||||||||||||||||||||||||||||
| U.S. | Non - U.S. | U.S. | Non - U.S. | Total | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| GWP | $ | 231 | $ | 89 | $ | 51 | $ | 6 | $ | 377 | |||||||||||||||||||
| Less: Installment GWP and other GAAP adjustments (1) | 43 | 65 | 44 | 6 | 158 | ||||||||||||||||||||||||
| Upfront GWP | 188 | 24 | 7 | — | 219 | ||||||||||||||||||||||||
| Plus: Installment premiums and other (2) | 47 | 55 | 35 | 5 | 142 | ||||||||||||||||||||||||
| PVP | $ | 235 | $ | 79 | $ | 42 | $ | 5 | $ | 361 | |||||||||||||||||||
106
| Year Ended December 31, 2019 | |||||||||||||||||||
| Public Finance | Structured Finance | ||||||||||||||||||
| U.S. | Non - U.S. | U.S. | Non - U.S. | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| GWP | $ | 198 | $ | 417 | $ | 57 | $ | 5 | $ | 677 | |||||||||
| Less: Installment GWP and other GAAP adjustments (1) | (3 | ) | 417 | 55 | — | 469 | |||||||||||||
| Upfront GWP | 201 | — | 2 | 5 | 208 | ||||||||||||||
| Plus: Installment premium PVP | — | 211 | 43 | 1 | 255 | ||||||||||||||
| PVP | $ | 201 | $ | 211 | $ | 45 | $ | 6 | $ | 463 | |||||||||
| Year Ended December 31, 2018 | |||||||||||||||||||
| Public Finance | Structured Finance | ||||||||||||||||||
| U.S. | Non - U.S. | U.S. | Non - U.S. | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| GWP | $ | 320 | $ | 115 | $ | 167 | $ | 10 | $ | 612 | |||||||||
| Less: Installment GWP and other GAAP adjustments (1) | 34 | 75 | 9 | 1 | 119 | ||||||||||||||
| Upfront GWP | 286 | 40 | 158 | 9 | 493 | ||||||||||||||
| Plus: Installment premium PVP (2) | 105 | 54 | 8 | 3 | 170 | ||||||||||||||
| PVP | $ | 391 | $ | 94 | $ | 166 | $ | 12 | $ | 663 | |||||||||
| Year Ended December 31, 2017 | Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| GWP | $ | 190 | $ | 105 | $ | (1 | ) | $ | 13 | $ | 307 | GWP | $ | 294 | $ | 142 | $ | 18 | $ | — | $ | 454 | ||||||||||||||||||||||||||
| Less: Installment GWP and other GAAP adjustments (1) | (3 | ) | 103 | (1 | ) | — | 99 | Less: Installment GWP and other GAAP adjustments (1) | 33 | 141 | 17 | — | 191 | |||||||||||||||||||||||||||||||||||
| Upfront GWP | 193 | 2 | — | 13 | 208 | Upfront GWP | 261 | 1 | 1 | — | 263 | |||||||||||||||||||||||||||||||||||||
| Plus: Installment premium PVP | 3 | 64 | 12 | 2 | 81 | |||||||||||||||||||||||||||||||||||||||||||
| Plus: Installment premiums and other (2) | Plus: Installment premiums and other (2) | 31 | 81 | 13 | 2 | 127 | ||||||||||||||||||||||||||||||||||||||||||
| PVP | $ | 196 | $ | 66 | $ | 12 | $ | 15 | $ | 289 | PVP | $ | 292 | $ | 82 | $ | 14 | $ | 2 | $ | 390 | |||||||||||||||||||||||||||
_____________
(1) Includes the 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.
(2) Includes the present value of future premiums and fees on new business paid in installments discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturities such as Loss Mitigation Securities. The year 2022 also includes the present value of future premiums and fees associated with a financial guarantee written by the Company that, under GAAP, is accounted for under Accounting Standards Codification (ASC) 460, Guarantees.
Insured Portfolio
Financial Guaranty Exposure
The Company measures its financial guaranty exposurefollowing tables present information in termsrespect 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 guaranteesinsured portfolio to supplement the disclosures and discussion provided in its Insurance segment and to understand its relative position in the fixed income markets.
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 FG VIE consolidation)., along with each sector’s average rating.
107
Financial Guaranty Portfolio
Net Par Outstanding and Average Internal Rating by Sector
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Sector | Net Par Outstanding | Average Rating | Net Par Outstanding | Average Rating | ||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance: | ||||||||||||||||||||||||||
| General obligation | $ | 71,868 | A- | $ | 72,896 | A- | ||||||||||||||||||||
| Tax backed | 33,752 | A- | 35,726 | A- | ||||||||||||||||||||||
| Municipal utilities | 26,436 | A- | 25,556 | A- | ||||||||||||||||||||||
| Transportation | 19,688 | A- | 17,241 | BBB+ | ||||||||||||||||||||||
| Healthcare | 11,304 | BBB+ | 9,588 | BBB+ | ||||||||||||||||||||||
| Higher education | 7,137 | A- | 6,927 | A- | ||||||||||||||||||||||
| Infrastructure finance | 6,955 | A- | 6,329 | A- | ||||||||||||||||||||||
| Housing revenue | 959 | BBB- | 1,000 | BBB- | ||||||||||||||||||||||
| Investor-owned utilities | 332 | A- | 611 | A- | ||||||||||||||||||||||
| Renewable energy | 180 | A- | 193 | A- | ||||||||||||||||||||||
| Other public finance | 1,025 | BBB | 1,152 | A- | ||||||||||||||||||||||
| Total U.S. public finance | 179,636 | A- | 177,219 | A- | ||||||||||||||||||||||
| Non-U.S public finance: | ||||||||||||||||||||||||||
| Regulated utilities | 17,855 | BBB+ | 18,814 | BBB+ | ||||||||||||||||||||||
| Infrastructure finance | 13,915 | BBB | 16,475 | BBB | ||||||||||||||||||||||
| Sovereign and sub-sovereign | 9,526 | A+ | 10,886 | A+ | ||||||||||||||||||||||
| Renewable energy | 2,086 | A- | 2,398 | A- | ||||||||||||||||||||||
| Pooled infrastructure | 1,081 | AAA | 1,372 | AAA | ||||||||||||||||||||||
| Total non-U.S. public finance | 44,463 | BBB+ | 49,945 | BBB+ | ||||||||||||||||||||||
| Total public finance | 224,099 | A- | 227,164 | A- | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. structured finance: | ||||||||||||||||||||||||||
| Life insurance transactions | 3,879 | AA- | 3,431 | AA- | ||||||||||||||||||||||
| RMBS | 1,956 | BBB- | 2,391 | BB+ | ||||||||||||||||||||||
| Pooled corporate obligations | 625 | AAA | 534 | AA+ | ||||||||||||||||||||||
| Financial products | 453 | AA- | 770 | AA- | ||||||||||||||||||||||
| Consumer receivables | 437 | A | 583 | A+ | ||||||||||||||||||||||
| Other structured finance | 878 | BBB+ | 665 | BBB+ | ||||||||||||||||||||||
| Total U.S. structured finance | 8,228 | A | 8,374 | A | ||||||||||||||||||||||
| Non-U.S. structured finance: | ||||||||||||||||||||||||||
| Pooled corporate obligations | 344 | AAA | 351 | AAA | ||||||||||||||||||||||
| RMBS | 263 | A- | 325 | A | ||||||||||||||||||||||
| Other structured finance | 324 | AA- | 178 | AA | ||||||||||||||||||||||
| Total non-U.S structured finance | 931 | AA | 854 | AA | ||||||||||||||||||||||
| Total structured finance | 9,159 | A | 9,228 | A | ||||||||||||||||||||||
| Total net par outstanding | $ | 233,258 | A- | $ | 236,392 | A- | ||||||||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||
| Sector | Net Par Outstanding | Avg. Rating | Net Par Outstanding | Avg. Rating | ||||||||
| (dollars in millions) | ||||||||||||
| Public finance: | ||||||||||||
| U.S.: | ||||||||||||
| General obligation | $ | 73,467 | A- | $ | 78,800 | A- | ||||||
| Tax backed | 37,047 | A- | 40,616 | A- | ||||||||
| Municipal utilities | 26,195 | A- | 28,402 | A- | ||||||||
| Transportation | 16,209 | BBB+ | 15,197 | A- | ||||||||
| Healthcare | 7,148 | A- | 6,750 | A- | ||||||||
| Higher education | 5,916 | A- | 6,643 | A- | ||||||||
| Infrastructure finance | 5,429 | A- | 5,489 | A- | ||||||||
| Housing revenue | 1,321 | BBB+ | 1,435 | BBB+ | ||||||||
| Investor-owned utilities | 655 | A- | 846 | A- | ||||||||
| Renewable energy | 210 | A- | 215 | BBB+ | ||||||||
| Other public finance—U.S. | 1,890 | A- | 2,169 | A- | ||||||||
| Total public finance—U.S. | 175,487 | A- | 186,562 | A- | ||||||||
| Non-U.S.: | ||||||||||||
| Regulated utilities | 18,995 | BBB+ | 18,124 | BBB+ | ||||||||
| Infrastructure finance | 17,952 | BBB | 17,166 | BBB | ||||||||
| Sovereign and sub-sovereign | 11,341 | A+ | 6,094 | A | ||||||||
| Renewable energy | 1,555 | A | 1,346 | A | ||||||||
| Pooled infrastructure | 1,416 | AAA | 1,373 | AAA | ||||||||
| Total public finance—non-U.S. | 51,259 | A- | 44,103 | BBB+ | ||||||||
| Total public finance | 226,746 | A- | 230,665 | A- | ||||||||
| Structured finance: | ||||||||||||
| U.S.: | ||||||||||||
| RMBS | 3,546 | BBB- | 4,270 | BBB- | ||||||||
| Life insurance transactions | 1,776 | AA- | 1,435 | A+ | ||||||||
| Pooled corporate obligations | 1,401 | AA- | 1,215 | AA- | ||||||||
| Financial products | 1,019 | AA- | 1,094 | AA- | ||||||||
| Consumer receivables | 962 | A- | 1,255 | A- | ||||||||
| Other structured finance—U.S. | 596 | BBB+ | 675 | A- | ||||||||
| Total structured finance—U.S. | 9,300 | A- | 9,944 | A- | ||||||||
| Non-U.S.: | ||||||||||||
| RMBS | 427 | A | 576 | A- | ||||||||
| Pooled corporate obligations | 55 | BB+ | 126 | A | ||||||||
| Other structured finance | 279 | A+ | 491 | A | ||||||||
| Total structured finance—non-U.S. | 761 | A | 1,193 | A | ||||||||
| Total structured finance | 10,061 | A- | 11,137 | A- | ||||||||
| Total net par outstanding | $ | 236,807 | A- | $ | 241,802 | A- | ||||||
108
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||
| Rating Category | Net Par Outstanding | % | Net Par Outstanding | % | ||||||||||
| (dollars in millions) | ||||||||||||||
| AAA | $ | 4,361 | 1.8 | % | $ | 4,618 | 1.9 | % | ||||||
| AA | 29,037 | 12.3 | 27,021 | 11.2 | ||||||||||
| A | 111,329 | 47.0 | 119,415 | 49.4 | ||||||||||
| BBB | 83,574 | 35.3 | 80,588 | 33.3 | ||||||||||
| BIG | 8,506 | 3.6 | 10,160 | 4.2 | ||||||||||
| Total net par outstanding | $ | 236,807 | 100.0 | % | $ | 241,802 | 100.0 | % | ||||||
The tables below show the Company'sCompany’s ten largest U.S. public finance, U.S. structured finance and non-U.S. exposures by revenue source, excluding related authorities and public corporations, as of December 31, 2019:2022.
Ten Largest U.S. Public Finance Exposures
by Revenue Source
As of December 31, 20192022
| Net Par Outstanding | Percent of Total U.S. Public Finance Net Par Outstanding | Rating | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| New Jersey (State of) | $ | 3,130 | 1.7 | % | BBB | ||||||||||||
| Pennsylvania (Commonwealth of) | 2,271 | 1.3 | BBB+ | ||||||||||||||
| Metro Washington Airports Authority (Dulles Toll Road) | 1,630 | 0.9 | BBB+ | ||||||||||||||
| New York Metropolitan Transportation Authority | 1,568 | 0.9 | A- | ||||||||||||||
| Illinois (State of) | 1,312 | 0.7 | BBB- | ||||||||||||||
| Foothill/Eastern Transportation Corridor Agency, California | 1,309 | 0.7 | BBB+ | ||||||||||||||
| Alameda Corridor Transportation Authority, California | 1,261 | 0.7 | BBB+ | ||||||||||||||
| North Texas Tollway Authority | 1,239 | 0.7 | A+ | ||||||||||||||
| Port Authority of New York and New Jersey | 1,034 | 0.6 | BBB | ||||||||||||||
| CommonSpirit Health, Illinois | 1,000 | 0.6 | A- | ||||||||||||||
| Total of top ten U.S. public finance exposures | $ | 15,754 | 8.8 | % | |||||||||||||
| Net Par Outstanding | Percent of Total U.S. Public Finance Net Par Outstanding | Rating | ||||||
| (dollars in millions) | ||||||||
| New Jersey (State of) | $ | 4,224 | 2.4 | % | BBB | |||
| Pennsylvania (Commonwealth of) | 1,978 | 1.1 | A- | |||||
| Illinois (State of) | 1,803 | 1.1 | BBB | |||||
| New York Metropolitan Transportation Authority | 1,630 | 0.9 | A- | |||||
| Puerto Rico, General Obligation, Appropriations and Guarantees of the Commonwealth | 1,409 | 0.8 | CCC | |||||
| Puerto Rico Highways & Transportation Authority | 1,265 | 0.7 | CCC | |||||
| Chicago (City of) Illinois | 1,158 | 0.7 | BBB | |||||
| North Texas Tollway Authority | 1,120 | 0.6 | A | |||||
| California (State of) | 1,082 | 0.6 | AA- | |||||
| Wisconsin (State of) | 1,053 | 0.6 | A+ | |||||
| Total of top ten U.S. public finance exposures | $ | 16,722 | 9.5 | % | ||||
Ten Largest U.S. Structured Finance Exposures
As of December 31, 20192022
| Net Par Outstanding | Percent of Total U.S. Structured Finance Net Par Outstanding | Rating | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| Private US Insurance Securitization | $ | 1,100 | 13.4 | % | AA | ||||||||||||
| Private US Insurance Securitization | 910 | 11.1 | AA- | ||||||||||||||
| Private US Insurance Securitization | 500 | 6.1 | A | ||||||||||||||
| Private US Insurance Securitization | 400 | 4.8 | AA- | ||||||||||||||
| Private US Insurance Securitization | 395 | 4.8 | AA- | ||||||||||||||
| Private US Insurance Securitization | 386 | 4.6 | AA- | ||||||||||||||
| SLM Student Loan Trust 2007-A | 215 | 2.6 | AA | ||||||||||||||
| Private US Insurance Securitization | 129 | 1.6 | AA | ||||||||||||||
| Private Middle Market CLO | 129 | 1.6 | AAA | ||||||||||||||
| Option One 2007-FXD2 | 118 | 1.4 | CCC | ||||||||||||||
| Total of top ten U.S. structured finance exposures | $ | 4,282 | 52.0 | % | |||||||||||||
109
| Net Par Outstanding | Percent of Total U.S. Structured Finance Net Par Outstanding | Rating | ||||||
| (dollars in millions) | ||||||||
| Private US Insurance Securitization | $ | 530 | 5.7 | % | AA | |||
| Private US Insurance Securitization | 500 | 5.4 | AA- | |||||
| SLM Private Credit Student Trust 2007-A | 417 | 4.4 | A+ | |||||
| Private US Insurance Securitization | 340 | 3.7 | AA- | |||||
| Fortress Credit Opportunities VII CLO Limited | 257 | 2.8 | AA- | |||||
| Private US Insurance Securitization | 213 | 2.3 | AA- | |||||
| ABPCI Direct Lending Fund CLO I Ltd | 208 | 2.2 | A | |||||
| SLM Private Credit Student Loan Trust 2006-C | 194 | 2.1 | AA- | |||||
| Option One 2007-FXD2 | 177 | 1.9 | CCC | |||||
| Brightwood Fund III Static 2018-1, LLC | 159 | 1.7 | AA | |||||
| Total of top ten U.S. structured finance exposures | $ | 2,995 | 32.2 | % | ||||
Ten Largest Non-U.S. Exposures
As of December 31, 20192022
| Country | Net Par Outstanding | Percent of Total Non-U.S. Net Par Outstanding | Rating | |||||||
| (dollars in millions) | ||||||||||
| Southern Water Services Limited | United Kingdom | $ | 2,760 | 5.3 | % | A- | ||||
| Thames Water Utility Finance Plc | United Kingdom | 2,068 | 4.0 | A- | ||||||
| Hydro-Quebec, Province of Quebec | Canada | 2,013 | 3.9 | A+ | ||||||
| Southern Gas Networks PLC | United Kingdom | 1,739 | 3.3 | BBB | ||||||
| Societe des Autoroutes du Nord et de l'Est de France S.A. | France | 1,689 | 3.2 | BBB+ | ||||||
| Welsh Water PLC | United Kingdom | 1,652 | 3.2 | A- | ||||||
| Anglian Water Services Financing | United Kingdom | 1,502 | 2.9 | A- | ||||||
| National Grid Gas PLC | United Kingdom | 1,314 | 2.5 | BBB+ | ||||||
| British Broadcasting Corporation (BBC) | United Kingdom | 1,305 | 2.5 | A+ | ||||||
| Channel Link Enterprises Finance PLC | France, United Kingdom | 1,234 | 2.4 | BBB | ||||||
| Total of top ten non-U.S. exposures | $ | 17,276 | 33.2 | % | ||||||
| Country | Net Par Outstanding | Percent of Total Non-U.S. Net Par Outstanding | Rating | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Southern Water Services Limited | United Kingdom | $ | 2,199 | 4.8 | % | BBB | |||||||||||||||||
| Thames Water Utilities Finance Plc | United Kingdom | 1,811 | 4.0 | BBB | |||||||||||||||||||
| Southern Gas Networks PLC | United Kingdom | 1,806 | 4.0 | BBB | |||||||||||||||||||
| Dwr Cymru Financing Limited | United Kingdom | 1,635 | 3.6 | A- | |||||||||||||||||||
| Quebec Province | Canada | 1,498 | 3.3 | AA- | |||||||||||||||||||
| National Grid Gas PLC | United Kingdom | 1,390 | 3.1 | BBB+ | |||||||||||||||||||
| Anglian Water Services Financing PLC | United Kingdom | 1,215 | 2.7 | A- | |||||||||||||||||||
| Channel Link Enterprises Finance PLC | France, United Kingdom | 1,159 | 2.5 | BBB | |||||||||||||||||||
| Yorkshire Water Services Finance Plc | United Kingdom | 1,072 | 2.4 | BBB | |||||||||||||||||||
| British Broadcasting Corporation (BBC) | United Kingdom | 1,047 | 2.3 | A+ | |||||||||||||||||||
| Total of top ten non-U.S. exposures | $ | 14,832 | 32.7 | % | |||||||||||||||||||
| Number of Risks | Net Par Outstanding | Percent of Total Net Par Outstanding | |||||||
| (dollars in millions) | |||||||||
| U.S.: | |||||||||
| California | 1,318 | $ | 33,368 | 14.1 | % | ||||
| Pennsylvania | 665 | 15,895 | 6.7 | ||||||
| Texas | 1,090 | 14,860 | 6.3 | ||||||
| New York | 749 | 14,682 | 6.2 | ||||||
| Illinois | 602 | 13,977 | 5.9 | ||||||
| New Jersey | 337 | 10,504 | 4.4 | ||||||
| Florida | 266 | 7,107 | 3.0 | ||||||
| Michigan | 305 | 5,345 | 2.3 | ||||||
| Puerto Rico | 17 | 4,270 | 1.8 | ||||||
| Louisiana | 162 | 4,167 | 1.8 | ||||||
| Other | 2,529 | 51,312 | 21.7 | ||||||
| Total U.S. public finance | 8,040 | 175,487 | 74.2 | ||||||
| U.S. Structured finance (multiple states) | 450 | 9,300 | 3.9 | ||||||
| Total U.S. | 8,490 | 184,787 | 78.1 | ||||||
| Non-U.S.: | |||||||||
| United Kingdom | 288 | 38,450 | 16.2 | ||||||
| France | 7 | 3,130 | 1.3 | ||||||
| Canada | 8 | 2,495 | 1.1 | ||||||
| Australia | 11 | 2,112 | 0.9 | ||||||
| Austria | 3 | 1,250 | 0.5 | ||||||
| Other | 42 | 4,583 | 1.9 | ||||||
| Total non-U.S. | 359 | 52,020 | 21.9 | ||||||
| Total | 8,849 | $ | 236,807 | 100.0 | % | ||||
Financial Guaranty Portfolio by Issue Size
The Company seeks broad coverage of the market by insuring and reinsuring small and large issues alike. The following tables set forth the distribution of the Company'sCompany’s portfolio by original size of the Company'sCompany’s exposure.
Public Finance Portfolio by Issue Size
As of December 31, 20192022
| Original Par Amount Per Issue | Number of Issues | Net Par Outstanding | % of Public Finance Net Par Outstanding | |||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Less than $10 million | 10,135 | $ | 29,669 | 13.2 | % | |||||||||||||||
| $10 through $50 million | 3,535 | 61,120 | 27.3 | |||||||||||||||||
| $50 through $100 million | 620 | 36,154 | 16.1 | |||||||||||||||||
| $100 million to $200 million | 327 | 37,816 | 16.9 | |||||||||||||||||
| $200 million or greater | 205 | 59,340 | 26.5 | |||||||||||||||||
| Total | 14,822 | $ | 224,099 | 100.0 | % | |||||||||||||||
| Original Par Amount Per Issue | Number of Issues | Net Par Outstanding | % of Public Finance Net Par Outstanding | ||||||
| (dollars in millions) | |||||||||
| Less than $10 million | 12,838 | $ | 33,384 | 14.7 | % | ||||
| $10 through $50 million | 3,844 | 62,416 | 27.6 | ||||||
| $50 through $100 million | 640 | 34,257 | 15.1 | ||||||
| $100 million to $200 million | 342 | 35,469 | 15.6 | ||||||
| $200 million or greater | 227 | 61,220 | 27.0 | ||||||
| Total | 17,891 | $ | 226,746 | 100.0 | % | ||||
Structured Finance Portfolio by Issue Size
As of December 31, 20192022
| Original Par Amount Per Issue | Number of Issues | Net Par Outstanding | % of Structured Finance Net Par Outstanding | ||||||
| (dollars in millions) | |||||||||
| Less than $10 million | 135 | $ | 108 | 1.1 | % | ||||
| $10 through $50 million | 163 | 1,057 | 10.4 | ||||||
| $50 through $100 million | 57 | 1,117 | 11.1 | ||||||
| $100 million to $200 million | 76 | 2,229 | 22.2 | ||||||
| $200 million or greater | 95 | 5,550 | 55.2 | ||||||
| Total | 526 | $ | 10,061 | 100.0 | % | ||||
| Original Par Amount Per Issue | Number of Issues | Net Par Outstanding | % of Structured Finance Net Par Outstanding | |||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Less than $10 million | 110 | $ | 102 | 1.1 | % | |||||||||||||||
| $10 through $50 million | 148 | 1,071 | 11.7 | |||||||||||||||||
| $50 through $100 million | 42 | 896 | 9.8 | |||||||||||||||||
| $100 million to $200 million | 49 | 1,413 | 15.4 | |||||||||||||||||
| $200 million or greater | 83 | 5,677 | 62.0 | |||||||||||||||||
| Total | 432 | $ | 9,159 | 100.0 | % | |||||||||||||||
Exposure to Puerto Rico
The Company had insured exposure to obligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) as well as its general obligation bonds aggregating $1.4
110
billion net par outstanding as of December 31, 2022, 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 the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA) and the University of Puerto Rico (U of PR).
The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in “—Liquidity and Capital Resources—Insurance Subsidiaries, Financial Guaranty Policies” below and Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.
Exposure to Puerto Rico by Company
As of December 31, 20192022
| Net Par Outstanding | ||||||||||||||||||||||||||||||||||||||
| AGM | AGC | AG Re | Eliminations (1) | Total Net Par Outstanding | Gross Par Outstanding | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Resolved Puerto Rico Exposures | ||||||||||||||||||||||||||||||||||||||
| PRHTA (Transportation revenue) (2) | $ | 49 | $ | 183 | $ | 108 | $ | (42) | $ | 298 | $ | 298 | ||||||||||||||||||||||||||
| PRHTA (Highway revenue) (2) | 140 | 30 | 12 | — | 182 | 182 | ||||||||||||||||||||||||||||||||
| Commonwealth of Puerto Rico - GO (3) | — | 19 | 6 | — | 25 | 25 | ||||||||||||||||||||||||||||||||
| PBA (3) | 1 | 4 | — | (1) | 4 | 4 | ||||||||||||||||||||||||||||||||
| Total Resolved | 190 | 236 | 126 | (43) | 509 | 509 | ||||||||||||||||||||||||||||||||
| Other Puerto Rico Exposures | ||||||||||||||||||||||||||||||||||||||
| PREPA (4) | 446 | 69 | 205 | — | 720 | 730 | ||||||||||||||||||||||||||||||||
| MFA (5) | 101 | 6 | 24 | — | 131 | 138 | ||||||||||||||||||||||||||||||||
| PRASA and U of PR (5) | — | 1 | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||
| Total Other | 547 | 76 | 229 | — | 852 | 869 | ||||||||||||||||||||||||||||||||
| Total exposure to Puerto Rico | $ | 737 | $ | 312 | $ | 355 | $ | (43) | $ | 1,361 | $ | 1,378 | ||||||||||||||||||||||||||
____________________
(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) Resolved on December 6, 2022, pursuant to the Modified Fifth Amended Title III Plan of Adjustment of the Puerto Rico Highways and Transportation Authority.
(3) Resolved on March 15, 2022, pursuant to the Modified Eighth Amended Title III Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority.
(4) This exposure is in payment default.
(5) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
| 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 | 139 | 1 | (7 | ) | 140 | 145 | |||||||||||||||||
| Public Corporations - Certain Revenues Potentially Subject to Clawback | ||||||||||||||||||||||||
| Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) (2) | 223 | 481 | 186 | (79 | ) | 811 | 842 | |||||||||||||||||
| PRHTA (Highway revenue) (2) | 345 | 74 | 35 | — | 454 | 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) | 525 | 71 | 226 | — | 822 | 838 | ||||||||||||||||||
| PRASA | — | 284 | 89 | — | 373 | 373 | ||||||||||||||||||
| MFA | 153 | 33 | 62 | — | 248 | 282 | ||||||||||||||||||
| U of PR | — | 1 | — | — | 1 | 1 | ||||||||||||||||||
| Total exposure to Puerto Rico | $ | 1,864 | $ | 1,518 | $ | 975 | $ | (87 | ) | $ | 4,270 | $ | 4,458 | |||||||||||
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 principaldebt service 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 interestdebt service due in any given period and the amount paid by the obligors.
111
Amortization Schedule
of Net Par Outstandingof Puerto Rico
As of December 31, 2022
| Scheduled Net Par Amortization | ||||||||||||||||||||||||||||||||||||||
| 2023 Q1 | 2023 Q2 | 2023 Q3 | 2023 Q4 | 2024 | 2025 | 2026 | 2027 | 2028 -2032 | 2033 -2037 | 2038 -2042 | Total | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Resolved Puerto Rico Exposures | ||||||||||||||||||||||||||||||||||||||
| PRHTA (Transportation revenue) | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | 8 | $ | 8 | $ | — | $ | 12 | $ | 127 | $ | 133 | $ | 298 | ||||||||||||||
| PRHTA (Highway revenue) | — | — | — | — | — | — | — | — | 81 | 101 | — | 182 | ||||||||||||||||||||||||||
| Commonwealth of Puerto Rico - GO | — | — | — | — | — | — | 2 | 4 | 19 | — | — | 25 | ||||||||||||||||||||||||||
| PBA | — | — | 2 | — | — | 2 | — | — | — | — | — | 4 | ||||||||||||||||||||||||||
| Total Resolved | — | — | 12 | — | — | 10 | 10 | 4 | 112 | 228 | 133 | 509 | ||||||||||||||||||||||||||
| Other Puerto Rico Exposures | ||||||||||||||||||||||||||||||||||||||
| PREPA | — | — | 95 | — | 93 | 68 | 105 | 105 | 241 | 13 | — | 720 | ||||||||||||||||||||||||||
| MFA | — | — | 18 | — | 18 | 18 | 37 | 15 | 25 | — | — | 131 | ||||||||||||||||||||||||||
| PRASA and U of PR | — | — | — | — | 1 | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||||
| Total Other | — | — | 113 | — | 112 | 86 | 142 | 120 | 266 | 13 | — | 852 | ||||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 125 | $ | — | $ | 112 | $ | 96 | $ | 152 | $ | 124 | $ | 378 | $ | 241 | $ | 133 | $ | 1,361 | ||||||||||||||
Amortization Schedule of Net Debt Service of Puerto Rico
As of December 31, 20192022
| Scheduled Net Par Amortization | ||||||||||||||||||||||||||||||||||||||||||
| 2020 (1Q) | 2020 (2Q) | 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 | 163 | 166 | 292 | 82 | — | 811 | ||||||||||||||||||||||||||||
| PRHTA (Highway revenue) | — | — | 22 | — | 35 | 6 | 32 | 33 | 55 | 177 | 94 | — | — | 454 | ||||||||||||||||||||||||||||
| PRCCDA | — | — | — | — | — | — | — | — | 19 | 76 | 57 | — | — | 152 | ||||||||||||||||||||||||||||
| PRIFA | — | — | — | — | — | — | 2 | — | — | — | 7 | 7 | — | 16 | ||||||||||||||||||||||||||||
| Other Public Corporations | ||||||||||||||||||||||||||||||||||||||||||
| PREPA | — | — | 48 | — | 28 | 28 | 95 | 93 | 386 | 140 | 4 | — | — | 822 | ||||||||||||||||||||||||||||
| PRASA | — | — | — | — | — | — | — | 1 | 109 | — | 2 | 15 | 246 | 373 | ||||||||||||||||||||||||||||
| MFA | — | — | 45 | — | 40 | 40 | 22 | 18 | 79 | 4 | — | — | — | 248 | ||||||||||||||||||||||||||||
| U of PR | — | — | — | — | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 286 | $ | — | $ | 149 | $ | 139 | $ | 205 | $ | 222 | $ | 1,158 | $ | 1,021 | $ | 740 | $ | 104 | $ | 246 | $ | 4,270 | ||||||||||||||
| Scheduled Net Debt Service Amortization | ||||||||||||||||||||||||||||||||||||||
| 2023 Q1 | 2023 Q2 | 2023 Q3 | 2023 Q4 | 2024 | 2025 | 2026 | 2027 | 2028 -2032 | 2033 -2037 | 2038 -2042 | Total | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Resolved Puerto Rico Exposures | ||||||||||||||||||||||||||||||||||||||
| PRHTA (Transportation revenue) | $ | 8 | $ | — | $ | 18 | $ | — | $ | 15 | $ | 23 | $ | 22 | $ | 14 | $ | 82 | $ | 182 | $ | 151 | $ | 515 | ||||||||||||||
| PRHTA (Highway revenue) | 5 | — | 5 | — | 9 | 9 | 10 | 10 | 124 | 116 | — | 288 | ||||||||||||||||||||||||||
| Commonwealth of Puerto Rico - GO | — | — | 1 | — | 2 | 1 | 3 | 6 | 21 | — | — | 34 | ||||||||||||||||||||||||||
| PBA | — | — | 2 | — | — | 3 | — | — | — | — | — | 5 | ||||||||||||||||||||||||||
| Total Resolved | 13 | — | 26 | — | 26 | 36 | 35 | 30 | 227 | 298 | 151 | 842 | ||||||||||||||||||||||||||
| Other Puerto Rico Exposures | ||||||||||||||||||||||||||||||||||||||
| PREPA | 14 | 3 | 109 | 3 | 122 | 92 | 126 | 122 | 274 | 14 | — | 879 | ||||||||||||||||||||||||||
| MFA | 3 | — | 21 | — | 24 | 22 | 41 | 17 | 28 | — | — | 156 | ||||||||||||||||||||||||||
| PRASA and U of PR | — | — | — | — | 1 | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||||
| Total Other | 17 | 3 | 130 | 3 | 147 | 114 | 167 | 139 | 302 | 14 | — | 1,036 | ||||||||||||||||||||||||||
| Total | $ | 30 | $ | 3 | $ | 156 | $ | 3 | $ | 173 | $ | 150 | $ | 202 | $ | 169 | $ | 529 | $ | 312 | $ | 151 | $ | 1,878 | ||||||||||||||
| Scheduled Net Debt Service Amortization | ||||||||||||||||||||||||||||||||||||||||||
| 2020 (1Q) | 2020 (2Q) | 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 | $ | 33 | $ | — | $ | 173 | $ | — | $ | 74 | $ | 94 | $ | 70 | $ | 128 | $ | 514 | $ | 572 | $ | 294 | $ | — | $ | — | $ | 1,952 | ||||||||||||||
| PBA | 4 | — | 9 | — | 20 | 6 | 13 | 6 | 81 | 50 | 20 | — | — | 209 | ||||||||||||||||||||||||||||
| Public Corporations - Certain Revenues Potentially Subject to Clawback | ||||||||||||||||||||||||||||||||||||||||||
| PRHTA (Transportation revenue) | 21 | — | 46 | — | 59 | 68 | 72 | 41 | 331 | 294 | 356 | 89 | — | 1,377 | ||||||||||||||||||||||||||||
| PRHTA (Highway revenue) | 12 | — | 34 | — | 58 | 27 | 52 | 51 | 134 | 233 | 101 | — | — | 702 | ||||||||||||||||||||||||||||
| PRCCDA | 3 | — | 3 | — | 7 | 7 | 7 | 7 | 52 | 103 | 61 | — | — | 250 | ||||||||||||||||||||||||||||
| PRIFA | — | — | — | — | 1 | 1 | 3 | 1 | 4 | 3 | 10 | 8 | — | 31 | ||||||||||||||||||||||||||||
| Other Public Corporations | ||||||||||||||||||||||||||||||||||||||||||
| PREPA | 17 | 3 | 65 | 3 | 63 | 62 | 128 | 121 | 467 | 155 | 5 | — | — | 1,089 | ||||||||||||||||||||||||||||
| PRASA | 10 | — | 10 | — | 19 | 19 | 19 | 20 | 190 | 68 | 70 | 82 | 272 | 779 | ||||||||||||||||||||||||||||
| MFA | 6 | — | 52 | — | 50 | 48 | 28 | 23 | 89 | 5 | — | — | — | 301 | ||||||||||||||||||||||||||||
| U of PR | — | — | — | — | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||
| Total | $ | 106 | $ | 3 | $ | 392 | $ | 3 | $ | 351 | $ | 332 | $ | 392 | $ | 398 | $ | 1,862 | $ | 1,484 | $ | 917 | $ | 179 | $ | 272 | $ | 6,691 | ||||||||||||||
Financial Guaranty Exposure to U.S. Residential Mortgage-Backed Securities
The following table below providespresents information on certain risk characteristicsin respect of the Company’s U.S. RMBS exposures. As of December 31, 2019, U.S. RMBS net par outstanding was $3.5 billion, of which $1.6 billion was rated BIG.exposures to supplement the disclosures and discussion provided in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered). U.S. RMBS exposures represent 2%0.8% of the total net par outstanding, and BIG U.S. RMBS represent 19%17.1% of total BIG net par outstanding as of December 31, 2019. See Item 8, Financial Statements and Supplementary Data, Note 6, Expected Loss to be Paid, for a discussion of expected losses to be paid on U.S. RMBS exposures.2022.
112
Distribution of U.S. RMBS by Year Insured and Type of Exposure as of December 31, 20192022
| 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 | $ | 10 | $ | 8 | $ | — | $ | 342 | $ | 14 | $ | 374 | ||||||||||||||||||||||||||
| 2005 | 22 | 122 | 15 | 184 | 53 | 396 | ||||||||||||||||||||||||||||||||
| 2006 | 25 | 25 | 1 | 44 | 109 | 204 | ||||||||||||||||||||||||||||||||
| 2007 | — | 196 | 16 | 590 | 149 | 951 | ||||||||||||||||||||||||||||||||
| 2008 | — | — | — | 31 | — | 31 | ||||||||||||||||||||||||||||||||
| Total exposures | $ | 57 | $ | 351 | $ | 32 | $ | 1,191 | $ | 325 | $ | 1,956 | ||||||||||||||||||||||||||
| Exposures rated BIG | $ | 38 | $ | 208 | $ | 16 | $ | 633 | $ | 115 | $ | 1,010 | ||||||||||||||||||||||||||
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 | $ | 22 | $ | 21 | $ | 1 | $ | 581 | $ | 47 | $ | 672 | ||||||||||||
| 2005 | 50 | 217 | 24 | 222 | 132 | 645 | ||||||||||||||||||
| 2006 | 38 | 42 | 11 | 280 | 217 | 588 | ||||||||||||||||||
| 2007 | — | 332 | 28 | 957 | 281 | 1,598 | ||||||||||||||||||
| 2008 | — | — | — | 43 | — | 43 | ||||||||||||||||||
| Total exposures | $ | 110 | $ | 612 | $ | 64 | $ | 2,083 | $ | 677 | $ | 3,546 | ||||||||||||
| Gross Exposure | Net Exposure | |||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2019 | As of December 31, 2018 | |||||||||||||
| (in millions) | ||||||||||||||||
| Life insurance transactions (1) | $ | 1,046 | $ | 880 | $ | 898 | $ | 763 | ||||||||
| Aircraft RVI policies | 398 | 340 | 243 | 218 | ||||||||||||
Liquidity and Capital Resources
AGL and its U.S. Holding Company SubsidiariesCompanies
AGL directly owns (i) AG Re, an insurance company domiciled in Bermuda, and (ii) AGUS, a U.S. holding company with public debt. AGUS directly owns: (i) AGC, an insurance company domiciled in Maryland; and (ii) AGMH, a U.S. holding company with public debt outstanding. AGMH directly owns AGM, an insurance subsidiary domiciled in New York. AGUS and AGMH are collectively referred to as the U.S. Holding Companies.
Sources and Uses of Funds
The liquidity of AGL AGUS and AGMHits U.S. Holding Companies is largely dependent on dividends from their operating subsidiaries (see Insurance Subsidiaries, Distributions from Insurance Subsidiaries below for a description of dividend restrictions) and their access to external financing. The operating liquidity requirements of these entities includeAGL and the payment of operating expenses,U.S. Holding Companies include:
•principal and interest on debt issued by AGUS and AGMH, and AGMH;
•dividends on AGL'sAGL’s common shares. shares; and
•the payment of operating expenses.
AGL and its holding company subsidiariesU.S. Holding Companies may also require liquidity to fund acquisitions of new businesses, to to:
•make capital investments in their operating subsidiaries, subsidiaries;
•fund acquisitions of new businesses;
•purchase or redeem the Company'sCompany’s outstanding debt,debt; or in the case of AGL, to
•repurchase itsAGL’s common shares pursuant to itsAGL’s 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 timeand a half times 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“— Overview— Key Business Strategies, Capital Management” above for information on common share repurchases.
Long-Term Debt Obligations
The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, and Guarantor and U.S. Holding Companies’ Summarized Financial Information, below.
113
U.S. Holding Companies
Long-Term Debt and Intercompany Loans
| As of December 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Effective Interest Rate | Final Maturity | Principal Amount | |||||||||||||||||||||
| AGUS - long-term debt | |||||||||||||||||||||||
| 7% Senior Notes | 6.40% | 2034 | $ | 200 | $ | 200 | |||||||||||||||||
| 5% Senior Notes | 5.00% | 2024 | 330 | 330 | |||||||||||||||||||
| 3.15% Senior Notes | 3.15% | 2031 | 500 | 500 | |||||||||||||||||||
| 3.6% Senior Notes | 3.60% | 2051 | 400 | 400 | |||||||||||||||||||
| Series A Enhanced Junior Subordinated Debentures | 3 month LIBOR +2.38% | 2066 | 150 | 150 | |||||||||||||||||||
| AGUS long-term debt | 1,580 | 1,580 | |||||||||||||||||||||
| AGUS - intercompany loans from: | |||||||||||||||||||||||
| AGC and AGM | 3.50% | 2030 | 250 | 250 | |||||||||||||||||||
| AGRO | 6 month LIBOR +3.00% | 2023 | 20 | 20 | |||||||||||||||||||
| AGUS intercompany loans | 270 | 270 | |||||||||||||||||||||
| Total AGUS long-term debt and intercompany loans | 1,850 | 1,850 | |||||||||||||||||||||
| AGMH | |||||||||||||||||||||||
| Junior Subordinated Debentures | 6.40% | 2066 | 300 | 300 | |||||||||||||||||||
| Total AGMH long-term debt | 300 | 300 | |||||||||||||||||||||
| AGMH’s long-term debt purchased by AGUS (2) | (154) | (154) | |||||||||||||||||||||
| U.S. Holding Company long-term debt | $ | 1,996 | $ | 1,996 | |||||||||||||||||||
____________________
(1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
Interest Paid on U.S. Holding Companies’ Long-Term Debt and Intercompany Loans
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| AGUS - long-term debt | $ | 68 | $ | 50 | $ | 44 | |||||||||||
| AGUS - intercompany loans | 10 | 10 | 10 | ||||||||||||||
| Total AGUS | 78 | 60 | 54 | ||||||||||||||
| AGMH - long-term debt | 19 | 40 | 46 | ||||||||||||||
| AGMH’s long-term debt purchased by AGUS | (10) | (10) | (9) | ||||||||||||||
| Total interest paid | $ | 87 | $ | 90 | $ | 91 | |||||||||||
On May 26, 2021, AGUS issued $500 million in 3.15% Senior Notes. On July 9, 2021, a discussionportion of the dividend restrictionsproceeds of the debt issuance was used to redeem $200 million in AGMH debt. On August 20, 2021, AGUS issued $400 million in 3.6% Senior Notes, and on September 27, 2021, the proceeds of the debt issuance were used to redeem $230 million in AGMH debt and $170 million in AGUS debt. See Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.
The Series A Enhanced Junior Subordinated Debentures pay interest based on LIBOR. If the AGMH Junior Subordinated Debentures are outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at one-month LIBOR plus 2.215%. The Company believes that after June 2023 the reference to LIBOR will be replaced, by operation of law in accordance with federal legislation enacted in March 2022 (AIRLA), with a rate based on SOFR. See “— Executive Summary — Other Matters — LIBOR Sunset” above.
114
U.S. Holding Companies
Expected Debt Service of Long-Term Debt
As of December 31, 2022
| Year | AGUS | AGMH | Eliminations (1) | Total | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| 2023 | $ | 102 | $ | 19 | $ | (40) | $ | 81 | ||||||||||||||||||
| 2024 | 401 | 19 | (19) | 401 | ||||||||||||||||||||||
| 2025 | 111 | 19 | (69) | 61 | ||||||||||||||||||||||
| 2026 | 109 | 19 | (67) | 61 | ||||||||||||||||||||||
| 2027 | 108 | 19 | (65) | 62 | ||||||||||||||||||||||
| 2028-2047 | 1,400 | 384 | (302) | 1,482 | ||||||||||||||||||||||
| 2048-2066 | 720 | 665 | (340) | 1,045 | ||||||||||||||||||||||
| Total | $ | 2,951 | $ | 1,144 | $ | (902) | $ | 3,193 | ||||||||||||||||||
____________________
(1) Includes eliminations of intercompany loans payable and AGMH’s debt purchased by AGUS.
From time to time, AGL and its insurancesubsidiaries 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.
Intercompany Loans Payable
On October 1, 2019, the U.S. Insurance Subsidiaries made 10-year, 3.5% interest rate intercompany loans to AGUS, aggregating $250 million, to fund the BlueMountain Acquisition and the related capital contributions. Interest is payable annually in arrears on each anniversary of the note, and commenced on October 1, 2020. Interest accrues daily and is computed on a basis of a 360-day year from October 1, 2019 until the date on which the principal amount is paid in full. AGUS will pay 20% of the original principal amount of each note on the sixth, seventh, eighth, and ninth anniversaries. The remaining 20% of the original principal amount and all accrued and unpaid interest will be paid on the maturity date. AGUS has the right to prepay the principal amount of the notes in whole or in part at any time, or from time to time, without payment of any premium or penalty.
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. AGUS repaid $10 million in each of 2021 and 2020 in outstanding principal as well as accrued and unpaid interest. There were no repayments in 2022. As of December 31, 2022, $20 million remained outstanding.
Capital Contributions to AssuredIM
The Company contributed $60 million of cash to AssuredIM at closing, and contributed an additional $30 million in cash in February 2020, $15 million in both February 2021 and February 2022 and $10 million in February 2023.
Guarantor and U.S. Holding Companies’ Summarized Financial Information
AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,430 million aggregate principal amount of notes issued by the U.S. Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by the U.S. Holding Companies, and the intercompany loans. The following tables include summarized financial information for AGL and the U.S. Holding Companies, excluding their investments in subsidiaries.
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| As of December 31, 2022 | |||||||||||
| AGL | U.S. Holding Companies | ||||||||||
| (in millions) | |||||||||||
| Assets | |||||||||||
| Fixed-maturity securities (1) | $ | 21 | $ | 3 | |||||||
| Short-term investments, other invested assets and cash | 5 | 143 | |||||||||
| Receivables from affiliates (2) | 57 | — | |||||||||
| Receivable from U.S. Holding Companies | 18 | — | |||||||||
| Other assets | 1 | 53 | |||||||||
| Liabilities | |||||||||||
| Long-term debt | — | 1,675 | |||||||||
| Loans payable to affiliates | — | 270 | |||||||||
| Payable to affiliates (2) | 15 | 9 | |||||||||
| Payable to AGL | — | 18 | |||||||||
| Other liabilities | 7 | 72 | |||||||||
____________________
(1) As of December 31, 2022, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.9 years and 4.7 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
| Year Ended December 31, 2022 | |||||||||||
| AGL | U.S. Holding Companies | ||||||||||
| (in millions) | |||||||||||
| Revenues | $ | (1) | $ | 1 | |||||||
| Expenses | |||||||||||
| Interest expense | — | 89 | |||||||||
| Other expenses | 45 | 9 | |||||||||
| Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (46) | (97) | |||||||||
| Net income (loss) | (46) | (86) | |||||||||
The following table presents significant holding company cash flow activitiesitems for AGL and the U.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities.
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AGL and U.S. Holding Company SubsidiariesCompanies
| AGL | AGUS | AGMH | |||||||||
| (in millions) | |||||||||||
| Year ended December 31, 2019 | |||||||||||
| Intercompany sources | $ | 689 | $ | 667 | $ | 220 | |||||
| Intercompany (uses) | — | (492 | ) | (199 | ) | ||||||
| External sources (uses): | |||||||||||
| Dividends paid to AGL shareholders | (74 | ) | — | — | |||||||
| Repurchases of common shares (1) | (500 | ) | — | — | |||||||
| Interest paid (2) | — | (46 | ) | (38 | ) | ||||||
| Purchase of AGMH's debt by AGUS | — | (3 | ) | — | |||||||
| BlueMountain acquisition | — | (157 | ) | — | |||||||
| Year ended December 31, 2018 | |||||||||||
| Intercompany sources | $ | 597 | $ | 525 | $ | 205 | |||||
| Intercompany (uses) | — | (485 | ) | (192 | ) | ||||||
| External sources (uses): | |||||||||||
| Dividends paid to AGL shareholders | (71 | ) | — | — | |||||||
| Repurchases of common shares (1) | (500 | ) | — | — | |||||||
| Interest paid (2) | — | (58 | ) | (41 | ) | ||||||
| Purchase of AGMH's debt by AGUS | — | (100 | ) | — | |||||||
| Year ended December 31, 2017 | |||||||||||
| Intercompany sources | $ | 595 | $ | 391 | $ | 322 | |||||
| Intercompany (uses) | — | (511 | ) | (279 | ) | ||||||
| External sources (uses): | |||||||||||
| Dividends paid to AGL shareholders | (70 | ) | — | — | |||||||
| Repurchases of common shares (1) | (501 | ) | — | — | |||||||
| Interest paid (2) | — | (32 | ) | (45 | ) | ||||||
| Purchase of AGMH's debt by AGUS | — | (28 | ) | — | |||||||
| Year Ended December 31, 2022 | |||||||||||
| AGL | U.S. Holding Companies | ||||||||||
| (in millions) | |||||||||||
| Dividends received from subsidiaries | $ | 437 | $ | 476 | |||||||
| Interest on intercompany loans | — | (10) | |||||||||
| Interest paid (1) | — | (77) | |||||||||
| Investments in subsidiaries | — | (22) | |||||||||
| Return of capital from subsidiaries | — | 9 | |||||||||
| Dividends paid to AGL | — | (437) | |||||||||
| Dividends paid | (64) | — | |||||||||
| Repurchases of common shares (2) | (500) | — | |||||||||
____________________
(2) See Item 8, Financial Statements and Supplementary Data, Note 18, Insurance Company Regulatory Requirements.19, Shareholders’ Equity, for additional information about share repurchases and authorizations.
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.
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.
| Principal Amount | Interest Paid | ||||||||||||||||||
| As of December 31, | Year Ended December 31, | ||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2017 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| AGUS | $ | 850 | $ | 850 | $ | 46 | $ | 58 | $ | 32 | |||||||||
| Intercompany loans | 290 | 50 | 3 | 3 | 3 | ||||||||||||||
| Total AGUS | 1,140 | 900 | 49 | 61 | 35 | ||||||||||||||
| AGMH | 730 | 730 | 46 | 46 | 46 | ||||||||||||||
| AGM | 4 | 5 | — | — | — | ||||||||||||||
| AGMH's debt purchased by AGUS (1) | (131 | ) | (128 | ) | (8 | ) | (5 | ) | (1 | ) | |||||||||
| Elimination of intercompany loans | (290 | ) | (50 | ) | (3 | ) | (3 | ) | (3 | ) | |||||||||
| Total | $ | 1,453 | $ | 1,457 | $ | 84 | $ | 99 | $ | 77 | |||||||||
Insurance Subsidiaries
The Company has several insurance subsidiaries. The U.S. Insurance Subsidiaries consist of AGM and AGC. AGM owns: (i) AGUK, an insurance subsidiary domiciled in the U.K; and (ii) AGE, an insurance company domiciled in France. AGUK and AGE are collectively referred to as the European Insurance Subsidiaries. AG Re is an insurance company domiciled in Bermuda, which owns AGRO, an insurance subsidiary, also domiciled in Bermuda.
Sources and Uses of Funds
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,
•reinsurance premiums,
•principal of and, where applicable, interest on, surplus notes, where applicable, 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.portfolios, although the Company may enter into secured short-term loan facilities with financial institutions to provide short-term liquidity for the payment of insurance claims it anticipates making in connection with the future resolutions of other Puerto Rico exposures. The Company generally targets a
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balance of its most liquid assets including cash and short-term securities, U.S. 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. TheAs of December 31, 2022, the Company intendsintended to hold and hashad the ability to hold temporarily impaired debt securities in an unrealized loss position until the date of anticipated recovery of amortized cost.
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'sCompany’s insurance subsidiaries, insurance regulations and rating agency capital requirements.
Financial Guaranty Policies
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. Premiums received on financial guaranty contracts are paid either upfront or in installments over the life of the insured obligations.
Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year-to-year,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.
The following table presents estimated probability weighted expected cash outflows under direct and assumed financial guaranty contracts, whether accounted for as insurance or credit derivatives, including claim payments under contracts in consolidated FG VIEs, as of December 31, 2022. This amount is not reduced for cessions under reinsurance contracts or recoveries attributable to Loss Mitigation Securities. This amount includes any benefit anticipated from excess spread or other recoveries within the contracts but does not reflect any benefit for recoveries under breaches of R&W. This amount also excludes estimated recoveries related to past claims paid for policies in the public finance sector.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| U.S. public finance | $ | (525 | ) | $ | (395 | ) | $ | (268 | ) | ||
| Non-U.S. public finance | — | (1 | ) | 5 | |||||||
| Structured finance: | |||||||||||
| U.S. RMBS | 87 | 159 | 48 | ||||||||
| Other structured finance | (7 | ) | (9 | ) | (14 | ) | |||||
| Structured finance | 80 | 150 | 34 | ||||||||
| Claims (paid) recovered, net of reinsurance (1) | $ | (445 | ) | $ | (246 | ) | $ | (229 | ) | ||
| (in | |||||
| Less than 1 year | $ | 325 | |||
| 1-3 years | 582 | ||||
| 3-5 years | 418 | ||||
| More than 5 years | 321 | ||||
| Total | $ | 1,646 | |||
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
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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 $676$418 million as of December 31, 2019.2022. 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. AtAs of December 31, 2019,2022, approximately $1.7$1.9 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"“pay-as-you-go” basis and to replicate the terms of a traditional financial guaranty insurance policy. However,The documentation for certain CDS were negotiated to require the Company mayto 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 inrestructured. Furthermore, some CDS documentation requires 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.
Distributions From Insurance Subsidiaries
The transaction documentationCompany 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 the holding companies’ 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 one counterpartyrating 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 Item 8, Financial Statements and Supplementary Data, Note 15, Insurance Company Regulatory Requirements.
Dividend restrictions by insurance subsidiary are as follows:
•The maximum amount available during 2023 for $180AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $209 million, of which approximately $40 million is available for distribution in the CDS insuredfirst quarter of 2023.
•The maximum amount available during 2023 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $102 million, of which approximately $20 million is available for distribution in the first quarter of 2023.
•Based on the applicable law and regulations, in 2023 AG Re (a subsidiary of AGL) has the capacity to: (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Authority; and (ii) declare and pay dividends in an aggregate amount up to approximately $210 million as of December 31, 2022. 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 $138 million as of December 31, 2022; and (ii) the amount of statutory surplus, which, as of December 31, 2022, was a deficit of $19 million.
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•Based on the applicable law and regulations, in 2023 AGRO (an indirect subsidiary of AG Re) 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 $98 million as of December 31, 2022. 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 $374 million as of December 31, 2022; and (ii) the amount of statutory surplus, which, as of December 31, 2022, was $253 million.
Distributions from / Contribution to Insurance Company Subsidiaries
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Dividends paid by AGC to AGUS | $ | 207 | $ | 94 | $ | 166 | |||||||||||
| Dividends paid by AGM to AGMH | 266 | 291 | 267 | ||||||||||||||
| Dividends paid by AG Re to AGL (1) | — | 150 | 150 | ||||||||||||||
| Dividends from AGUK to AGM (2) | — | — | 124 | ||||||||||||||
| Contributions from AGM to AGE (2) | — | — | (123) | ||||||||||||||
____________________
(1) The 2021 and 2020 amounts included fixed-maturity securities with a fair value of $46 million and $47 million, respectively.
(2) In 2020, the dividend paid to AGM from AGUK was contributed to AGE.
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 requiresif counterparties exercise contractual rights triggered by the Companydowngrade against insured obligors, and the insured obligors are unable to postpay.
For example, the U.S. Insurance Subsidiaries have issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. The U.S. Insurance Subsidiaries insure periodic payments owed by the municipal obligors to the bank counterparties. In such cases, the U.S. Insurance Subsidiaries would be required to pay the termination payment owed by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy, if: (i) the U.S. Insurance Subsidiaries have been downgraded below the rating trigger set forth in a swap under which they have insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, subjectreplacing the U.S. Insurance Subsidiaries or otherwise curing the downgrade of the U.S. Insurance Subsidiaries; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded below the rating trigger set forth in such swap (which rating trigger varies on a cap,transaction by transaction basis), and such condition has been met; (iv) the bank counterparty has elected to secure its obligationterminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make paymentsthe termination payment payable by it. Conversely, no termination payment would be owed in such cases if the transaction documents include as a condition that an underlying event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded below a specified rating trigger, and such condition has not been met. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of the U.S. Insurance Subsidiaries were downgraded below “A-” by S&P or below “A3” by Moody’s, and the conditions giving rise to the obligation of the U.S. Insurance Subsidiaries to make a payment under the swap policies were all satisfied, then the U.S. Insurance Subsidiaries could pay claims in an amount not exceeding approximately $13 million in respect of such contracts.termination payments.
As another example, with respect to variable rate demand obligations (VRDOs) for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% – 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a
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claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2019,2022, AGM and AGC didhad insured approximately $1.5 billion net par of VRDOs, of which approximately $15 million of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. As of December 31, 2022, none of the insured VRDOs were issued by municipal obligors rated BIG. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.
In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM in respect to AGMH’s former GIC business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody’s. AGMH’s former subsidiary FSA Asset Management LLC is expected to have to post collateralsufficient eligible and liquid assets to satisfy these requirementsany expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.
Assumed Reinsurance
Some of the maximum posting requirement was $180 million.Company’s insurance subsidiaries (Assuming Subsidiaries) assumed financial guaranty insurance from legacy third-party bond insurers. The agreements under which such Assuming Subsidiaries assumed such business are generally subject to termination at the option of the ceding company (a) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (b) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (c) upon certain changes of control of the Assuming Subsidiary. Upon termination due to one of the above events, the Assuming Subsidiary 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 Assuming Subsidiary would be released from liability with respect to such business.
As of December 31, 2022, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $268 million, including $234 million by AGC and $34 million by AG Re.
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 doesis not consider itself to be the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty'sGuaranty’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'sAGC’s or AGM'sAGM’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 (CPS) is one-month LIBOR plus 200 bps. LIBOR may be discontinued. 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.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Net cash flows provided by (used in) operating activities before effect of VIE consolidation | $ | (255 | ) | $ | 451 | $ | 414 | ||||
| Effect of VIE consolidation (1) | (254 | ) | 11 | 19 | |||||||
| Net cash flows provided by (used in) operating activities | (509 | ) | 462 | 433 | |||||||
| Net cash flows provided by (used in) investing activities before effect of VIE consolidation | 1,055 | 192 | 112 | ||||||||
| Acquisitions, net of cash acquired | (145 | ) | — | 95 | |||||||
| Effect of VIE consolidation (1) | 259 | 105 | 138 | ||||||||
| Net cash flows provided by (used in) investing activities | 1,169 | 297 | 345 | ||||||||
| Dividends paid | (74 | ) | (71 | ) | (70 | ) | |||||
| Repurchases of common stock | (500 | ) | (500 | ) | (501 | ) | |||||
| Repurchase of debt | (3 | ) | (100 | ) | (28 | ) | |||||
| Net cash flows provided by (used in) financing activities before effect of VIE consolidation | (16 | ) | (8 | ) | (10 | ) | |||||
| Effect of VIE consolidation (1) | 9 | (116 | ) | (157 | ) | ||||||
| Net cash flows provided by (used in) financing activities (2) | (584 | ) | (795 | ) | (766 | ) | |||||
| Effect of exchange rate changes | 3 | (4 | ) | 5 | |||||||
| Cash and restricted cash at beginning of period | 104 | 144 | 127 | ||||||||
| Total cash and restricted cash at the end of the period | $ | 183 | $ | 104 | $ | 144 | |||||
The Company leases and occupies approximately 103,500 square feetbelieves that after June 2023 the reference to LIBOR in New York City through 2032. Subject to certain conditions, the Company has an option to renew the lease for five years atsuch CCS will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a fair market rent. The Company also leases 78,400 square feet of office space at another location in New York City, which expires in 2024. In addition, AGL and its subsidiaries lease additional office space in various locations under non-cancelable operating leases which expire at various dates through 2029. See “Contractual Obligations” below or Item 8, Financial Statements and Supplementary Data, Note 20, Commitments and Contingencies, for lease payments due by period. Rent expense was $12 million in 2019, $9 million in 2018 and $9 million in 2017.
| As of December 31, 2019 | |||||||||||||||||||
Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Long-term debt(1): | |||||||||||||||||||
| AGUS: | |||||||||||||||||||
| 7% Senior Notes | $ | 14 | $ | 28 | $ | 28 | $ | 331 | $ | 401 | |||||||||
| 5% Senior Notes | 25 | 50 | 550 | — | 625 | ||||||||||||||
| Series A Enhanced Junior Subordinated Debentures | 6 | 12 | 12 | 420 | 450 | ||||||||||||||
| AGMH: | |||||||||||||||||||
67/8% QUIBS | 7 | 14 | 14 | 629 | 664 | ||||||||||||||
| 6.25% Notes | 14 | 29 | 29 | 1,350 | 1,422 | ||||||||||||||
| 5.6% Notes | 6 | 11 | 11 | 540 | 568 | ||||||||||||||
| Junior Subordinated Debentures | 19 | 38 | 38 | 1,107 | 1,202 | ||||||||||||||
| AGM Notes Payable | 2 | — | — | 2 | 4 | ||||||||||||||
| Operating and finance lease obligations (2) | 20 | 39 | 30 | 62 | 151 | ||||||||||||||
| Other compensation plans (3) | 19 | 6 | 4 | — | 29 | ||||||||||||||
| Estimated claim payments (4) | 516 | 661 | 103 | 1,265 | 2,545 | ||||||||||||||
| Ceded premium payable, net of commission | 4 | 5 | 4 | 16 | 29 | ||||||||||||||
| Other | 8 | — | — | — | 8 | ||||||||||||||
| Total (5) | $ | 660 | $ | 893 | $ | 823 | $ | 5,722 | $ | 8,098 | |||||||||
Investment Portfolio
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
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sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income.
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | ||||||||||||
| (in millions) | |||||||||||||||
| Fixed-maturity securities: | |||||||||||||||
| Obligations of state and political subdivisions | $ | 4,036 | $ | 4,340 | $ | 4,761 | $ | 4,911 | |||||||
| U.S. government and agencies | 137 | 147 | 167 | 175 | |||||||||||
| Corporate securities | 2,137 | 2,221 | 2,175 | 2,136 | |||||||||||
| Mortgage-backed securities (1): | |||||||||||||||
| RMBS | 745 | 775 | 999 | 982 | |||||||||||
| Commercial mortgage-backed securities (CMBS) | 402 | 419 | 542 | 539 | |||||||||||
| Asset-backed securities | 684 | 720 | 942 | 1,068 | |||||||||||
| Non-U.S. government securities | 230 | 232 | 298 | 278 | |||||||||||
| Total fixed-maturity securities | 8,371 | 8,854 | 9,884 | 10,089 | |||||||||||
| Short-term investments | 1,268 | 1,268 | 729 | 729 | |||||||||||
| Total fixed-maturity and short-term investments | $ | 9,639 | $ | 10,122 | $ | 10,613 | $ | 10,818 | |||||||
| 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 | ||||||||||||||||||||
| 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 | $ | 195 | $ | (4 | ) | $ | 658 | $ | (14 | ) | $ | 853 | $ | (18 | ) | ||||||||
| U.S. government and agencies | 11 | — | 24 | (1 | ) | 35 | (1 | ) | |||||||||||||||
| Corporate securities | 836 | (19 | ) | 522 | (33 | ) | 1,358 | (52 | ) | ||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | 85 | (2 | ) | 447 | (32 | ) | 532 | (34 | ) | ||||||||||||||
| CMBS | 111 | (1 | ) | 164 | (6 | ) | 275 | (7 | ) | ||||||||||||||
| Asset-backed securities | 322 | (4 | ) | 38 | (1 | ) | 360 | (5 | ) | ||||||||||||||
| Non-U.S. government securities | 83 | (4 | ) | 99 | (18 | ) | 182 | (22 | ) | ||||||||||||||
| Total | $ | 1,643 | $ | (34 | ) | $ | 1,952 | $ | (105 | ) | $ | 3,595 | $ | (139 | ) | ||||||||
| Number of securities (1) | 417 | 608 | 997 | ||||||||||||||||||||
| Number of securities with OTTI (1) | 22 | 22 | 42 | ||||||||||||||||||||
Changes in interest rates affect the value of the Company’s fixed-maturity portfolio.securities. 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,investment-grade, liquid instruments. Other invested assets include other alternative investments, which are generally less liquid. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement and Note 7, Investments and Cash.
Investment Portfolio
Carrying Value
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Fixed-maturity securities, available-for-sale (1) | $ | 7,119 | $ | 8,202 | |||||||
| Fixed-maturity securities, trading (2) | 303 | — | |||||||||
| Short-term investments | 810 | 1,225 | |||||||||
| Other invested assets | 133 | 181 | |||||||||
| Total | $ | 8,365 | $ | 9,608 | |||||||
____________________
(1) As of December 31, 2022, includes $358 million of New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.
(2) Represents CVIs received under the 2022 Puerto Rico Resolutions.
The Company’s available-for-sale fixed-maturity securities had a duration of 4.4 years as of December 31, 2022 and 4.7 years as of December 31, 2021, respectively.
Available-for-Sale Fixed-Maturity Securities By Contractual Maturity
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 Available-for-Sale Fixed-Maturity Securities
by Contractual Maturity
As of December 31, 2019 2022
| Amortized Cost | Estimated Fair Value | ||||||||||
| (in millions) | |||||||||||
| Due within one year | $ | 290 | $ | 282 | |||||||
| Due after one year through five years | 1,713 | 1,585 | |||||||||
| Due after five years through 10 years | 1,778 | 1,667 | |||||||||
| Due after 10 years | 3,226 | 2,974 | |||||||||
| Mortgage-backed securities: | |||||||||||
| RMBS | 418 | 340 | |||||||||
| CMBS | 282 | 271 | |||||||||
| Total | $ | 7,707 | $ | 7,119 | |||||||
Amortized Cost | Estimated Fair Value | ||||||
| (in millions) | |||||||
| Due within one year | $ | 326 | $ | 334 | |||
| Due after one year through five years | 1,538 | 1,591 | |||||
| Due after five years through 10 years | 2,022 | 2,128 | |||||
| Due after 10 years | 3,338 | 3,607 | |||||
| Mortgage-backed securities: | |||||||
| RMBS | 745 | 775 | |||||
| CMBS | 402 | 419 | |||||
| Total | $ | 8,371 | $ | 8,854 | |||
The following table summarizes the ratings distributions of the Company’s investment portfolioavailable-for-sale fixed-maturity securities as of December 31, 20192022 and December 31, 2018.2021. Ratings generally reflect the lower of Moody’s and S&P classifications, except for bonds purchased for loss mitigation or other risk management strategies,(i) Loss Mitigation Securities, which use Assured Guaranty’s internal ratings classifications.classifications, or (ii) Puerto Rico securities received under the 2022 Puerto Rico Resolutions, which are not rated.
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Distribution of
Available-for-Sale Fixed-Maturity Securities by Rating
| As of December 31, | ||||||||||||||
| Rating | 2022 | 2021 | ||||||||||||
| AAA | 14.2 | % | 14.6 | % | ||||||||||
| AA | 37.1 | 38.2 | ||||||||||||
| A | 24.4 | 25.1 | ||||||||||||
| BBB | 11.0 | 13.7 | ||||||||||||
| BIG (1) | 7.4 | 7.5 | ||||||||||||
| Not rated (2) | 5.9 | 0.9 | ||||||||||||
| Total | 100.0 | % | 100.0 | % | ||||||||||
____________________
(1) The BIG category primarily includes Loss Mitigation Securities. See Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.
(2) As of December 31, 2022, the not rated category primarily includes New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.
The Company also had $303 million in trading fixed-maturity securities as of December 31, 2022 representing CVIs received under the 2022 Puerto Rico Resolutions, which are not rated.
Portfolio of Obligations of State and Political Subdivisions
The Company’s fixed-maturity investment portfolio includes issuances by a wide number of municipal authorities across the U.S. and its territories. The following table presents the components of the Company’s $3,394 million (fair value) of obligations of state and political subdivisions included in the Company’s available-for-sale fixed-maturity portfolio as of December 31, 2022.
Fair Value of Available-for-Sale Fixed-Maturity Portfolio of Obligations of State and Political Subdivisions
As of December 31, 2022 (1)
| State | State General Obligation | Local General Obligation | Revenue Bonds | Total Fair Value | Amortized Cost | Average Credit Rating | ||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| California | $ | 47 | $ | 65 | $ | 287 | $ | 399 | $ | 414 | A | |||||||||||||||||||||||||||
| Puerto Rico | 33 | — | 327 | 360 | 362 | Not Rated | ||||||||||||||||||||||||||||||||
| New York | 3 | 37 | 298 | 338 | 352 | AA | ||||||||||||||||||||||||||||||||
| Texas | 16 | 73 | 245 | 334 | 351 | AA | ||||||||||||||||||||||||||||||||
| Washington | 45 | 53 | 94 | 192 | 198 | AA | ||||||||||||||||||||||||||||||||
| Florida | — | 2 | 162 | 164 | 171 | A+ | ||||||||||||||||||||||||||||||||
| Massachusetts | 63 | — | 82 | 145 | 149 | AA | ||||||||||||||||||||||||||||||||
| Pennsylvania | 31 | 5 | 76 | 112 | 114 | A+ | ||||||||||||||||||||||||||||||||
| Illinois | 12 | 16 | 77 | 105 | 109 | A+ | ||||||||||||||||||||||||||||||||
| Colorado | — | 22 | 51 | 73 | 76 | AA | ||||||||||||||||||||||||||||||||
| All others | 99 | 107 | 606 | 812 | 857 | AA- | ||||||||||||||||||||||||||||||||
| Total | $ | 349 | $ | 380 | $ | 2,305 | $ | 3,034 | $ | 3,153 | A | |||||||||||||||||||||||||||
____________________
(1) Excludes $360 million as of December 31, 2022 of pre-refunded bonds, at fair value. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.
The revenue bond portfolio primarily consists of essential service revenue bonds issued by transportation authorities, utilities, and universities.
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Revenue Bonds
Sources of Funds
As of December 31, 2022
| Type | Amortized Cost | Fair Value | ||||||||||||
| (in millions) | ||||||||||||||
| Tax revenue | $ | 845 | $ | 832 | ||||||||||
| Transportation | 563 | 541 | ||||||||||||
| Utilities | 419 | 411 | ||||||||||||
| Education | 286 | 276 | ||||||||||||
| Healthcare | 172 | 165 | ||||||||||||
| All others | 96 | 80 | ||||||||||||
| Total | $ | 2,381 | $ | 2,305 | ||||||||||
Other Investments
Other invested assets, which are generally less liquid than fixed-maturity securities primarily consist of investments in renewable and clean energy and private equity funds managed by a third party.
The Insurance segment reports AGAS’ percentage ownership of AssuredIM Funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of December 31, 2022 and December 31, 2021, all of the funds in which AGAS directly invests are consolidated in the Company’s consolidated financial statements. The amounts in the table below represent the fair value of AGAS’ interests in the AssuredIM Funds. See Part I, Item 1. Business — Asset Management — Products, for a description of the fund strategies. See also Commitments below.
Fair Value of AGAS’ Interest in AssuredIM Funds
| As of December 31, | ||||||||||||||
| Strategy | 2022 | 2021 | ||||||||||||
| (in millions) | ||||||||||||||
| CLOs | $ | 272 | $ | 228 | ||||||||||
| Municipal bonds (1) | 105 | 107 | ||||||||||||
| Healthcare | 91 | 115 | ||||||||||||
| Asset-based | 101 | 93 | ||||||||||||
| Total | $ | 569 | $ | 543 | ||||||||||
____________________
(1) The fund was unwound in January 2023 based on the December 31, 2022 valuation. On January 31, 2023 the fund distributed substantially all of its available cash to AGAS and other investors in the fund.
Equity in Earnings (Losses) of Investees of AGAS’ Investment in AssuredIM Funds
| Year Ended December 31, | ||||||||||||||||||||
| Strategy | 2022 | 2021 | 2020 | |||||||||||||||||
| (in millions) | ||||||||||||||||||||
| CLOs | $ | (2) | $ | 29 | $ | 14 | ||||||||||||||
| Municipal bonds | (2) | 2 | 5 | |||||||||||||||||
| Healthcare | (11) | 30 | 19 | |||||||||||||||||
| Asset-based | 5 | 19 | 4 | |||||||||||||||||
| Total | $ | (10) | $ | 80 | $ | 42 | ||||||||||||||
Restricted Assets
| Rating | As of December 31, 2019 | As of December 31, 2018 | ||||
| AAA | 16.2 | % | 15.7 | % | ||
| AA | 45.1 | 48.2 | ||||
| A | 21.2 | 19.8 | ||||
| BBB | 8.2 | 5.0 | ||||
| BIG (1) | 8.6 | 10.8 | ||||
| Not rated | 0.7 | 0.5 | ||||
| Total | 100.0 | % | 100.0 | % | ||
Based on fair value, investments and restrictedother assets that are either held in trust for the benefit of third partythird-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted totaled $280$222 million and $266$243 million, as of December 31, 20192022 and December 31, 2018,2021, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the
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benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,502$1,169 million and $1,855$1,231 million, based on fair value as of December 31, 20192022 and December 31, 2018,2021, respectively.
The U.S. Insurance Subsidiaries are authorized to invest up to $750 million in AssuredIM Funds. Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds. As of December 31, 2022, the Insurance segment had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. In addition to its commitments to AssuredIM Funds, the Company had unfunded commitments of $78 million as of December 31, 2022 to other alternative investments.
AssuredIM
Sources and Uses of Funds
AssuredIM’s sources of liquidity are: (1) cash from operations, including management and performance fees (which are unpredictable as to amount and timing); and (2) capital contributions from AGUS ($15 million, $15 million and $30 million in 2022, 2021 and 2020, respectively, had been contributed to supplement cash from operations). As of December 31, 2022 and December 31, 2021, AssuredIM had $41 million and $37 million, respectively, in cash and short-term investments.
AssuredIM’s liquidity needs primarily include: (1) paying operating expenses including compensation; (2) paying dividends or other distributions to AGUS; and (3) capital to support growth and expansion of the asset management business. In each of 2022, 2021 and 2020, AssuredIM distributed $8.8 million to AGUS to fund AGUS’s interest payments on its intercompany debt to the U.S. Insurance Subsidiaries. That debt was incurred in October 2019 to fund the BlueMountain Acquisition. See “— AGL and U.S. Holding Companies — Intercompany Loans Payable” above for additional information.
Lease Obligations
The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco, London, Paris, and other locations with various lease terms. See Item 8, Financial Statements and Supplementary Data, Note 17, Leases, for a table of minimum lease obligations and other lease commitments.
FG VIEs and CIVs
The Company manages its liquidity needs by evaluating cash flows without the effect of consolidatedconsolidating FG VIEs and CIVs; however, the Company'sCompany’s consolidated financial statements reflectinclude the financial positioneffect of Assured Guaranty as well as Assured Guaranty's consolidated VIEs.consolidating FG VIEs and CIVs. The primary sources and uses of cash at Assured Guaranty's consolidatedGuaranty’s FG VIEs and CIVs 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 insuredthe debt obligations, and the primary uses of cash are the payment of principal and interest due on the debt obligations. 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. For the Puerto Rico Trusts, the primary source of cash is the collection of debt service on the assets in the trusts and the primary use of cash is the payment of the trusts debt obligations.
See Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.
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Credit Facilities of CIVs
Certain of the Company’s 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 Assured Guaranty subsidiaries. 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 Assured Guaranty subsidiaries.
As of December 31, 2022, these credit facilities had varying maturities ranging from 2023 to 2031 with the aggregate principal amount not exceeding $1.6 billion. The available commitment was based on the amount of equity contributed to the warehouse which was $377 million. As of December 31, 2022, $284 million was drawn under credit facilities with interest rates ranging from 3-month SOFR plus 150 bps to 3-month Euribor plus 200 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of December 31, 2022.
As of December 31, 2022, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $110 million jointly and $71 million individually for the consolidated healthcare fund. The available commitment was based on the capital committed to the funds. As of December 31, 2022, $58 million was drawn by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime floor of 3%). The fund was in compliance with all financial covenants as of December 31, 2022.
Consolidated Cash Flow Summary
The summarized consolidated statements of cash flows in the table below present the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of consolidating FG VIEs and CIVs.
Summarized Consolidated Cash Flows
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation | $ | (1,056) | $ | 420 | $ | 67 | |||||||||||
| Effect of FG VIEs and CIVs consolidation | (1,423) | (2,357) | (920) | ||||||||||||||
| Net cash flows provided by (used in) operating activities | (2,479) | (1,937) | (853) | ||||||||||||||
| Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation | 1,618 | (156) | 478 | ||||||||||||||
| Effect of FG VIEs and CIVs consolidation | 122 | 179 | 310 | ||||||||||||||
| Net cash flows provided by (used in) investing activities | 1,740 | 23 | 788 | ||||||||||||||
| Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation | |||||||||||||||||
| Dividends paid | (64) | (66) | (69) | ||||||||||||||
| Repurchases of common shares | (500) | (496) | (446) | ||||||||||||||
| Issuance of long-term debt, net of issuance costs | — | 889 | — | ||||||||||||||
| Redemptions and purchases of debt, including make-whole payment | — | (619) | (21) | ||||||||||||||
| Other | (8) | (12) | (11) | ||||||||||||||
| Effect of FG VIEs and CIVs consolidation | 1,184 | 2,264 | 730 | ||||||||||||||
| Net cash flows provided by (used in) financing activities (1) | 612 | 1,960 | 183 | ||||||||||||||
| Effect of exchange rate changes, before effect of FG VIEs and CIVs consolidation | (3) | (2) | (3) | ||||||||||||||
| Effect of FG VIEs and CIVs consolidation | (5) | — | — | ||||||||||||||
| Effect of exchange rate changes | (8) | (2) | (3) | ||||||||||||||
| Increase (decrease) in cash and cash equivalents and restricted cash | (135) | 44 | 115 | ||||||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | 342 | 298 | 183 | ||||||||||||||
| Cash and cash equivalents and restricted cash at the end of the period | $ | 207 | $ | 342 | $ | 298 | |||||||||||
____________________
(1) Claims paid on consolidated FG VIEs are presented in the consolidated statements of cash flows 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 FG VIEs and CIVs, was an outflow of $1,056 million in 2022 and an inflow of $420 million in 2021. The increase in cash outflows during 2022 was primarily due to a $1.3 billion increase in net claim payments, which were primarily due to the 2022 Puerto Rico Resolutions as well as an increase of $81 million in tax payments. Cash flows from operations attributable to the effect of FG VIE and CIV consolidation were outflows in 2022 and 2021. The consolidated statements of cash flows present the investing activities of the consolidated AssuredIM Funds and CLOs as cash flows from operations. The decrease in outflows in 2022 compared with 2021 is mainly due to a decrease of $2,154 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $1,352 million.
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 during 2022 was mainly attributable to a decrease of $865 million for purchases of available-for-sale fixed-maturity securities, $208 million in sales, maturities and paydowns of trading securities, and an increase in net sales of short-term investments of $786 million in 2022 to fund share repurchases and claim payments in connection with the 2022 Puerto Rico Resolutions, partially offset by lower disposals of $177 million of available-for-sale fixed-maturity securities. See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, for additional information.
Financing activities primarily consist of share repurchases, dividends, and paydowns of FG VIEs’ liabilities, as well as CLO issuances and CLO warehouse financing activities. In 2021, it also included the issuance of 3.15% Senior Notes and 3.6% Senior Notes and redemptions of a portion of AGMH and AGUS debt. See Item 8, Financial Statements and Supplementary
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Data, Note 12, Long-Term Debt and Credit Facilities. The CIVs’ financing cash flows mainly include issuances and repayments of CLOs and CLO warehouse financing debt. The decrease in financing cash flow activity from VIEs was primarily due to a decrease of $2,251 million in issuances, and repayments of $1,192 million by the consolidated CLOs and CLO warehouses. The proceeds from CLO issuances and CLO warehouse borrowings are used to fund the purchases of loans. FG VIEs’ cash flows relate to the paydowns of FG VIEs’ liabilities. See Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
From January 1, 2023 through February 28, 2023, the Company repurchased an additional 36 thousand common shares. As of February 28, 2023, the Company was authorized to repurchase $201 million of its common shares. For more information about the Company’s share repurchases and authorizations, see Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss due to factors that affect the overall performance of the financial markets or movesmovements in market prices. The Company'sCompany’s primary market risk exposures include interest rate risk, foreign currency exchange rate risk and credit spread risk, and primarily affect the following areas.
•The fair value of credit derivatives within the financial guaranty portfolio of insured obligations fluctuates based onis sensitive to changes in credit spreads of the underlying obligations and the Company'sCompany’s own credit spreads.
•The fair value of the investment portfolio is primarily driven by changes in interest rates and also affected by changes in credit spreads.
•New business production is sensitive to changes in interest rates.
•Expected loss to be paid (recovered) is sensitive to changes in interest rates.
•The fair value of the investment portfolio contains foreign denominated securities whose value also fluctuates based on changes in foreign exchange rates.
The carrying value of premiums receivable includeincludes foreign denominated receivables whose value fluctuatesvalues fluctuate based on changes in foreign exchange rates.
•Asset management revenues are sensitive to changes in the fair value of investments.
•The fair value of CIVs are sensitive to changes in market risk.
•The fair value of the assets and liabilities of consolidated FG VIEs may fluctuate based on changes in prepayments, spreads, default rates, interest rates, and house price depreciation/appreciation. The fair value of the FG VIEs’ liabilities would also fluctuatefluctuates based on changes in the Company'sCompany’s credit spread.
Sensitivity of Credit Derivatives to Credit Risk
The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. The quoted price of five-year CDS contracts traded on AGC at December 31, 20192022 and December 31, 20182021 was 4163 bps and 11049 bps, respectively. Movements in AGM'sAGM’s CDS prices no longer have a significant impact on the estimated fair value of the Company'sCompany’s credit derivative contracts due to the relatively low volume and characteristics of CDS contracts remaining in AGM'sAGM’s portfolio.
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. An overall narrowing of spreads generally results in an unrealized gain on credit derivatives for the Company, and an overall widening of spreads generally results in an unrealized loss for the Company.
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The fair value of credit derivative contracts also reflects the change in the Company'sCompany’s own credit cost, based on the price to purchase credit protection on AGC. Historically, the price of CDS traded on AGC typically moved directionally the same as general market spreads, although this may not always be the case. In certain circumstances, due to the fact that spread movements are not perfectly correlated, the narrowing or widening of the price of CDS traded on AGC can have a more significant financial statement impact than the changes in risks it assumes.
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, approximately 17% based on fair value, of the Company's CDS contracts were fair valued using this minimum premium as of December 31, 2018. As of December 31, 2019,2022 and December 31, 2021, the corresponding number was de minimis.use of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiumspremium fluctuates due to changes in AGC'sAGC’s credit spreads. In general, when AGC'sAGC’s credit spreads narrow, the cost to hedge AGC'sAGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC'sAGC’s credit spreads widen, the cost to hedge AGC'sAGC’s name increases causing more transactions to price at established floor levels.
The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming an immediate parallel shiftsshift 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 and AGM and on the risks that they both assume.AGC.
Effect of Changes in Credit Spread on Credit Derivatives
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||
| 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) | 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) | (in millions) | |||||||||||||||||||||||||||||||||||||||||
| Increase of 25 bps | Increase of 25 bps | $ | (315 | ) | $ | (130 | ) | $ | (348 | ) | $ | (141 | ) | Increase of 25 bps | $ | (233) | $ | (71) | $ | (250) | $ | (96) | ||||||||||||||||||||
| Base Scenario | Base Scenario | (185 | ) | — | (207 | ) | — | Base Scenario | (162) | — | (154) | — | ||||||||||||||||||||||||||||||
| Decrease of 25 bps | Decrease of 25 bps | (97 | ) | 88 | (143 | ) | 64 | Decrease of 25 bps | (99) | 63 | (83) | 71 | ||||||||||||||||||||||||||||||
| All transactions priced at floor | All transactions priced at floor | (56 | ) | 129 | (101 | ) | 106 | All transactions priced at floor | (27) | 135 | (37) | 117 | ||||||||||||||||||||||||||||||
____________________
(1) Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Credit Derivatives, for additional information.
Sensitivity of Investment Portfolio to Interest Rate Risk
Interest rate risk is the risk that financial instruments'instruments’ values will change due to changes in the level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. The Company is exposed to interest rate risk primarily in its investment portfolio. As interest rates rise for an available-for-sale investment portfolio, the fair value of fixed‑incomefixed maturity securities generally decreases; as interestsinterest rates fall for an available-for-sale portfolio, the fair value of fixed-income securities generally increases. The Company'sCompany’s policy is generally to hold assets in the investment portfolio to maturity. Therefore, barring credit deterioration, interest rate movements do not result in realized gains or losses unless assets are sold prior to maturity. The Company does not hedge interest rate risk; instead, interest rate fluctuation risk is managed through the investment guidelines which limit duration and prohibit investment in historically high volatility sectors.
Interest rate sensitivity in the investment portfolio can be estimated by projecting a hypothetical instantaneous increase or decrease in interest rates. The following table presents the estimated pre-tax change in fair value of the Company'sCompany’s fixed-maturity securities and short-term investments from instantaneous parallel shifts in interest rates.
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Increase (Decrease) in Fair Value (Pre-Tax)
of Fixed-Maturity Securities and Short-Term Investments
from Changes in Interest Rates on the Investment Portfolio(1)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Decrease of 300 bps | $ | 1,315 | $ | 509 | |||||||
| Decrease of 200 bps | 854 | 508 | |||||||||
| Decrease of 100 bps | 404 | 357 | |||||||||
| Increase of 100 bps | (378) | (403) | |||||||||
| Increase of 200 bps | (734) | (788) | |||||||||
| Increase of 300 bps | (1,069) | (1,176) | |||||||||
____________________
| Increase (Decrease) in Fair Value from Changes in Interest Rates | |||||||||||||||||||||||
300 Basis Point Decrease | 200 Basis Point Decrease | 100 Basis Point Decrease | 100 Basis Point Increase | 200 Basis Point Increase | 300 Basis Point Increase | ||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| December 31, 2019 | $ | 641 | $ | 624 | $ | 404 | $ | (420 | ) | $ | (852 | ) | $ | (1,295 | ) | ||||||||
| December 31, 2018 | $ | 1,226 | $ | 1,029 | $ | 552 | $ | (465 | ) | $ | (996 | ) | $ | (1,525 | ) | ||||||||
See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.
Sensitivity of Other AreasNew Business Production to Interest Rate Risk
Sensitivity of Expected Loss to be Paid (Recovered) to Interest Rates
Expected losses to be paid (recovered), and therefore loss reserves and loss and loss adjustment expenses are sensitive to changes in interest rates also impactin several ways. First, expected losses to be paid are discounted at the amountend of each reporting period at the risk-free rate, such that an increase in discount rates has the effect of reducing net expected loss to be paid for transactions in a net expected payable position and increasing net expected loss to be paid for transactions in a net expected recoverable position. The effect of changes in discount rates on expected losses to be paid was a gain of $115 million in 2022, a gain of $33 million in 2021 and a loss of $13 million in 2020. The gain related to changes in discount rates was highest in 2022 as interest rates rose from historically low levels during 2022.
Some of the future.Company’s expected losses to be paid (recovered) relate to insured obligations with variable interest rates.
In the case of RMBS, fluctuations in interest rates impact the amount of periodic excess spread, which is created when a trust’s assets produce interest that exceeds the amount required to pay interest on the trust’s liabilities. There are several RMBS transactions in the Company'sCompany’s insured portfolio which benefit from excess spread either by coveringusing it to cover losses in a particular period or reimbursingreimburse past claims under the Company'sCompany’s policies. As of December 31, 2019,2022, the Company projects approximately $114 million ofthat the maximum potential excess spread for all of itsat risk in the U.S. RMBS transactions over their remaining lives.is approximately $20 million. In the significantly higher interest rate environment of 2022, much of the Company’s benefit from future excess spread has been reduced. If future expectations of interest rates become lower, the Company could experience an additional benefit due to projected excess spread.
Since RMBS excess spread is determined by the relationship between interest rates on the underlying collateral and the trust’s certificates, it can be affected by unmatched moves in either of these interest rates. For example, modifications to
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underlying mortgage rates (e.g., rate reductions for troubled borrowers) can reduce excess spread becausewhen an upswing in short-term rates that increases the trust’s certificate interest rate that is not met with equal increases to the interest rates on the underlying mortgages can decrease excess spread.mortgages. These potential reductions in excess spread are often mitigated by an interest rate cap, which goes into effect once the collateral rate falls below the stated certificate rate. Interest due on most of the RMBS securitiestransactions the Company insures are capped at the collateral rate. The Company is not obligated to pay additional claims when the collateral interest rate drops below the trust's certificate stated interest rate, rather this just causes the Company to lose the benefit of potential positive excess spread. Additionally, faster than expected prepayments can decrease the dollar amount of excess spread and therefore reduce the cash flow available to cover losses or reimburse past claims. Interest rates can also have indirect effects on the underlying performance or value of collateral backing an obligation. Higher interest rates can lead to slower prepayments of debt, and can cause market prices of financed assets to decline. Conversely, lower interest rates can lead to faster prepayment and higher potential recovery values.
Sensitivity to Foreign Exchange Rate Risk
Foreign exchange risk is the risk that a financial instrument'sinstrument’s value will change due to a change in the foreign currency exchange rates. The Company has foreign denominated securities in its investment portfolio as well as foreign denominated premium receivables. The Company'sCompany’s material exposure is to changes in U.S. dollar/pound sterling and U.S. dollar/euro exchange rates. Securities denominated in currencies other than U.S. dollar were 8.5%9.2% and 7.4%9.8% of the fixed-maturity securities and short-term investments as of December 31, 20192022 and 2018,2021, respectively. Changes in fair value of available-for-sale investments attributable to changes in foreign exchange rates are recorded in OCI.other comprehensive income. Approximately 78%74% and 72%78% of installment premiums at December 31, 20192022 and December 31, 2018,2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Changes in premiums receivable attributable to changes in foreign exchange rates are reported in the consolidated statement of operations.
of Fixed-Maturity Securities and Short-Term Investments and Premiums Receivable
from Changes in Foreign Exchange Rates
| Increase (Decrease) in Carrying Value from Changes in Foreign Exchange Rates | |||||||||||||||||||||||
30% Decrease | 20% Decrease | 10% Decrease | 10% Increase | 20% Increase | 30% Increase | ||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Investment Portfolio: | |||||||||||||||||||||||
| December 31, 2019 | $ | (257 | ) | $ | (171 | ) | $ | (86 | ) | $ | 86 | $ | 171 | $ | 257 | ||||||||
| December 31, 2018 | (239 | ) | (159 | ) | (80 | ) | 80 | 159 | 239 | ||||||||||||||
| Premium Receivables: | |||||||||||||||||||||||
| December 31, 2019 | (301 | ) | (201 | ) | (100 | ) | 100 | 201 | 301 | ||||||||||||||
| December 31, 2018 | (192 | ) | (128 | ) | (64 | ) | 64 | 128 | 192 | ||||||||||||||
| Fixed-Maturity Securities and Short-Term Investments | Premium Receivable, net of Reinsurance and Commissions Payable | ||||||||||||||||||||||
| As of December 31, | As of December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Decrease of 30% | $ | (226) | $ | (280) | $ | (288) | $ | (318) | |||||||||||||||
| Decrease of 20% | (151) | (186) | (192) | (212) | |||||||||||||||||||
| Decrease of 10% | (75) | (93) | (96) | (106) | |||||||||||||||||||
| Increase of 10% | 75 | 93 | 96 | 106 | |||||||||||||||||||
| Increase of 20% | 151 | 186 | 192 | 212 | |||||||||||||||||||
| Increase of 30% | 226 | 280 | 288 | 318 | |||||||||||||||||||
See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 5, Contracts Accounted for as Insurance, for additional information.
Sensitivity of Asset Management Fees to Changes in Fair Value of Assured Investment ManagementAssuredIM Managed InvestmentsAssets
In the ordinary course of business, Assured Investment ManagementAssuredIM may manage a variety of risks, including market risk, credit risk, liquidity risk, foreign exchange risk and interest rate risk. The Company identifies, measures and monitors risk through various
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control mechanisms, including, but not limited to, monitoring and diversifying exposures and activities across a variety of instruments, markets and counterparties.
At December 31, 2019,2022, the majority of the Company’s investment advisory fees wereAssuredIM’s management fees are generated by CLOs, where the Company typically earns fees as a percentage of adjusted par outstanding. Subordinate management fees, which are the majority of CLO fees, may be deferred if a CLO fails one or more over collateralization tests, which could be triggered by a sharp decline in loan prices. In such a scenario the CLO fees are deferred until the CLO passes the overcollateralization test.
Management fees on AssuredIM Funds are generally based on AUMNAV, or for certain funds, based on total committed capital, and may vary based on changes in fair value of the applicable fundsinvestments in the AssuredIM Funds.
In addition to management fees, the Company manages.also receives performance fees, which are generally calculated as a portion of net profits or cash distributions. Movements in credit markets, equity market prices, interest rates, foreign exchange rates, or all of these could cause the value of AUM to fluctuate, and the returns realized on AUM to change, and clients to reallocate assets away from the Company, which could result in lower asset management fees.
Management believes that investment performance is one of the most important factors for the growth and retention of AUM. Poor investment performance relative to applicable portfolio benchmarks and to competitors could reduce revenues and growth because existing clients might withdraw funds in favor of better performing products, which could reduce the ability to attract funds; and could result in lower asset management revenues.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 10, Asset Management Fees, for additional information.
Sensitivity of CIVs to Market Risk
The fair value of the Company’s AssuredIM consolidated CLOs (collectively, consolidated CLOs), is generally sensitive to changes related to: 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); reinvestment assumptions; yields implied by market prices for similar securities; and changes to the market prices of similar loans held by the CLOs. Significant changes to some of these inputs could materially change the fair value of the assets and liabilities of consolidated CLOs, as these are all inputs used to project and discount future cash flows.
The fair value of the Company’s consolidated AssuredIM Funds is generally sensitive to changes in prices of comparable or similar investments; changes in financial projections of subject companies; changes in company specific risk premium, changes in the risk-free rate of return; changes in equity risk premium; and new information obtained from a 10% declineissuers. These 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.
The Insurance segment’s sensitivity to changes in fair value of Assured Investment Management managed investments.the AssuredIM Funds in which it invests or which it consolidates at the AGL level is summarized below.
Sensitivity of Insurance Segment Investments in CIVs
| Sensitivity to Changes in Fair Value | |||||||||||
| Year Ended December 31, 2019 | |||||||||||
| Management Fees | Performance Fees | Total | |||||||||
| (in millions) | |||||||||||
| 10% Decline in fair value of Assured Investment Management manged investments gain (loss) | $ | (2 | ) | $ | (4 | ) | $ | (6 | ) | ||
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Decrease of 10% | $ | (19) | $ | (23) | |||||||
| Increase of 10% | 19 | 23 | |||||||||
See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.
Sensitivity of FG VIEs’ Assets and Liabilities to Market Risk
The fair value of the Company’s FG VIEs’ assets is generally sensitive to changes related to estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral
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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 materially change the marketfair 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 leads 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 pricing provider 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. For certain non-structured FG VIE assets, such as assets in Puerto Rico Trusts, interest rates and the credit worthiness of the obligor are the biggest drivers of value. The independent third party's valuation methods are similar to those mentioned above, aside from collateral analysis, which may not be applicable.
The models to price the FG VIEs’ liabilities used, where appropriate, the same inputs used in determining fair value of FG VIEs’ assets and, for those liabilities insured by the Company, the benefit from the Company's insurance policy guaranteeing the timely payment of principal and interest, taking into account the Company'sCompany’s own credit risk.
Significant changes to certain of the inputs described above could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIEs that is insured by the Company. In general, extending the timing of expected loss payments by the Company into the future typically leads 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 leads 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.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm(PCAOB ID No. 238) | |||||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Assured Guaranty Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Assured Guaranty Ltd. and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of operations, of comprehensive income (loss), of shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 20182021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Valuation of the Loss and Loss Adjustment Expense (LAE) Reserve and the Salvage and Subrogation Recoverable - Estimation of the Expected Loss to be Paid (Recovered)
As described in Notes 64 and 75 to the consolidated financial statements, the loss and LAE reserve and the salvage and subrogation recoverable reported on the consolidated balance sheet relate only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. As of December 31, 2019,2022, the loss and LAE reserve was $1.0 billion$296 million and the salvage and subrogation recoverable was $747$257 million. A loss and LAE reserve for a financial guaranty insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (“total losses”)(total losses) exceed the deferred premium revenue, on a contract by contractcontract-by-contract basis. The expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for claimloss and LAE payments, net of inflows for expected salvage and subrogation and net of excess spread on underlying collateral, using current risk-free rates. If a transaction is in a net recovery position, this results in the recording of a salvage and subrogation recoverable. Expected cash outflows and inflows are probability weighted cash flows that reflect management'smanagement’s assumptions about the likelihood of all possible outcomes based on all information available to management. The determination of expected loss to be paid (recovered) is a subjective process involving numerous significantestimates, assumptions and judgments includingrelating to internal credit ratings, severity of loss, economic projections, delinquencies, liquidation rates, prepayment rates, timing of cash flows, recovery rates, internal credit rating, and probability weightings, as used in the respective cash flow models used by management.
The principal considerations for our determination that performing procedures relating to the valuation of the loss and LAE reserve and the salvage and subrogation recoverable -– estimation of the expected loss to be paid (recovered) is a critical audit matter are (i) there wasthe significant judgment by management in determining the significant assumptions related to internal credit ratings, severity of loss, delinquencies, liquidation rates, prepayment rates, timing of cash flows, recovery rates, and probability weightings (collectively referred to as the “significant assumptions”) used in the respective cash flow models in determining the estimate, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures related to the valuation; (ii) there wasthe significant auditor effort and judgment in evaluating audit evidence relating to the aforementioned significant assumptions and judgments used in the respective cash flow models; and (iii) the audit effort included the involvement of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s valuation of the loss and LAE reserve and the salvage and subrogation recoverable, - estimation of the expected loss to be paid, including controls over the cash flow models and the development of the aforementioned significant assumptions. These procedures also included, among others, the use of professionals with specialized skill and knowledge to assist in (i) independently estimating a range of expected loss to be paid (recovered) and comparing the independent estimate to management’s estimate to evaluate the reasonableness of the estimate for certain transactions ;transactions; and (ii) testing management’s process for determining the estimate for certain transactions by evaluating the reasonableness of the aforementioned significant assumptions, used as applicable inand assessing the appropriateness of the methodology of the respective cash flow models for certain transactions used in developing the estimate of the expected loss to be paid.paid (recovered). Performing these procedures also involved testing the completeness and accuracy of data provided by management.
/s/ PricewaterhouseCoopers LLP
New York, New York
We have served as the Company’s auditor since 2003.
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Assured Guaranty Ltd.
Consolidated Balance Sheets
(dollars in millions except per share and share amounts)data)
| As of December 31, | ||||||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | 2022 | 2021 | |||||||||||||||
| Assets | Assets | |||||||||||||||||
| Investment portfolio: | ||||||||||||||||||
| Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $8,371 and $9,884) | $ | 8,854 | $ | 10,089 | ||||||||||||||
| Investments: | Investments: | |||||||||||||||||
| Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $65 and $42 (amortized cost of $7,707 and $7,822) | Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $65 and $42 (amortized cost of $7,707 and $7,822) | $ | 7,119 | $ | 8,202 | |||||||||||||
| Fixed-maturity securities, trading, at fair value | Fixed-maturity securities, trading, at fair value | 303 | — | |||||||||||||||
| Short-term investments, at fair value | 1,268 | 729 | Short-term investments, at fair value | 810 | 1,225 | |||||||||||||
| Other invested assets (includes $6 and $7 measured at fair value) | 118 | 55 | ||||||||||||||||
| Total investment portfolio | 10,240 | 10,873 | ||||||||||||||||
| Other invested assets (includes $30 and $31, at fair value) | Other invested assets (includes $30 and $31, at fair value) | 133 | 181 | |||||||||||||||
| Total investments | Total investments | 8,365 | 9,608 | |||||||||||||||
| Cash | 169 | 104 | Cash | 107 | 120 | |||||||||||||
| Premiums receivable, net of commissions payable | 1,286 | 904 | Premiums receivable, net of commissions payable | 1,298 | 1,372 | |||||||||||||
| Deferred acquisition costs | 111 | 105 | Deferred acquisition costs | 147 | 131 | |||||||||||||
| Salvage and subrogation recoverable | 747 | 490 | Salvage and subrogation recoverable | 257 | 801 | |||||||||||||
| Financial guaranty variable interest entities’ assets, at fair value | 442 | 569 | ||||||||||||||||
| Assets of consolidated investment vehicles (includes $558 measured at fair value) | 572 | — | ||||||||||||||||
| Financial guaranty variable interest entities’ assets (includes $413 and $260, at fair value) | Financial guaranty variable interest entities’ assets (includes $413 and $260, at fair value) | 416 | 260 | |||||||||||||||
| Assets of consolidated investment vehicles (includes $5,363 and $4,902, at fair value) | Assets of consolidated investment vehicles (includes $5,363 and $4,902, at fair value) | 5,493 | 5,271 | |||||||||||||||
| Goodwill and other intangible assets | 216 | 24 | Goodwill and other intangible assets | 163 | 175 | |||||||||||||
| Other assets (includes $135 and $139 measured at fair value) | 543 | 534 | ||||||||||||||||
| Other assets (includes $148 and $132, at fair value) | Other assets (includes $148 and $132, at fair value) | 597 | 470 | |||||||||||||||
| Total assets | $ | 14,326 | $ | 13,603 | Total assets | $ | 16,843 | $ | 18,208 | |||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||
| Liabilities | Liabilities | |||||||||||||||||
| Unearned premium reserve | $ | 3,736 | $ | 3,512 | Unearned premium reserve | $ | 3,620 | $ | 3,716 | |||||||||
| Loss and loss adjustment expense reserve | 1,050 | 1,177 | Loss and loss adjustment expense reserve | 296 | 869 | |||||||||||||
| Long-term debt | 1,235 | 1,233 | Long-term debt | 1,675 | 1,673 | |||||||||||||
| Credit derivative liabilities, at fair value | 191 | 209 | Credit derivative liabilities, at fair value | 163 | 156 | |||||||||||||
| Financial guaranty variable interest entities’ liabilities with recourse, at fair value | 367 | 517 | ||||||||||||||||
| Financial guaranty variable interest entities’ liabilities without recourse, at fair value | 102 | 102 | ||||||||||||||||
| Liabilities of consolidated investment vehicles (includes $481 measured at fair value) | 482 | — | ||||||||||||||||
| Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $702 and $269, without recourse $13 and $20) | Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $702 and $269, without recourse $13 and $20) | 715 | 289 | |||||||||||||||
| Liabilities of consolidated investment vehicles (includes $4,431 and $3,849, at fair value) | Liabilities of consolidated investment vehicles (includes $4,431 and $3,849, at fair value) | 4,625 | 4,436 | |||||||||||||||
| Other liabilities | 511 | 298 | Other liabilities | 457 | 569 | |||||||||||||
| Total liabilities | 7,674 | 7,048 | Total liabilities | 11,551 | 11,708 | |||||||||||||
| Commitments and contingencies (see Note 20) | ||||||||||||||||||
| Redeemable noncontrolling interests in consolidated investment vehicles | 7 | — | ||||||||||||||||
| Commitments and contingencies (Note 18) | Commitments and contingencies (Note 18) | |||||||||||||||||
| Redeemable noncontrolling interests (Note 8) | Redeemable noncontrolling interests (Note 8) | — | 22 | |||||||||||||||
| Common stock ($0.01 par value, 500,000,000 shares authorized; 93,274,987 and 103,672,592 shares issued and outstanding) | 1 | 1 | ||||||||||||||||
| Additional paid-in capital | — | 86 | ||||||||||||||||
| Shareholders’ equity | Shareholders’ equity | |||||||||||||||||
| Common shares ($0.01 par value, 500,000,000 shares authorized; 59,013,040 and 67,518,424 shares issued and outstanding) | Common shares ($0.01 par value, 500,000,000 shares authorized; 59,013,040 and 67,518,424 shares issued and outstanding) | 1 | 1 | |||||||||||||||
| Retained earnings | 6,295 | 6,374 | Retained earnings | 5,577 | 5,990 | |||||||||||||
| Accumulated other comprehensive income, net of tax of $71 and $38 | 342 | 93 | ||||||||||||||||
| Accumulated other comprehensive income (loss), net of tax of $(84) and $60 | Accumulated other comprehensive income (loss), net of tax of $(84) and $60 | (515) | 300 | |||||||||||||||
| Deferred equity compensation | 1 | 1 | Deferred equity compensation | 1 | 1 | |||||||||||||
| Total shareholders’ equity attributable to Assured Guaranty Ltd. | 6,639 | 6,555 | Total shareholders’ equity attributable to Assured Guaranty Ltd. | 5,064 | 6,292 | |||||||||||||
| Nonredeemable noncontrolling interests | 6 | — | ||||||||||||||||
| Nonredeemable noncontrolling interests (Note 8) | Nonredeemable noncontrolling interests (Note 8) | 228 | 186 | |||||||||||||||
| Total shareholders’ equity | 6,645 | 6,555 | Total shareholders’ equity | 5,292 | 6,478 | |||||||||||||
| Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 14,326 | $ | 13,603 | Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 16,843 | $ | 18,208 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
137
Assured Guaranty Ltd.
Consolidated Statements of Operations
(dollars in millions except per share amounts)data)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Revenues | Revenues | |||||||||||||||||||||||||||
| Net earned premiums | $ | 476 | $ | 548 | $ | 690 | Net earned premiums | $ | 494 | $ | 414 | $ | 485 | |||||||||||||||
| Net investment income | 378 | 395 | 417 | Net investment income | 269 | 269 | 297 | |||||||||||||||||||||
| Asset management fees | 22 | — | — | Asset management fees | 93 | 88 | 89 | |||||||||||||||||||||
| Net realized investment gains (losses) | 22 | (32 | ) | 40 | Net realized investment gains (losses) | (56) | 15 | 18 | ||||||||||||||||||||
| Net change in fair value of credit derivatives | (6 | ) | 112 | 111 | ||||||||||||||||||||||||
| Fair value gains (losses) on credit derivatives | Fair value gains (losses) on credit derivatives | (11) | (58) | 81 | ||||||||||||||||||||||||
| Fair value gains (losses) on committed capital securities | Fair value gains (losses) on committed capital securities | 24 | (28) | (1) | ||||||||||||||||||||||||
| Fair value gains (losses) on financial guaranty variable interest entities | 42 | 14 | 30 | Fair value gains (losses) on financial guaranty variable interest entities | 22 | 23 | (10) | |||||||||||||||||||||
| Fair value gains (losses) on consolidated investment vehicles | Fair value gains (losses) on consolidated investment vehicles | 17 | 127 | 41 | ||||||||||||||||||||||||
| Foreign exchange gains (losses) on remeasurement | 24 | (37 | ) | 60 | Foreign exchange gains (losses) on remeasurement | (112) | (23) | 39 | ||||||||||||||||||||
| Bargain purchase gain and settlement of pre-existing relationships | — | — | 58 | |||||||||||||||||||||||||
| Fair value gains (losses) on trading securities | Fair value gains (losses) on trading securities | (34) | — | — | ||||||||||||||||||||||||
| Commutation gains (losses) | 1 | (16 | ) | 328 | Commutation gains (losses) | 2 | — | 38 | ||||||||||||||||||||
| Other income (loss) | 4 | 17 | 5 | Other income (loss) | 15 | 21 | 38 | |||||||||||||||||||||
| Total revenues | 963 | 1,001 | 1,739 | Total revenues | 723 | 848 | 1,115 | |||||||||||||||||||||
| Expenses | Expenses | |||||||||||||||||||||||||||
| Loss and loss adjustment expenses | 93 | 64 | 388 | |||||||||||||||||||||||||
| Loss and loss adjustment expenses (benefit) | Loss and loss adjustment expenses (benefit) | 16 | (220) | 203 | ||||||||||||||||||||||||
| Interest expense | 89 | 94 | 97 | Interest expense | 81 | 87 | 85 | |||||||||||||||||||||
| Loss on extinguishment of debt | Loss on extinguishment of debt | — | 175 | — | ||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 18 | 16 | 19 | Amortization of deferred acquisition costs | 14 | 14 | 16 | |||||||||||||||||||||
| Employee compensation and benefit expenses | 178 | 152 | 143 | Employee compensation and benefit expenses | 258 | 230 | 228 | |||||||||||||||||||||
| Other operating expenses | 125 | 96 | 101 | Other operating expenses | 167 | 179 | 197 | |||||||||||||||||||||
| Total expenses | 503 | 422 | 748 | Total expenses | 536 | 465 | 729 | |||||||||||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 460 | 579 | 991 | |||||||||||||||||||||||||
| Equity in net earnings of investees | 4 | 1 | — | |||||||||||||||||||||||||
| Income (loss) before income taxes and equity in earnings (losses) of investees | Income (loss) before income taxes and equity in earnings (losses) of investees | 187 | 383 | 386 | ||||||||||||||||||||||||
| Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | (39) | 94 | 27 | ||||||||||||||||||||||||
| Income (loss) before income taxes | 464 | 580 | 991 | Income (loss) before income taxes | 148 | 477 | 413 | |||||||||||||||||||||
| Provision (benefit) for income taxes | Provision (benefit) for income taxes | |||||||||||||||||||||||||||
| Current | (2 | ) | (15 | ) | 11 | Current | 14 | 96 | (13) | |||||||||||||||||||
| Deferred | 65 | 74 | 250 | Deferred | (3) | (38) | 58 | |||||||||||||||||||||
| Total provision (benefit) for income taxes | 63 | 59 | 261 | Total provision (benefit) for income taxes | 11 | 58 | 45 | |||||||||||||||||||||
| Net income (loss) | 401 | 521 | 730 | Net income (loss) | 137 | 419 | 368 | |||||||||||||||||||||
| Less: Redeemable noncontrolling interests | (1 | ) | — | — | ||||||||||||||||||||||||
| Less: Noncontrolling interests | Less: Noncontrolling interests | 13 | 30 | 6 | ||||||||||||||||||||||||
| Net income (loss) attributable to Assured Guaranty Ltd. | $ | 402 | $ | 521 | $ | 730 | Net income (loss) attributable to Assured Guaranty Ltd. | $ | 124 | $ | 389 | $ | 362 | |||||||||||||||
| Earnings per share: | Earnings per share: | |||||||||||||||||||||||||||
| Basic | $ | 4.04 | $ | 4.73 | $ | 6.05 | Basic | $ | 1.95 | $ | 5.29 | $ | 4.22 | |||||||||||||||
| Diluted | $ | 4.00 | $ | 4.68 | $ | 5.96 | Diluted | $ | 1.92 | $ | 5.23 | $ | 4.19 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
138
Assured Guaranty Ltd.
Consolidated Statements of Comprehensive Income
(Loss)
(in millions)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Net income (loss) | $ | 401 | $ | 521 | $ | 730 | Net income (loss) | $ | 137 | $ | 419 | $ | 368 | |||||||||||||||
| Change in net unrealized gains (losses) on: | Change in net unrealized gains (losses) on: | |||||||||||||||||||||||||||
| Investments with no other-than-temporary impairment, net of tax provision (benefit) of $46, $(32) and $27 | 293 | (215 | ) | 64 | ||||||||||||||||||||||||
| Investments with other-than-temporary impairment, net of tax provision (benefit) of $(14), $(8) and $46 | (46 | ) | (26 | ) | 89 | |||||||||||||||||||||||
| Investments with no credit impairment, net of tax provision (benefit) of $(121), $(31) and $20 | Investments with no credit impairment, net of tax provision (benefit) of $(121), $(31) and $20 | (718) | (202) | 163 | ||||||||||||||||||||||||
| Investments with credit impairment, net of tax provision (benefit) of $(20), $2 and $(4) | Investments with credit impairment, net of tax provision (benefit) of $(20), $2 and $(4) | (86) | 6 | (16) | ||||||||||||||||||||||||
| Change in net unrealized gains (losses) on investments | 247 | (241 | ) | 153 | Change in net unrealized gains (losses) on investments | (804) | (196) | 147 | ||||||||||||||||||||
| Change in net unrealized gains (losses) on financial guaranty variable interest entities' liabilities with recourse, net of tax | 4 | 2 | — | |||||||||||||||||||||||||
| Other, net of tax provision (benefit) of $0, $(2) and $2 | (2 | ) | (8 | ) | 14 | |||||||||||||||||||||||
| Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | (2) | (1) | 7 | ||||||||||||||||||||||||
| Other, net of tax | Other, net of tax | (9) | (1) | 2 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | 249 | (247 | ) | 167 | Other comprehensive income (loss) | (815) | (198) | 156 | ||||||||||||||||||||
| Comprehensive income (loss) | 650 | 274 | 897 | Comprehensive income (loss) | (678) | 221 | 524 | |||||||||||||||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interests | (1 | ) | — | — | Less: Comprehensive income (loss) attributable to noncontrolling interests | 13 | 30 | 6 | ||||||||||||||||||||
| Comprehensive income (loss) attributable to Assured Guaranty Ltd. | $ | 651 | $ | 274 | $ | 897 | Comprehensive income (loss) attributable to Assured Guaranty Ltd. | $ | (691) | $ | 191 | $ | 518 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
139
Assured Guaranty Ltd.
Consolidated Statements of Shareholders’ Equity
(dollars in millions, except share data)
| 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, 2016 | 127,988,230 | $ | 1 | $ | 1,060 | $ | 5,289 | $ | 149 | $ | 5 | $ | 6,504 | $ | — | $ | 6,504 | ||||||||||||||||||
| Net income | — | — | — | 730 | — | — | 730 | — | 730 | ||||||||||||||||||||||||||
| Dividends ($0.57 per share) | — | — | — | (70 | ) | — | — | (70 | ) | — | (70 | ) | |||||||||||||||||||||||
| Common stock repurchases | (12,669,643 | ) | — | (501 | ) | — | — | — | (501 | ) | — | (501 | ) | ||||||||||||||||||||||
| Share-based compensation | 702,265 | — | 14 | — | — | (4 | ) | 10 | — | 10 | |||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 167 | — | 167 | — | 167 | ||||||||||||||||||||||||||
| Effect of 2017 Tax Act | — | — | — | (56 | ) | 56 | — | — | — | — | |||||||||||||||||||||||||
| Other | — | — | — | (1 | ) | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||||
| Balance at December 31, 2017 | 116,020,852 | 1 | 573 | 5,892 | 372 | 1 | 6,839 | — | 6,839 | ||||||||||||||||||||||||||
| Net income | — | — | — | 521 | — | — | 521 | — | 521 | ||||||||||||||||||||||||||
| Dividends ($0.64 per share) | — | — | — | (71 | ) | — | — | (71 | ) | — | (71 | ) | |||||||||||||||||||||||
| Common stock repurchases | (13,243,107 | ) | — | (500 | ) | — | — | — | (500 | ) | — | (500 | ) | ||||||||||||||||||||||
| Share-based compensation | 894,847 | — | 13 | — | — | — | 13 | — | 13 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (247 | ) | — | (247 | ) | — | (247 | ) | |||||||||||||||||||||||
| Effect of adoption of ASU 2016-01 (see Note 1) | — | — | — | 32 | (32 | ) | — | — | — | — | |||||||||||||||||||||||||
| Balance at December 31, 2018 | 103,672,592 | 1 | 86 | 6,374 | 93 | 1 | 6,555 | — | 6,555 | ||||||||||||||||||||||||||
| Net income | — | — | — | 402 | — | — | 402 | — | 402 | ||||||||||||||||||||||||||
| Dividends ($0.72 per share) | — | — | — | (74 | ) | — | — | (74 | ) | — | (74 | ) | |||||||||||||||||||||||
| Common stock repurchases | (11,163,929 | ) | — | (93 | ) | (407 | ) | — | — | (500 | ) | — | (500 | ) | |||||||||||||||||||||
| Share-based compensation | 766,324 | — | 7 | — | — | — | 7 | — | 7 | ||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | — | 6 | 6 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 249 | — | 249 | — | 249 | ||||||||||||||||||||||||||
| Balance at December 31, 2019 | 93,274,987 | $ | 1 | $ | — | $ | 6,295 | $ | 342 | $ | 1 | $ | 6,639 | $ | 6 | $ | 6,645 | ||||||||||||||||||
| Common Shares Outstanding | Total Shareholders’ Equity Attributable to Assured Guaranty Ltd. | Nonredeemable Noncontrolling Interests | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Par Value | Retained Earnings | Accumulated Other Comprehensive Income | Deferred Equity Compensation | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 | 93,274,987 | $ | 1 | $ | 6,295 | $ | 342 | $ | 1 | $ | 6,639 | $ | 6 | $ | 6,645 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | 362 | — | — | 362 | 7 | 369 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.80 per share) | — | — | (69) | — | — | (69) | — | (69) | ||||||||||||||||||||||||||||||||||||||||||
| Common shares repurchases | (15,787,804) | — | (446) | — | — | (446) | — | (446) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 445,490 | — | 16 | — | — | 16 | — | 16 | ||||||||||||||||||||||||||||||||||||||||||
| Reallocation of ownership interest | — | — | — | — | — | — | 10 | 10 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 63 | 63 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | (45) | (45) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 156 | — | 156 | — | 156 | ||||||||||||||||||||||||||||||||||||||||||
| Other (Note 16) | (385,777) | — | (15) | — | — | (15) | — | (15) | ||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2020 | 77,546,896 | 1 | 6,143 | 498 | 1 | 6,643 | 41 | 6,684 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 389 | — | — | 389 | 29 | 418 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.88 per share) | — | — | (65) | — | — | (65) | — | (65) | ||||||||||||||||||||||||||||||||||||||||||
| Common shares repurchases | (10,519,040) | — | (496) | — | — | (496) | — | (496) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 490,568 | — | 19 | — | — | 19 | — | 19 | ||||||||||||||||||||||||||||||||||||||||||
| Consolidation | — | — | — | — | — | — | 89 | 89 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 40 | 40 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | (13) | (13) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (198) | — | (198) | — | (198) | ||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2021 | 67,518,424 | 1 | 5,990 | 300 | 1 | 6,292 | 186 | 6,478 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 124 | — | — | 124 | 14 | 138 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends ($1.00 per share) | — | — | (64) | — | — | (64) | — | (64) | ||||||||||||||||||||||||||||||||||||||||||
| Common shares repurchases | (8,847,981) | — | (503) | — | — | (503) | — | (503) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 342,597 | — | 30 | — | — | 30 | — | 30 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 89 | 89 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | (61) | (61) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (815) | — | (815) | — | (815) | ||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2022 | 59,013,040 | $ | 1 | $ | 5,577 | $ | (515) | $ | 1 | $ | 5,064 | $ | 228 | $ | 5,292 | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
140
Assured Guaranty Ltd.
Consolidated Statements of Cash Flows
(in millions)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Operating Activities: | |||||||||||
| Net Income | $ | 401 | $ | 521 | $ | 730 | |||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||
| Non-cash interest and operating expenses | 34 | 36 | 26 | ||||||||
| Net amortization of premium (discount) on investments | (35 | ) | (31 | ) | (46 | ) | |||||
| Provision (benefit) for deferred income taxes | 65 | 74 | 250 | ||||||||
| Net realized investment losses (gains) | (22 | ) | 32 | (40 | ) | ||||||
| Bargain purchase gain and settlement of pre-existing relationships | — | — | (58 | ) | |||||||
| Change in premiums receivable, net of premiums and commissions payable | (388 | ) | (6 | ) | (69 | ) | |||||
| Change in ceded unearned premium reserve | 20 | 58 | 90 | ||||||||
| Change in unearned premium reserve | 224 | 39 | (424 | ) | |||||||
| Change in loss and loss adjustment expense reserve, net | (528 | ) | (173 | ) | 142 | ||||||
| Change in financial guaranty variable interest entities' assets and liabilities, net | (27 | ) | (5 | ) | (15 | ) | |||||
| Change in credit derivative assets and liabilities, net | (1 | ) | (62 | ) | (144 | ) | |||||
| Other | — | (21 | ) | (9 | ) | ||||||
| Cash flows from consolidated investment vehicles: | |||||||||||
| Purchases of securities | (267 | ) | — | — | |||||||
| Other changes in investment vehicles | 15 | — | — | ||||||||
| Net cash flows provided by (used in) operating activities | (509 | ) | 462 | 433 | |||||||
| Investing activities | |||||||||||
| Fixed-maturity securities: | |||||||||||
| Purchases | (873 | ) | (1,881 | ) | (2,552 | ) | |||||
| Sales | 1,805 | 1,180 | 1,701 | ||||||||
| Maturities and paydowns | 781 | 962 | 821 | ||||||||
| Short-term investments with maturities of over three months: | |||||||||||
| Purchases | (229 | ) | (243 | ) | (255 | ) | |||||
| Sales | 2 | 23 | 102 | ||||||||
| Maturities and paydowns | 316 | 207 | 191 | ||||||||
| Net sales (purchases) of short-term investments with original maturities of less than three months | (623 | ) | (84 | ) | 36 | ||||||
| Net proceeds from paydowns on financial guaranty variable interest entities’ assets | 139 | 116 | 147 | ||||||||
| Net proceeds from sales of financial guaranty variable interest entities’ assets | 51 | — | — | ||||||||
| Acquisitions, net of cash acquired (see Note 2) | (145 | ) | — | 95 | |||||||
| Proceeds from maturity of other invested asset | — | — | 85 | ||||||||
| Proceeds from sales of other invested assets | 36 | 38 | 2 | ||||||||
| Purchases of other invested assets | (88 | ) | (20 | ) | (23 | ) | |||||
| Other | (3 | ) | (1 | ) | (5 | ) | |||||
| Net cash flows provided by (used in) investing activities | $ | 1,169 | $ | 297 | $ | 345 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income (loss) | $ | 137 | $ | 419 | $ | 368 | |||||||||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||||||||
| Non-cash interest and operating expenses | 65 | 69 | 54 | ||||||||||||||
| Provision (benefit) for deferred income taxes | (3) | (38) | 58 | ||||||||||||||
| Net realized investment losses (gains) | 56 | (15) | (18) | ||||||||||||||
| Equity in (earnings) losses of investees | 39 | (94) | (27) | ||||||||||||||
| Fair value losses (gains) on trading securities | 34 | — | — | ||||||||||||||
| Loss on extinguishment of debt | — | 175 | — | ||||||||||||||
| Change in premiums receivable, net of premiums and commissions payable | 74 | — | (102) | ||||||||||||||
| Change in unearned premium reserve, net | (93) | (17) | 19 | ||||||||||||||
| Change in loss and loss adjustment expense reserve, net | (1,207) | (99) | (174) | ||||||||||||||
| Change in current income taxes | (106) | 64 | 9 | ||||||||||||||
| Change in credit derivative assets and liabilities, net | 8 | 54 | (85) | ||||||||||||||
| Other | (56) | 20 | (1) | ||||||||||||||
| Cash flows from consolidated investment vehicles: | |||||||||||||||||
| Purchases of securities | (3,201) | (4,957) | (2,053) | ||||||||||||||
| Sales of securities | 1,513 | 2,161 | 1,156 | ||||||||||||||
| Maturities and paydowns of securities | 156 | 430 | 71 | ||||||||||||||
| Proceeds from (purchases of) money market funds | 6 | (6) | (108) | ||||||||||||||
| Purchases to cover securities sold short | (223) | (621) | (460) | ||||||||||||||
| Proceeds from securities sold short | 188 | 618 | 509 | ||||||||||||||
| Other changes in consolidated investment vehicles | 134 | (100) | (69) | ||||||||||||||
| Net cash flows provided by (used in) operating activities | (2,479) | (1,937) | (853) | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Fixed-maturity securities, available for sale: | |||||||||||||||||
| Purchases | (371) | (1,236) | (1,380) | ||||||||||||||
| Sales | 717 | 428 | 779 | ||||||||||||||
| Maturities and paydowns | 682 | 1,148 | 878 | ||||||||||||||
| Short-term investments with original maturities of over three months: | |||||||||||||||||
| Purchases | (63) | — | (85) | ||||||||||||||
| Sales | — | — | 5 | ||||||||||||||
| Maturities and paydowns | 36 | 36 | 73 | ||||||||||||||
| Net sales (purchases) of short-term investments with original maturities of less than three months | 439 | (410) | 430 | ||||||||||||||
| Fixed-maturity securities, trading: | |||||||||||||||||
| Sales | 121 | — | — | ||||||||||||||
| Maturities and paydowns | 87 | — | — | ||||||||||||||
| Purchases of other invested assets | (25) | (79) | (19) | ||||||||||||||
| Sales and return of capital of other invested assets | 36 | 80 | 23 | ||||||||||||||
| Paydowns on financial guaranty variable interest entities’ assets | 84 | 62 | 83 | ||||||||||||||
| Other | (3) | (6) | 1 | ||||||||||||||
| Net cash flows provided by (used in) investing activities | 1,740 | 23 | 788 | ||||||||||||||
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
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Assured Guaranty Ltd.
Consolidated Statements of Cash Flows, - (Continued)Continued
(in millions)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Financing activities | |||||||||||
| Dividends paid | $ | (74 | ) | $ | (71 | ) | $ | (70 | ) | ||
| Repurchases of common stock | (500 | ) | (500 | ) | (501 | ) | |||||
| Net paydowns of financial guaranty variable interest entities’ liabilities | (181 | ) | (116 | ) | (157 | ) | |||||
| Paydown of long-term debt | (4 | ) | (101 | ) | (30 | ) | |||||
| Other | (15 | ) | (7 | ) | (8 | ) | |||||
| Cash flows from consolidated investment vehicles: | |||||||||||
| Proceeds from issuance of collateralized loan obligations | 482 | — | — | ||||||||
| Repayment of warehouse loans and equity | (306 | ) | — | — | |||||||
| Contributions from noncontrolling interests to investment vehicles | 18 | — | — | ||||||||
| Distributions to redeemable noncontrolling interests from investment vehicles | (4 | ) | — | — | |||||||
| Net cash flows provided by (used in) financing activities | (584 | ) | (795 | ) | (766 | ) | |||||
| Effect of foreign exchange rate changes | 3 | (4 | ) | 5 | |||||||
| Increase (decrease) in cash and restricted cash | 79 | (40 | ) | 17 | |||||||
| Cash and restricted cash at beginning of period | 104 | 144 | 127 | ||||||||
| Cash and restricted cash at end of period | $ | 183 | $ | 104 | $ | 144 | |||||
| Supplemental cash flow information | |||||||||||
| Cash paid (received) during the period for: | |||||||||||
| Income taxes | $ | 4 | $ | (4 | ) | $ | 10 | ||||
| Interest on long-term debt | 84 | 99 | 77 | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
| Purchases of fixed-maturity investments | $ | (188 | ) | $ | (4 | ) | $ | (32 | ) | ||
| Sales of fixed-maturity investments | 44 | — | — | ||||||||
| As of December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Reconciliation of cash and restricted cash to the consolidated balance sheets: | |||||||||||
| Cash | $ | 169 | $ | 104 | $ | 144 | |||||
| Restricted cash (included in other assets) | — | — | — | ||||||||
| Cash of consolidated investment vehicles | 14 | — | — | ||||||||
| Cash and restricted cash at the end of period | $ | 183 | $ | 104 | $ | 144 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Dividends paid | $ | (64) | $ | (66) | $ | (69) | |||||||||||
| Repurchases of common shares | (500) | (496) | (446) | ||||||||||||||
| Net paydowns of financial guaranty variable interest entities’ liabilities | (99) | (53) | (77) | ||||||||||||||
| Issuance of long-term debt, net of issuance costs | — | 889 | — | ||||||||||||||
| Redemptions and purchases of debt, including make-whole payment | (2) | (620) | (22) | ||||||||||||||
| Other | (6) | 26 | (10) | ||||||||||||||
| Cash flows from consolidated investment vehicles: | |||||||||||||||||
| Proceeds from issuance of collateralized loan obligations | 1,372 | 3,276 | 738 | ||||||||||||||
| Repayment of collateralized loan obligations | (373) | (824) | — | ||||||||||||||
| Proceeds from issuance of warehouse financing debt | 991 | 1,338 | 234 | ||||||||||||||
| Repayment of warehouse financing debt | (796) | (1,537) | (210) | ||||||||||||||
| Contributions from noncontrolling interests to consolidated investment vehicles | 74 | 39 | 88 | ||||||||||||||
| Distributions to noncontrolling interests from consolidated investment vehicles | (26) | (12) | (43) | ||||||||||||||
| Borrowing (payment) under credit facility | 41 | — | — | ||||||||||||||
| Net cash flows provided by (used in) financing activities | 612 | 1,960 | 183 | ||||||||||||||
| Effect of foreign exchange rate changes | (8) | (2) | (3) | ||||||||||||||
| Increase (decrease) in cash and cash equivalents and restricted cash | (135) | 44 | 115 | ||||||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | 342 | 298 | 183 | ||||||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 207 | $ | 342 | $ | 298 | |||||||||||
| Supplemental cash flow information | |||||||||||||||||
| Income taxes paid (received) | $ | 105 | $ | 24 | $ | (25) | |||||||||||
| Interest paid on long-term debt | 77 | 80 | 81 | ||||||||||||||
| Supplemental disclosure of non-cash activities: | |||||||||||||||||
| Puerto Rico Salvage (see Note 3) | |||||||||||||||||
| Fixed-maturity securities, available-for-sale, received as salvage | $ | 986 | $ | — | $ | — | |||||||||||
| Fixed-maturity securities, available-for-sale, ceded to a reinsurer | 27 | — | — | ||||||||||||||
| Fixed-maturity securities, trading, received as salvage | 549 | — | — | ||||||||||||||
| Fixed-maturity securities, trading, ceded to a reinsurer | 6 | — | — | ||||||||||||||
| Debt securities of financial guaranty variable interest entities received as salvage | 234 | — | — | ||||||||||||||
| Contributions from noncontrolling interests | 36 | 1 | — | ||||||||||||||
| Distributions to noncontrolling interests | 56 | 1 | — | ||||||||||||||
| As of December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets: | |||||||||||||||||
| Cash | $ | 107 | $ | 120 | $ | 162 | |||||||||||
| Restricted cash (included in other assets) | 1 | 2 | 2 | ||||||||||||||
| Cash of financial guaranty variable interest entities (see Note 8) | 2 | — | — | ||||||||||||||
| Cash and cash equivalents of consolidated investment vehicles (see Note 8) | 97 | 220 | 134 | ||||||||||||||
| Cash and cash equivalents and restricted cash at the end of period | $ | 207 | $ | 342 | $ | 298 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
142
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements
1.Business and 2017 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 U.S.United States (U.S.) and internationalnon-U.S. 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 (debt(collectively, debt service), 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 similar risk profiles similar to those of its structured finance exposures written in financial guaranty form.
Through Assured Investment Management LLC (AssuredIM LLC) and its assetinvestment management subsidiaries,affiliates (together with AssuredIM LLC, AssuredIM), the Company providesserves as investment management services across various asset classes includingadvisor to 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 legacy hedge and opportunity funds now subject to an orderly wind-down. AssuredIM has managed structured and public finance, credit and special situation investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients.
The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will result in any transaction. The Company is not yet able to estimate the impact that any transaction being discussed would have on its financial statements.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In management'smanagement’s opinion, all material adjustments necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, andincluding 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. The presentation of equity in net earnings of investees was changed in 2019 to reflect amounts previously reported in net investment income and other income to a separate line item on the consolidated statements of operations. Certain prior year balances have been reclassified to conform to the current year's presentation.
The consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated VIEs.financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs). See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.
The Company'sCompany’s principal insurance subsidiaries are:
•Assured Guaranty Municipal Corp. (AGM), domiciled in New York;
•Assured Guaranty Corp. (AGC), domiciled in Maryland;
•Assured Guaranty (Europe) plc (AGE UK)UK Limited (AGUK), organized in the U.K.;
•Assured Guaranty (Europe) SA (AGE SA)(AGE), organized in France;
•Assured Guaranty Re Ltd. (AG Re), domiciled in Bermuda; and
•Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda.
The Company'sCompany’s principal asset management subsidiaries are BlueMountain Capitalare:
•Assured Investment Management LLC, (BlueMountain)organized in Delaware;
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•Assured Investment Management (London) LLP, organized in the U.K.; and
•Assured Healthcare Partners LLC, organized in Delaware.
AGM, AGC and, until its merger with AGM on April 1, 2021, Municipal Assurance Corp. (MAC), BlueMountain CLO Management,(collectively, the U.S. Insurance Subsidiaries), jointly own an investment subsidiary, AG Asset Strategies LLC and BlueMountain GP Holdings, LLC.(AGAS), which invests in funds managed by AssuredIM (AssuredIM Funds).
Significant Accounting Policies
The Company revalues assets, liabilities, revenue and expenses denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates. Gains and losses relating to transactions in foreign denominations in those subsidiaries where the functional currency is the U.S. dollar are reported in the consolidated statementstatements of operations. Gains and losses relating to translating foreign functional currency financial statements forto U.S. GAAP reportingdollars are recordedreported in the consolidated statements of other comprehensive income (loss) (OCI).
Other accounting policies are included in the following notes.notes to the consolidated financial statements.
| Note | |||||
| Note | |||||
| Expected loss to be paid | Note | ||||
| Contracts accounted for as insurance | Note | ||||
| Contracts accounted for as credit derivatives | Note 6 | ||||
| Investments and cash | Note 7 | ||||
| Financial guaranty variable interest entities and consolidated investment vehicles | Note 8 | ||||
| Fair value measurement | Note 9 | ||||
| Note 10 | |||||
| Goodwill and other intangible assets | Note | ||||
| Note | |||||
| Note | |||||
| Note | |||||
| Note 17 | |||||
| Note | |||||
| Note | |||||
| Earnings per share | Note | ||||
In February 2016,March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02,2020-04, LeasesReference Rate Reform (Topic 842)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The Company adopted Topic 842 on January 1, 2019 usingamendments in this ASU only apply to contracts that reference the optional transition methodLondon Interbank Offered Rate (LIBOR) or another reference rate that allows the Companyis expected to initially apply the new requirements at the effective date, with no revisionbe discontinued due to prior periods. See Note 20, Commitments and Contingencies, for additional information.reference rate reform.
In March 2017,January 2021, the FASB issued ASU 2017-08,2021-01, Receivables-Nonrefundable Fees and Other CostsReference Rate Reform (Topic 310-20) - Premium Amortization on Purchased Callable Debt Securities848): Scope. This, to clarify the scope of relief related to ASU shortened the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This ASU was adopted on January 1, 2019, with no effect on the Company's consolidated financial statements.
2020-04. In June 2016,December 2022, the FASB issued ASU 2016-13,2022-06, Financial Instruments - Credit LossesReference Rate Reform (Topic 326)848): Measurement of Credit Losses on Financial Instruments. The ASU provides a new current expected credit loss model to account for credit losses on certain financial assets (e.g., reinsurance recoverables, premium receivables, and held-to-maturity debt securities) and off-balance sheet exposures (e.g., loan commitments). That model requires an entity to estimate lifetime credit losses related to certain financial assets, based on relevant historical information, adjusted for current conditions and reasonable and supportable forecasts that could affect the collectabilityDeferral of the reported amount. Sunset Date of Topic 848, to extend the aforementioned temporary optional expedients and exceptions from December 31, 2022 to December 31, 2024. These ASUs became effective upon their issuance and may be applied for contract modifications that occur from March 12, 2020 through December 31, 2024 (the Reference Rate Transition Period).
144
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The ASU also makes targeted amendmentsCompany adopted the optional relief afforded by ASUs in the third quarter of 2021 on a prospective basis, and the guidance will be followed until the optional relief terminates on December 31, 2024. The Company has identified insurance contracts, derivatives and other financial instruments that are directly or indirectly influenced by LIBOR and will be applying the accounting relief as relevant contract modifications are made during the Reference Rate Transition Period. There was no impact to the current impairment model for available-for-sale debt securities, which includes requiringCompany’s consolidated financial statements upon the recognitioninitial adoption of an allowance rather than a direct write-down of the investment, which may be reversed in the event that the credit of an issuer improves. In addition, the ASU eliminates the existing guidance for purchased credit impaired assets and introduces a new model for purchased financial assets with credit deterioration, such as certain of the Company's loss mitigation securities, which requires the recognition of an initial allowance for credit losses. Under the new guidance, the amortized cost would be the purchase price plus the allowance at the acquisition date.these ASUs.
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the 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,
•simplify and improve the accounting for certain market-based options or guaranteesguaranties associated with deposit (or account balance) contracts,
•simplify the amortization of deferred acquisition costs (DAC), and
•improve the effectiveness of the required disclosures.
In November 2020, the FASB deferred the effective date of this ASU to January 1, 2023, with early adoption permitted.
This ASU does not affect the Company’s financial guaranty insurance contracts, but may affect its accountingcontracts. The Company assessed the impact for certain specialty (non-financial guaranty) contracts. In October 2019,insurance contracts and determined that there will be no impact to 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 itsCompany’s consolidated financial statements.
Net Effect of BlueMountain Acquisition | ||||
| (in millions) | ||||
| Cash purchase price | $ | 157 | ||
| Identifiable assets acquired: | ||||
| Investment portfolio | 3 | |||
| Cash | 12 | |||
Intangible assets (1) | 79 | |||
| Other assets (2) | 59 | |||
| Total assets | 153 | |||
| Liabilities assumed: | ||||
Compensation payable (3) | 61 | |||
| Other liabilities | 52 | |||
| Total liabilities | 113 | |||
| Net assets of BlueMountain | 40 | |||
Goodwill recognized from BlueMountain Acquisition (1) | $ | 117 | ||
| Fair Value | Estimated Weighted Average Useful Life | ||||
| (in millions) | |||||
| CLO contracts | $ | 42 | 9.0 years | ||
| Investment management contracts | 24 | 4.8 years | |||
| CLO distribution network | 9 | 5.0 years | |||
| Trade name | 3 | 10.0 years | |||
| Favorable sublease | 1 | 4.4 years | |||
| Total finite-lived intangible assets, net | $ | 79 | |||
| Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| (dollars in millions) | |||||||
| Pro forma revenues | $ | 1,079 | $ | 1,210 | |||
| Pro forma net income | 358 | 436 | |||||
| Pro forma earnings per share (EPS): | |||||||
| Basic | 3.60 | 3.96 | |||||
| Diluted | 3.57 | 3.92 | |||||
| Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships | Net effect of Settlement of Pre-existing Relationships | Net Effect of MBIA UK Acquisition | |||||||||
| (in millions) | |||||||||||
| Purchase price (1) | $ | 334 | $ | — | $ | 334 | |||||
| Identifiable assets acquired: | |||||||||||
| Investments | 459 | — | 459 | ||||||||
| Cash | 72 | — | 72 | ||||||||
| Premiums receivable, net of commissions payable | 274 | (4 | ) | 270 | |||||||
| Other assets | 16 | (6 | ) | 10 | |||||||
| Total assets | 821 | (10 | ) | 811 | |||||||
| Liabilities assumed: | |||||||||||
| Unearned premium reserves | 389 | (6 | ) | 383 | |||||||
| Current tax payable | 25 | — | 25 | ||||||||
| Other liabilities | 4 | (5 | ) | (1 | ) | ||||||
| Total liabilities | 418 | (11 | ) | 407 | |||||||
| Net assets of MBIA UK | 403 | 1 | 404 | ||||||||
| Cash acquired from MBIA Holdings | 23 | — | 23 | ||||||||
| Deferred tax liability | (36 | ) | — | (36 | ) | ||||||
| Net asset effect of MBIA UK Acquisition | 390 | 1 | 391 | ||||||||
| Bargain purchase gain and settlement of pre-existing relationships resulting from MBIA UK Acquisition, after-tax | 56 | 1 | 57 | ||||||||
| Deferred tax | — | 1 | 1 | ||||||||
| Bargain purchase gain and settlement of pre-existing relationships resulting from MBIA UK Acquisition, pre-tax | $ | 56 | $ | 2 | $ | 58 | |||||
| Commutation | Assumption | Total | ||||||||||
| (in millions) | ||||||||||||
| Cash | $ | 20 | $ | 343 | $ | 363 | ||||||
| Premiums receivable/payable, net of commissions | $ | 16 | $ | 45 | $ | 61 | ||||||
| Unearned premium reserve, net | (56 | ) | (319 | ) | (375 | ) | ||||||
| Credit derivative liability, net | — | (68 | ) | (68 | ) | |||||||
| Other | 2 | (1 | ) | 1 | ||||||||
| Impact to net assets (liabilities), excluding cash | $ | (38 | ) | $ | (343 | ) | $ | (381 | ) | |||
| Commutation loss | $ | 18 | $ | — | $ | 18 | ||||||
The Company reports its results of operations in two segments: Insurance and Asset Management, separate from its Corporate division and the effects of consolidating FG VIEs and CIVs, which is consistent with the manner in which the Company'sCompany’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. Prior to the BlueMountain Acquisition Date, the Company's operating subsidiaries were all insurance companies, and results of operations were viewed by the CODM as 1 segment. Beginning in fourth quarter 2019, with the BlueMountain Acquisition 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 FG VIEs and investment vehicles. See Note 14, Variable Interest Entities.
The Insurance segment primarily consists ofof: (i) the Company's domesticCompany’s insurance subsidiaries; 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 by Assured Investment Management (Assured Investment Management funds).
(ii) AGAS. The Asset Management segment consists of the Company's Assured Investment Management subsidiaries,AssuredIM, which provideprovides asset management services to outsidethird-party investors as well as to the Company'sU.S. Insurance segment.Subsidiaries and AGAS.
The Corporate division primarily consists primarily of interest expense on the debt of AGUSthe U.S. Holding Companies and AGMH,any losses on extinguishment or repurchases of their debt, as well as other operating expenses attributed to holding companythe corporate activities including administrative services performed by operating subsidiaries forof AGL and the holding companies.U.S. Holding Companies.
The Other items consist of intersegment eliminations, reclassifications, and consolidation adjustments, includingcategory primarily includes the effect of consolidating FG VIEs and CIVs, intersegment eliminations and the reclassification of reimbursable fund expenses. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
The segment results differ from the consolidated financial statements in certain Assured Investment Management investment vehicles in whichrespects. The Insurance segment invests. See Note 14. Variable Interest Entities.includes: (i) premiums and losses from the financial guaranty insurance policies issued by the U.S. Insurance Subsidiaries which guarantee the FG VIEs’ debt; and (ii) AGAS’ share of earnings from investments in AssuredIM Funds in “equity in earnings (losses) of investees.” Under GAAP, (i) FG VIEs are consolidated by the U.S. Insurance Subsidiaries and the premiums and losses associated with their financial guaranty policies associated with the FG VIEs’ debt are eliminated, whereas the reconciliation tables below present the FG VIEs and related eliminations in “Other”, and (ii) CIVs are consolidated by AGUS, a U.S. holding company, whereas in the reconciliation tables below, the CIVs and related eliminations of the Insurance segment’s “equity in earnings (losses) of investees” associated with AGAS’ interest in CIVs are presented in “Other.” In addition, under GAAP, reimbursable fund expenses are shown as a component of asset management fees and included in total revenues, whereas in the Asset Management segment in the tables below, they are netted in “segment expenses”.
The Company analyzes the operating performance of each segment using “segment adjusted operating income (loss).” Results for each segment include specifically identifiable expenses as well as intersegment expense allocations, as applicable,
145
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
based on time studies and other cost allocation methodologies based on headcount or other metrics. Segment adjusted operating income is defined as “net income (loss) attributable to AGL”, adjusted for the following items:
•Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading.
•Elimination of non-credit impairment-related 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.
•Elimination of fair value gains (losses) on the Company’s committed capital securities (CCS) that are recognized in net income.
•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.
•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 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 following tables present the Company's operations by operating segment. Thetable presents information for prior years has been conformedthe Company’s operating segments. Intersegment revenues include transactions between and among the segments, the corporate division and other.
Segment Information
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| Insurance | Asset Management | Insurance | Asset Management | Insurance | Asset Management | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Third-party revenues | $ | 748 | $ | 78 | $ | 724 | $ | 73 | $ | 864 | $ | 61 | ||||||||||||||||||||||||||
| Intersegment revenues | 9 | 34 | 9 | 10 | 10 | 5 | ||||||||||||||||||||||||||||||||
| Segment revenues | 757 | 112 | 733 | 83 | 874 | 66 | ||||||||||||||||||||||||||||||||
| Segment expenses | 259 | 119 | 33 | 108 | 446 | 128 | ||||||||||||||||||||||||||||||||
| Segment equity in earnings (losses) of investees | (51) | — | 144 | — | 61 | — | ||||||||||||||||||||||||||||||||
| Less: Segment provision (benefit) for income taxes | 34 | (1) | 122 | (6) | 60 | (12) | ||||||||||||||||||||||||||||||||
| Segment adjusted operating income (loss) | $ | 413 | $ | (6) | $ | 722 | $ | (19) | $ | 429 | $ | (50) | ||||||||||||||||||||||||||
| Selected components of segment adjusted operating income: | ||||||||||||||||||||||||||||||||||||||
| Net investment income | $ | 278 | $ | — | $ | 280 | $ | — | $ | 310 | $ | — | ||||||||||||||||||||||||||
| Interest expense | 1 | 1 | — | 1 | — | — | ||||||||||||||||||||||||||||||||
| Non-cash compensation and operating expenses (1) | 41 | 18 | 56 | 17 | 39 | 31 | ||||||||||||||||||||||||||||||||
_____________________
(1) Consists of amortization of DAC and intangible assets, depreciation, share-based compensation (see Note 13, Employee Benefit Plans), write-off of long-lived intangible assets related to MAC licenses (see Note 11, Goodwill and Other Intangible Assets), and lease impairment (see Note 17, Leases).
146
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The tables below present a reconciliation of significant components of segment information to the new segment presentation.comparable consolidated amounts.
| Year Ended December 31, 2019 | |||||||||||||||||||
| Insurance | Asset Management | Corporate | Other | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Net investment income | $ | 383 | $ | — | $ | 4 | $ | (9 | ) | $ | 378 | ||||||||
| Interest expense | — | — | 94 | (5 | ) | 89 | |||||||||||||
| Non-cash compensation and operating expenses (1) | 39 | 3 | 6 | — | 48 | ||||||||||||||
| Intersegment revenues | $ | 5 | $ | — | $ | — | $ | (5 | ) | $ | — | ||||||||
| Third-party revenues | 912 | 22 | 3 | 27 | 964 | ||||||||||||||
| Total revenues | 917 | 22 | 3 | 22 | 964 | ||||||||||||||
| Total expenses | 324 | 34 | 133 | 25 | 516 | ||||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 593 | (12 | ) | (130 | ) | (3 | ) | 448 | |||||||||||
| Equity in net earnings of investees | 2 | — | — | 2 | 4 | ||||||||||||||
| Adjusted operating income (loss) before income taxes | 595 | (12 | ) | (130 | ) | (1 | ) | 452 | |||||||||||
| Provision (benefit) for income taxes | 83 | (2 | ) | (19 | ) | — | 62 | ||||||||||||
| Noncontrolling interests | — | — | — | (1 | ) | (1 | ) | ||||||||||||
| Adjusted operating income (loss) | 512 | (10 | ) | (111 | ) | — | 391 | ||||||||||||
| Reconciling items from adjusted operating income (loss) to net income (loss) attributable to AGL: | |||||||||||||||||||
| Plus pre-tax adjustments: | |||||||||||||||||||
| Realized gains (losses) on investments | 22 | ||||||||||||||||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (10 | ) | |||||||||||||||||
| Fair value gains (losses) on CCS | (22 | ) | |||||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 22 | ||||||||||||||||||
| Total pre-tax adjustments | 12 | ||||||||||||||||||
| Plus tax effect on pre-tax adjustments | (1 | ) | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 402 | |||||||||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||||
| Insurance | Asset Management | Corporate | Other | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Net investment income | $ | 396 | $ | — | $ | 6 | $ | (7 | ) | $ | 395 | ||||||||
| Interest expense | — | — | 97 | (3 | ) | 94 | |||||||||||||
| Non-cash compensation and operating expenses (1) | 35 | — | 6 | — | 41 | ||||||||||||||
| Intersegment revenues | $ | 3 | $ | — | $ | — | $ | (3 | ) | $ | — | ||||||||
| Third-party revenues | 989 | — | (28 | ) | (2 | ) | 959 | ||||||||||||
| Total revenues | 992 | — | (28 | ) | (5 | ) | 959 | ||||||||||||
| Total expenses | 302 | — | 129 | — | 431 | ||||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 690 | — | (157 | ) | (5 | ) | 528 | ||||||||||||
| Equity in net earnings of investees | 1 | — | — | — | 1 | ||||||||||||||
| Adjusted operating income (loss) before income taxes | 691 | — | (157 | ) | (5 | ) | 529 | ||||||||||||
| Provision (benefit) for income taxes | 109 | — | (61 | ) | (1 | ) | 47 | ||||||||||||
| Noncontrolling interests | — | — | — | — | — | ||||||||||||||
| Adjusted operating income (loss) | 582 | — | (96 | ) | (4 | ) | 482 | ||||||||||||
| Reconciling items from adjusted operating income (loss) to net income (loss) attributable to AGL: | |||||||||||||||||||
| Plus pre-tax adjustments: | |||||||||||||||||||
| Realized gains (losses) on investments | (32 | ) | |||||||||||||||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | 101 | ||||||||||||||||||
| Fair value gains (losses) on CCS | 14 | ||||||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (32 | ) | |||||||||||||||||
| Total pre-tax adjustments | 51 | ||||||||||||||||||
| Plus tax effect on pre-tax adjustments | (12 | ) | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 521 | |||||||||||||||||
| Year Ended December 31, 2017 | |||||||||||||||||||
| Insurance | Asset Management | Corporate | Other | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Net investment income | $ | 423 | $ | — | $ | 2 | $ | (8 | ) | $ | 417 | ||||||||
| Interest expense | — | — | 100 | (3 | ) | 97 | |||||||||||||
| Non-cash compensation and operating expenses (1) | 36 | — | 5 | — | 41 | ||||||||||||||
| Intersegment revenues | $ | 3 | $ | — | $ | — | $ | (3 | ) | $ | — | ||||||||
| Third-party revenues | 1,556 | — | (8 | ) | 10 | 1,558 | |||||||||||||
| Total revenues | 1,559 | — | (8 | ) | 7 | 1,558 | |||||||||||||
| Total expenses | 586 | — | 129 | (10 | ) | 705 | |||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 973 | — | (137 | ) | 17 | 853 | |||||||||||||
| Equity in net earnings of investees | — | — | — | — | — | ||||||||||||||
| Adjusted operating income (loss) before income taxes | 973 | — | (137 | ) | 17 | 853 | |||||||||||||
| Provision (benefit) for income taxes | 241 | — | (54 | ) | 5 | 192 | |||||||||||||
| Noncontrolling interests | — | — | — | — | — | ||||||||||||||
| Adjusted operating income (loss) | 732 | — | (83 | ) | 12 | 661 | |||||||||||||
| Reconciling items from adjusted operating income (loss) to net income (loss) attributable to AGL: | |||||||||||||||||||
| Plus pre-tax adjustments: | |||||||||||||||||||
| Realized gains (losses) on investments | 40 | ||||||||||||||||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | 43 | ||||||||||||||||||
| Fair value gains (losses) on CCS | (2 | ) | |||||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 57 | ||||||||||||||||||
| Total pre-tax adjustments | 138 | ||||||||||||||||||
| Plus tax effect on pre-tax adjustments | (69 | ) | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 730 | |||||||||||||||||
Reconciliation of Segment Information to Consolidated Information
Year Ended December 31, 2022
| Less: | Net Income (Loss) Attributable to AGL | ||||||||||||||||||||||||||||||||||
| Revenues | Expenses | Equity in Earnings (Losses) of Investees | Provision (Benefit) for Income Taxes | Noncontrolling Interests | |||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||||||||
| Insurance | $ | 757 | $ | 259 | $ | (51) | $ | 34 | $ | — | $ | 413 | |||||||||||||||||||||||
| Asset Management | 112 | 119 | — | (1) | — | (6) | |||||||||||||||||||||||||||||
| Total segments | 869 | 378 | (51) | 33 | — | 407 | |||||||||||||||||||||||||||||
| Corporate division | 4 | 143 | — | (5) | — | (134) | |||||||||||||||||||||||||||||
| Other | 14 | 19 | 12 | — | 13 | (6) | |||||||||||||||||||||||||||||
| Subtotal | 887 | 540 | (39) | 28 | 13 | 267 | |||||||||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||||||||||||||
| Realized gains (losses) on investments | (56) | — | — | — | — | (56) | |||||||||||||||||||||||||||||
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (22) | (4) | — | — | — | (18) | |||||||||||||||||||||||||||||
| Fair value gains (losses) on CCS | 24 | — | — | — | — | 24 | |||||||||||||||||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (110) | — | — | — | — | (110) | |||||||||||||||||||||||||||||
| Tax effect | — | — | — | (17) | — | 17 | |||||||||||||||||||||||||||||
| Total consolidated | $ | 723 | $ | 536 | $ | (39) | $ | 11 | $ | 13 | $ | 124 | |||||||||||||||||||||||
147
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Reconciliation of Segment Information to Consolidated Information
Year Ended December 31, 2021
| Less: | Net Income (Loss) Attributable to AGL | ||||||||||||||||||||||||||||||||||
| Revenues | Expenses | Equity in Earnings (Losses) of Investees | Provision (Benefit) for Income Taxes | Noncontrolling Interests | |||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||||||||
| Insurance | $ | 733 | $ | 33 | $ | 144 | $ | 122 | $ | — | $ | 722 | |||||||||||||||||||||||
| Asset Management | 83 | 108 | — | (6) | — | (19) | |||||||||||||||||||||||||||||
| Total segments | 816 | 141 | 144 | 116 | — | 703 | |||||||||||||||||||||||||||||
| Corporate division | 2 | 312 | — | (47) | — | (263) | |||||||||||||||||||||||||||||
| Other | 142 | 26 | (50) | 6 | 30 | 30 | |||||||||||||||||||||||||||||
| Subtotal | 960 | 479 | 94 | 75 | 30 | 470 | |||||||||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||||||||||||||
| Realized gains (losses) on investments | 15 | — | — | — | — | 15 | |||||||||||||||||||||||||||||
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (78) | (14) | — | — | — | (64) | |||||||||||||||||||||||||||||
| Fair value gains (losses) on CCS | (28) | — | — | — | — | (28) | |||||||||||||||||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (21) | — | — | — | — | (21) | |||||||||||||||||||||||||||||
| Tax effect | — | — | — | (17) | — | 17 | |||||||||||||||||||||||||||||
| Total consolidated | $ | 848 | $ | 465 | $ | 94 | $ | 58 | $ | 30 | $ | 389 | |||||||||||||||||||||||
148
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Reconciliation of Segment Information to Consolidated Information
Year Ended December 31, 2020
| Less: | Net Income (Loss) Attributable to AGL | ||||||||||||||||||||||||||||||||||
| Revenues | Expenses | Equity in Earnings (Losses) of Investees | Provision (Benefit) for Income Taxes | Noncontrolling Interests | |||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||||||||
| Insurance | $ | 874 | $ | 446 | $ | 61 | $ | 60 | $ | — | $ | 429 | |||||||||||||||||||||||
| Asset Management | 66 | 128 | — | (12) | — | (50) | |||||||||||||||||||||||||||||
| Total segments | 940 | 574 | 61 | 48 | — | 379 | |||||||||||||||||||||||||||||
| Corporate division | 9 | 132 | (6) | (18) | — | (111) | |||||||||||||||||||||||||||||
| Other | 40 | 21 | (28) | (3) | 6 | (12) | |||||||||||||||||||||||||||||
| Subtotal | 989 | 727 | 27 | 27 | 6 | 256 | |||||||||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||||||||||||||
| Realized gains (losses) on investments | 18 | — | — | — | — | 18 | |||||||||||||||||||||||||||||
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 67 | 2 | — | — | — | 65 | |||||||||||||||||||||||||||||
| Fair value gains (losses) on CCS | (1) | — | — | — | — | (1) | |||||||||||||||||||||||||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 42 | — | — | — | — | 42 | |||||||||||||||||||||||||||||
| Tax effect | — | — | — | 18 | — | (18) | |||||||||||||||||||||||||||||
| Total consolidated | $ | 1,115 | $ | 729 | $ | 27 | $ | 45 | $ | 6 | $ | 362 | |||||||||||||||||||||||
Supplemental Information
Year Ended December 31, 2022
| Net Earned Premiums | Net Investment Income | Loss and LAE (Benefit) | Amortization of DAC | Other Expenses(1) | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||
| Insurance | $ | 497 | $ | 278 | $ | 12 | $ | 14 | $ | 232 | |||||||||||||||||||
| Asset Management | — | — | — | — | 118 | ||||||||||||||||||||||||
| Total segments | 497 | 278 | 12 | 14 | 350 | ||||||||||||||||||||||||
| Corporate division | — | 4 | — | — | 54 | ||||||||||||||||||||||||
| Other | (3) | (13) | 8 | — | 21 | ||||||||||||||||||||||||
| Subtotal | 494 | 269 | 20 | 14 | 425 | ||||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||||||||
| Credit derivative impairment (recoveries) (2) | — | — | (4) | — | — | ||||||||||||||||||||||||
| Total consolidated | $ | 494 | $ | 269 | $ | 16 | $ | 14 | $ | 425 | |||||||||||||||||||
_____________________
149
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Supplemental Information
Year Ended December 31, 2021
| Net Earned Premiums | Net Investment Income | Loss and LAE (Benefit) | Amortization of DAC | Other Expenses(1) | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||
| Insurance | $ | 418 | $ | 280 | $ | (221) | $ | 14 | $ | 240 | |||||||||||||||||||
| Asset Management | — | — | — | — | 107 | ||||||||||||||||||||||||
| Total segments | 418 | 280 | (221) | 14 | 347 | ||||||||||||||||||||||||
| Corporate division | — | 2 | — | — | 41 | ||||||||||||||||||||||||
| Other | (4) | (13) | 15 | — | 21 | ||||||||||||||||||||||||
| Subtotal | 414 | 269 | (206) | 14 | 409 | ||||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||||||||
| Credit derivative impairment (recoveries) (2) | — | — | (14) | — | — | ||||||||||||||||||||||||
| Total consolidated | $ | 414 | $ | 269 | $ | (220) | $ | 14 | $ | 409 | |||||||||||||||||||
_____________________
(1) Consists of “employee compensation and benefit expenses” and “other operating expenses.” Includes non-cash compensation and operating expenses of $56 million for Insurance segment, $17 million for Asset Management segment, and $5 million for Corporate division.
(2) Credit derivative impairment (recoveries) are included in “fair value gains (losses) on credit derivatives” in the Company’s consolidated statements of operations, and in loss and LAE (benefit) on a segment basis.
Supplemental Information
Year Ended December 31, 2020
| Net Earned Premiums | Net Investment Income | Loss and LAE (Benefit) | Amortization of DAC | Other Expenses(1) | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||
| Insurance | $ | 490 | $ | 310 | $ | 204 | $ | 16 | $ | 226 | |||||||||||||||||||
| Asset Management | — | — | — | — | 128 | ||||||||||||||||||||||||
| Total segments | 490 | 310 | 204 | 16 | 354 | ||||||||||||||||||||||||
| Corporate division | — | 2 | — | — | 37 | ||||||||||||||||||||||||
| Other | (5) | (15) | (3) | — | 34 | ||||||||||||||||||||||||
| Subtotal | 485 | 297 | 201 | 16 | 425 | ||||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||||||||
| Credit derivative impairment (recoveries) (2) | — | — | 2 | — | — | ||||||||||||||||||||||||
| Total consolidated | $ | 485 | $ | 297 | $ | 203 | $ | 16 | $ | 425 | |||||||||||||||||||
_____________________
(1) Consists of “employee compensation and benefit expenses” and “other operating expenses.” Includes non-cash compensation and operating expenses of $39 million for Insurance segment, $31 million for Asset Management segment, and $6 million for Corporate division.
(2) Credit derivative impairment (recoveries) are included in “fair value gains (losses) on credit derivatives” in the Company’s consolidated statements of operations, and in loss and LAE (benefit) on a segment basis.
150
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The table below summarizes revenues for the operating segments, Corporate division and Other category by country of domicile for each period indicated, based on the country of domicile of the Company’s subsidiaries that generated the revenues.
Segment, Corporate Division and Other
Revenues by Country of Domicile
| Year Ended December 31, | ||||||||||||||||||||
| Country of Domicile | 2022 | 2021 | 2020 | |||||||||||||||||
| (in millions) | ||||||||||||||||||||
| U.S. | $ | 727 | $ | 762 | $ | 788 | ||||||||||||||
| Bermuda | 129 | 153 | 155 | |||||||||||||||||
| U.K. | 32 | 42 | 38 | |||||||||||||||||
| Other | (1) | 3 | 8 | |||||||||||||||||
| Total | $ | 887 | $ | 960 | $ | 989 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| U.S. | $ | 761 | $ | 732 | $ | 1,193 | |||||
| Bermuda | 161 | 203 | 224 | ||||||||
| U.K. and other | 42 | 24 | 141 | ||||||||
| Total | $ | 964 | $ | 959 | $ | 1,558 | |||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Total GAAP revenues | $ | 963 | $ | 1,001 | $ | 1,739 | |||||
| Less: Realized gains (losses) on investments | 22 | (32 | ) | 40 | |||||||
| Less: Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (10 | ) | 101 | 43 | |||||||
| Less: Fair value gains (losses) on CCS | (22 | ) | 14 | (2 | ) | ||||||
| Less: Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 22 | (32 | ) | 57 | |||||||
| Plus: Credit derivative impairment (recoveries) (1) | 13 | 9 | (43 | ) | |||||||
| Total segment revenues | $ | 964 | $ | 959 | $ | 1,558 | |||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Total GAAP expenses | $ | 503 | $ | 422 | $ | 748 | |||||
| Plus: Credit derivative impairment (recoveries) (1) | 13 | 9 | (43 | ) | |||||||
| Total segment expenses | $ | 516 | $ | 431 | $ | 705 | |||||
The Company primarily sells credit protection contractsprimarily in financial guaranty insurance form. Until 2009, theThe Company may also soldsell credit protection by issuing policies that guaranteedguarantee payment obligations under credit derivatives, primarily credit default swaps (CDS). The Company'sCompany’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 thesold by its U.S. since 2009.Insurance Subsidiaries. The Company has, however, acquired or reinsured portfolios both before and aftersince 2009 that include financial guaranty contracts in credit derivative form.
The Company seeks to limit its exposure to losses by underwriting obligations that it views asto be investment grade at inception, although on occasion it may underwrite new issuances that it views as BIG,to be 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 classessector and geography and, in the structured finance portfolio, typicallygenerally 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 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 obligations 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 14,8, Financial Guaranty Variable Interest Entities.Entities and Consolidated Investment Vehicles. Unless otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated.
The Company also provideswrites specialty insurancebusiness that is consistent with its risk profile and reinsurance on transactions without special purpose entities but with similar risk profilesbenefits from its underwriting experience and other types of financial guaranties.
151
Assured Guaranty Ltd.
Notes to its structured finance exposures written in financial guaranty form.Consolidated Financial Statements, Continued
Significant Risk Management Activities
The Portfolio Risk Management Committee, which includes members of senior management and senior risk and surveillance officers, is responsible for enterprise risk management for the Insurance segment and focuses on measuring and managing insurance credit, market and liquidity risk for the Company. This committee establishes company-wide credit policy for the Company'sCompany’s direct and assumed insurance business. It implements specific insurance underwriting procedures and limits for the Company and allocates underwriting capacity among the Company'sCompany’s insurance subsidiaries. The Portfolio Risk Management Committee is responsible for enterprise risk management for the overall company and focuses on measuring and managing credit, market and liquidity risk for the overall company. All insurance transactions in new asset classes or new jurisdictions must be approved by this committee.
The U.S., U.K., AG Re and AGRO risk management committees and AGUK’s and AGE’s (the European Insurance Subsidiaries) surveillance committees conduct an in-depth reviewreviews of the insured portfolios of the relevant subsidiaries, focusing on varying portions of the portfolio at each meeting. They review and may revise internal ratings assigned to the insured transactions and review sector reports, monthly product line surveillance reports and compliance reports.
All transactions in the insured portfolio are assigned internal credit ratings by the relevant underwriting committee at inception, whichand such credit ratings are updated by the relevant risk management or surveillance committee based on changes in transaction credit quality. As part of the surveillance process, the Company monitors trends and changes in transaction credit quality, and recommends such remedial actions as may be necessary or appropriate. The Company also develops strategies to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage the Company'sCompany’s litigation proceedings.
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 forof 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 ofreflect an approach similar to that employed by the rating agencies, except that the Company'sCompany’s internal credit ratings focus on future performance rather than lifetime performance.
The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as being the higher of AA or their current internal rating. Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect its internal ratings.
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 thea 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 6,4, Expected Loss to be Paid (Recovered), for additional information. Surveillance personnel then assign each BIG transaction to one of the appropriatethree BIG surveillance categorycategories described below based upon whether a future loss is expected and whether a claim has been paid. The Company uses a tax-equivalentthe pre-tax book yield of the relevant subsidiary’s investment portfolio 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 isare 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 surveillance categories are:
•BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
152
Assured Guaranty Ltd. Notes to Consolidated Financial Statements, Continued •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. • |
BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.
The emergence and continuation of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the Company'sglobal economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Due to the nature of the Company’s business, COVID-19 and its global impact, directly and indirectly affected certain sectors in the insured portfolio.
Shortly after the pandemic reached the U.S. through early 2021 the Company’s surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio reflect its internal ratings.of COVID-19 and governmental and private responses to COVID-19, 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 various intermittent closures and capacity and travel restrictions or an economic downturn. Given the significant federal funding to state and local governments in 2021 and the performance it observed, the Company’s surveillance department has reduced these supplemental procedures. However, the Company is still monitoring those sectors it identified as most at risk for any developments related to COVID-19. The Company classifieshas paid only relatively small insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19, and has already received reimbursement for most of 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.claims.
Financial Guaranty Exposure
The Company measures its financial guaranty exposure in terms of (a)of: (i) gross and net par outstandingoutstanding; and (b)(ii) gross and net debt service.
The Company typically guarantees the payment of principal and interestdebt service 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. Foreign denominated par outstanding is translated at the spot rate at the end of the reporting period.
The Company purchaseshas, from time to time, purchased securities that it has insured, and for which it hashad expected losses to be paid (Loss Mitigation Securities), in order to mitigate the economic effect of insured losses (loss mitigation securities).losses. The Company excludes amounts attributable to loss mitigation securitiesLoss Mitigation Securities from par and debt service outstanding, which amounts are includedand instead reports Loss Mitigation Securities in the investment portfolio, because
the Company manages such securities as investments and not insurance exposure. As of both December 31, 20192022 and December 31, 2018,2021, the Company excluded $1.4 billion and $1.9 billion, respectively, offrom net par outstanding $1.3 billion attributable to loss mitigation securities.Loss Mitigation Securities.
Gross debt service outstanding represents the sum of all estimated future principal and interestdebt service payments on the insured 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'sCompany’s public finance transactions), as the total estimated contractual future principal and interestdebt service 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
153
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•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 interestdebt service due on insured obligations through their respective expected terms, which includes the Company'sCompany’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 and assumptions 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 London Interbank Offered Rate (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. 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 December 31, 2019 | As of December 31, 2018 | As of December 31, 2019 | As of December 31, 2018 | ||||||||||||
| (in millions) | |||||||||||||||
| Public finance | $ | 363,497 | $ | 361,511 | $ | 362,361 | $ | 358,438 | |||||||
| Structured finance | 12,279 | 13,569 | 11,769 | 13,148 | |||||||||||
| Total financial guaranty | $ | 375,776 | $ | 375,080 | $ | 374,130 | $ | 371,586 | |||||||
| 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 | % | |||||||||||||||
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 | $ | 413 | 0.2 | % | $ | 2,399 | 5.4 | % | $ | 1,533 | 15.4 | % | $ | 273 | 22.9 | % | $ | 4,618 | 1.9 | % | |||||||||||||||
| AA | 21,646 | 11.6 | 1,711 | 3.9 | 3,599 | 36.2 | 65 | 5.4 | 27,021 | 11.2 | |||||||||||||||||||||||||
| A | 105,180 | 56.4 | 13,013 | 29.5 | 1,016 | 10.2 | 206 | 17.3 | 119,415 | 49.4 | |||||||||||||||||||||||||
| BBB | 52,935 | 28.4 | 25,939 | 58.8 | 1,164 | 11.7 | 550 | 46.1 | 80,588 | 33.3 | |||||||||||||||||||||||||
| BIG | 6,388 | 3.4 | 1,041 | 2.4 | 2,632 | 26.5 | 99 | 8.3 | 10,160 | 4.2 | |||||||||||||||||||||||||
| Total net par outstanding | $ | 186,562 | 100.0 | % | $ | 44,103 | 100.0 | % | $ | 9,944 | 100.0 | % | $ | 1,193 | 100.0 | % | $ | 241,802 | 100.0 | % | |||||||||||||||
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Debt Service | |||||||||||||||||||||||
| Public finance | $ | 359,899 | $ | 359,703 | $ | 357,694 | $ | 357,314 | |||||||||||||||
| Structured finance | 10,273 | 10,248 | 10,076 | 10,046 | |||||||||||||||||||
| Total financial guaranty | $ | 370,172 | $ | 369,951 | $ | 367,770 | $ | 367,360 | |||||||||||||||
| Par Outstanding | |||||||||||||||||||||||
| Public finance | $ | 224,254 | $ | 224,099 | $ | 227,507 | $ | 227,164 | |||||||||||||||
| Structured finance | 9,184 | 9,159 | 9,258 | 9,228 | |||||||||||||||||||
| Total financial guaranty | $ | 233,438 | $ | 233,258 | $ | 236,765 | $ | 236,392 | |||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| U.S. public finance | $ | 176,047 | $ | 187,919 | |||
| Non-U.S. public finance | 51,538 | 44,714 | |||||
| U.S. structured finance | 9,800 | 10,352 | |||||
| Non-U.S. structured finance | 771 | 1,206 | |||||
| Total gross par outstanding | $ | 238,156 | $ | 244,191 | |||
| Sector (1) | As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | ||||||||
| Public finance: | ||||||||
| U.S.: | ||||||||
| General obligation | $ | 73,467 | $ | 78,800 | ||||
| Tax backed | 37,047 | 40,616 | ||||||
| Municipal utilities | 26,195 | 28,402 | ||||||
| Transportation | 16,209 | 15,197 | ||||||
| Healthcare | 7,148 | 6,750 | ||||||
| Higher education | 5,916 | 6,643 | ||||||
| Infrastructure finance | 5,429 | 5,489 | ||||||
| Housing revenue | 1,321 | 1,435 | ||||||
| Investor-owned utilities | 655 | 846 | ||||||
| Renewable energy | 210 | 215 | ||||||
| Other public finance | 1,890 | 2,169 | ||||||
| Total public finance—U.S. | 175,487 | 186,562 | ||||||
| Non-U.S.: | ||||||||
| Regulated utilities | 18,995 | 18,124 | ||||||
| Infrastructure finance | 17,952 | 17,166 | ||||||
| Sovereign and sub-sovereign | 11,341 | 6,094 | ||||||
| Renewable energy | 1,555 | 1,346 | ||||||
| Pooled infrastructure | 1,416 | 1,373 | ||||||
| Total public finance—non-U.S. | 51,259 | 44,103 | ||||||
| Total public finance | 226,746 | 230,665 | ||||||
| Structured finance: | ||||||||
| U.S.: | ||||||||
| RMBS | 3,546 | 4,270 | ||||||
| Life insurance transactions | 1,776 | 1,435 | ||||||
| Pooled corporate obligations | 1,401 | 1,215 | ||||||
| Financial products | 1,019 | 1,094 | ||||||
| Consumer receivables | 962 | 1,255 | ||||||
| Other structured finance | 596 | 675 | ||||||
| Total structured finance—U.S. | 9,300 | 9,944 | ||||||
| Non-U.S.: | ||||||||
| RMBS | 427 | 576 | ||||||
| Pooled corporate obligations | 55 | 126 | ||||||
| Other structured finance | 279 | 491 | ||||||
| Total structured finance—non-U.S. | 761 | 1,193 | ||||||
| Total structured finance | 10,061 | 11,137 | ||||||
| Total net par outstanding | $ | 236,807 | $ | 241,802 | ||||
In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $301$220 million of public finance gross par for public finance and $610$792 million of gross par of structured finance direct gross par as of December 31, 2019.2022. 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 by Internal Rating
As of December 31, 2022
| 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 | $ | 222 | 0.1 | % | $ | 1,967 | 4.4 | % | $ | 926 | 11.2 | % | $ | 469 | 50.4 | % | $ | 3,584 | 1.5 | % | ||||||||||||||||||||||||||||||||||||||||||
| AA | 16,241 | 9.1 | 3,497 | 7.9 | 4,633 | 56.3 | 12 | 1.3 | 24,383 | 10.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| A | 96,807 | 53.9 | 9,271 | 20.9 | 1,075 | 13.1 | 340 | 36.5 | 107,493 | 46.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BBB | 62,570 | 34.8 | 28,747 | 64.6 | 479 | 5.8 | 110 | 11.8 | 91,906 | 39.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BIG | 3,796 | 2.1 | 981 | 2.2 | 1,115 | 13.6 | — | — | 5,892 | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net par outstanding | $ | 179,636 | 100.0 | % | $ | 44,463 | 100.0 | % | $ | 8,228 | 100.0 | % | $ | 931 | 100.0 | % | $ | 233,258 | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||||
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Financial Guaranty Portfolio by Internal Rating
As of December 31, 2021
| 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 | $ | 272 | 0.2 | % | $ | 2,217 | 4.5 | % | $ | 806 | 9.6 | % | $ | 493 | 57.7 | % | $ | 3,788 | 1.6 | % | ||||||||||||||||||||||||||||||||||||||||||
| AA | 16,372 | 9.2 | 4,205 | 8.4 | 4,760 | 56.8 | 22 | 2.6 | 25,359 | 10.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| A | 94,459 | 53.3 | 10,659 | 21.3 | 813 | 9.7 | 160 | 18.7 | 106,091 | 44.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BBB | 60,744 | 34.3 | 32,264 | 64.6 | 611 | 7.3 | 179 | 21.0 | 93,798 | 39.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BIG | 5,372 | 3.0 | 600 | 1.2 | 1,384 | 16.6 | — | — | 7,356 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net par outstanding | $ | 177,219 | 100.0 | % | $ | 49,945 | 100.0 | % | $ | 8,374 | 100.0 | % | $ | 854 | 100.0 | % | $ | 236,392 | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||||
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The following tables present net par outstanding by sector for the financial guaranty portfolio.
Financial Guaranty Portfolio
Net Par Outstanding by Sector
| As of December 31, | ||||||||||||||
| Sector | 2022 | 2021 | ||||||||||||
| (in millions) | ||||||||||||||
| Public finance: | ||||||||||||||
| U.S. public finance: | ||||||||||||||
| General obligation | $ | 71,868 | $ | 72,896 | ||||||||||
| Tax backed | 33,752 | 35,726 | ||||||||||||
| Municipal utilities | 26,436 | 25,556 | ||||||||||||
| Transportation | 19,688 | 17,241 | ||||||||||||
| Healthcare | 11,304 | 9,588 | ||||||||||||
| Higher education | 7,137 | 6,927 | ||||||||||||
| Infrastructure finance | 6,955 | 6,329 | ||||||||||||
| Housing revenue | 959 | 1,000 | ||||||||||||
| Investor-owned utilities | 332 | 611 | ||||||||||||
| Renewable energy | 180 | 193 | ||||||||||||
| Other public finance | 1,025 | 1,152 | ||||||||||||
| Total U.S. public finance | 179,636 | 177,219 | ||||||||||||
| Non-U.S public finance: | ||||||||||||||
| Regulated utilities | 17,855 | 18,814 | ||||||||||||
| Infrastructure finance | 13,915 | 16,475 | ||||||||||||
| Sovereign and sub-sovereign | 9,526 | 10,886 | ||||||||||||
| Renewable energy | 2,086 | 2,398 | ||||||||||||
| Pooled infrastructure | 1,081 | 1,372 | ||||||||||||
| Total non-U.S. public finance | 44,463 | 49,945 | ||||||||||||
| Total public finance | 224,099 | 227,164 | ||||||||||||
| Structured finance: | ||||||||||||||
| U.S. structured finance: | ||||||||||||||
| Life insurance transactions | 3,879 | 3,431 | ||||||||||||
| RMBS | 1,956 | 2,391 | ||||||||||||
| Pooled corporate obligations | 625 | 534 | ||||||||||||
| Financial products | 453 | 770 | ||||||||||||
| Consumer receivables | 437 | 583 | ||||||||||||
| Other structured finance | 878 | 665 | ||||||||||||
| Total U.S. structured finance | 8,228 | 8,374 | ||||||||||||
| Non-U.S. structured finance: | ||||||||||||||
| Pooled corporate obligations | 344 | 351 | ||||||||||||
| RMBS | 263 | 325 | ||||||||||||
| Other structured finance | 324 | 178 | ||||||||||||
| Total non-U.S structured finance | 931 | 854 | ||||||||||||
| Total structured finance | 9,159 | 9,228 | ||||||||||||
| Total net par outstanding | $ | 233,258 | $ | 236,392 | ||||||||||
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Financial Guaranty Portfolio
Expected Amortization of Net Par Outstanding
As of December 31, 2022
| Public Finance | Structured Finance | Total | |||||||||||||||
| (in millions) | |||||||||||||||||
| 0 to 5 years | $ | 47,218 | $ | 3,093 | $ | 50,311 | |||||||||||
| 5 to 10 years | 47,902 | 2,796 | 50,698 | ||||||||||||||
| 10 to 15 years | 41,695 | 1,737 | 43,432 | ||||||||||||||
| 15 to 20 years | 31,597 | 991 | 32,588 | ||||||||||||||
| 20 years and above | 55,687 | 542 | 56,229 | ||||||||||||||
| Total net par outstanding | $ | 224,099 | $ | 9,159 | $ | 233,258 | |||||||||||
Actual maturities of insured obligations could differamortization differs from contractualexpected maturities because borrowers may have the right to call or prepay certain obligations.obligations, terminations and because of management’s assumptions on structured finance amortization. The expected maturities of structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.
Financial Guaranty Portfolio
BIG Net Par Outstanding
As of December 31, 20192022
| BIG Net Par Outstanding | Net Par | ||||||||||||||||||||||||||||
| BIG 1 | BIG 2 | BIG 3 | Total BIG | Outstanding | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Public finance: | |||||||||||||||||||||||||||||
| U.S. public finance | $ | 2,364 | $ | 108 | $ | 1,324 | $ | 3,796 | $ | 179,636 | |||||||||||||||||||
| Non-U.S. public finance | 981 | — | — | 981 | 44,463 | ||||||||||||||||||||||||
| Public finance | 3,345 | 108 | 1,324 | 4,777 | 224,099 | ||||||||||||||||||||||||
| Structured finance: | |||||||||||||||||||||||||||||
| U.S. RMBS | 18 | 39 | 953 | 1,010 | 1,956 | ||||||||||||||||||||||||
| Other structured finance | — | 34 | 71 | 105 | 7,203 | ||||||||||||||||||||||||
| Structured finance | 18 | 73 | 1,024 | 1,115 | 9,159 | ||||||||||||||||||||||||
| Total | $ | 3,363 | $ | 181 | $ | 2,348 | $ | 5,892 | $ | 233,258 | |||||||||||||||||||
| Public Finance | Structured Finance | Total | |||||||||
| (in millions) | |||||||||||
| 0 to 5 years | $ | 55,219 | $ | 4,161 | $ | 59,380 | |||||
| 5 to 10 years | 48,500 | 1,852 | 50,352 | ||||||||
| 10 to 15 years | 42,901 | 1,917 | 44,818 | ||||||||
| 15 to 20 years | 33,820 | 1,698 | 35,518 | ||||||||
| 20 years and above | 46,306 | 433 | 46,739 | ||||||||
| Total net par outstanding | $ | 226,746 | $ | 10,061 | $ | 236,807 | |||||
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
As of December 31, 20192021
| BIG Net Par Outstanding | Net Par | ||||||||||||||||||||||||||||
| BIG 1 | BIG 2 | BIG 3 | Total BIG | Outstanding | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Public finance: | |||||||||||||||||||||||||||||
| U.S. public finance | $ | 1,765 | $ | 116 | $ | 3,491 | $ | 5,372 | $ | 177,219 | |||||||||||||||||||
| Non-U.S. public finance | 556 | — | 44 | 600 | 49,945 | ||||||||||||||||||||||||
| Public finance | 2,321 | 116 | 3,535 | 5,972 | 227,164 | ||||||||||||||||||||||||
| Structured finance: | |||||||||||||||||||||||||||||
| U.S. RMBS | 121 | 24 | 1,120 | 1,265 | 2,391 | ||||||||||||||||||||||||
| Other structured finance | 1 | 41 | 77 | 119 | 6,837 | ||||||||||||||||||||||||
| Structured finance | 122 | 65 | 1,197 | 1,384 | 9,228 | ||||||||||||||||||||||||
| Total | $ | 2,443 | $ | 181 | $ | 4,732 | $ | 7,356 | $ | 236,392 | |||||||||||||||||||
| 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 | ||||||||||||||
| Life insurance transactions | — | — | 40 | 40 | 1,771 | ||||||||||||||
| Other structured finance | 69 | 62 | 48 | 179 | 4,744 | ||||||||||||||
| Structured finance | 231 | 136 | 1,470 | 1,837 | 10,061 | ||||||||||||||
| Total | $ | 2,667 | $ | 566 | $ | 5,273 | $ | 8,506 | $ | 236,807 | |||||||||
| BIG Net Par Outstanding | Net Par | ||||||||||||||||||
| BIG 1 | BIG 2 | BIG 3 | Total BIG | Outstanding | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Public finance: | |||||||||||||||||||
| U.S. public finance | $ | 1,767 | $ | 399 | $ | 4,222 | $ | 6,388 | $ | 186,562 | |||||||||
| Non-U.S. public finance | 796 | 245 | — | 1,041 | 44,103 | ||||||||||||||
| Public finance | 2,563 | 644 | 4,222 | 7,429 | 230,665 | ||||||||||||||
| Structured finance: | |||||||||||||||||||
| U.S. RMBS | 368 | 214 | 1,805 | 2,387 | 4,270 | ||||||||||||||
| Life insurance transactions | — | — | 85 | 85 | 1,184 | ||||||||||||||
| Other structured finance | 127 | 79 | 53 | 259 | 5,683 | ||||||||||||||
| Structured finance | 495 | 293 | 1,943 | 2,731 | 11,137 | ||||||||||||||
| Total | $ | 3,058 | $ | 937 | $ | 6,165 | $ | 10,160 | $ | 241,802 | |||||||||
157
Assured Guaranty Ltd.
Financial Guaranty Portfolio
BIG Net Par Outstanding
| 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 | ||||||||||||
and Number of Risks
As of December 31, 20182022
| Net Par Outstanding | Number of Risks (2) | |||||||||||||||||||||||||||||||||||||
| Description | Financial Guaranty Insurance (1) | Credit Derivatives | Total | Financial Guaranty Insurance (1) | Credit Derivatives | Total | ||||||||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| BIG: | ||||||||||||||||||||||||||||||||||||||
| Category 1 | $ | 3,357 | $ | 6 | $ | 3,363 | 122 | 1 | 123 | |||||||||||||||||||||||||||||
| Category 2 | 171 | 10 | 181 | 14 | 2 | 16 | ||||||||||||||||||||||||||||||||
| Category 3 | 2,307 | 41 | 2,348 | 111 | 10 | 121 | ||||||||||||||||||||||||||||||||
| Total BIG | $ | 5,835 | $ | 57 | $ | 5,892 | 247 | 13 | 260 | |||||||||||||||||||||||||||||
| 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 | $ | 2,981 | $ | 77 | $ | 3,058 | 128 | 6 | 134 | ||||||||||||
| Category 2 | 932 | 5 | 937 | 39 | 1 | 40 | |||||||||||||||
| Category 3 | 6,090 | 75 | 6,165 | 145 | 8 | 153 | |||||||||||||||
| Total BIG | $ | 10,003 | $ | 157 | $ | 10,160 | 312 | 15 | 327 | ||||||||||||
Financial Guaranty Portfolio
BIG Net Par Outstanding and Number of Risks
As of December 31, 2021
| Net Par Outstanding | Number of Risks (2) | |||||||||||||||||||||||||||||||||||||
| Description | Financial Guaranty Insurance (1) | Credit Derivatives | Total | Financial Guaranty Insurance(1) | Credit Derivatives | Total | ||||||||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| BIG: | ||||||||||||||||||||||||||||||||||||||
| Category 1 | $ | 2,429 | $ | 14 | $ | 2,443 | 117 | 2 | 119 | |||||||||||||||||||||||||||||
| Category 2 | 177 | 4 | 181 | 16 | 1 | 17 | ||||||||||||||||||||||||||||||||
| Category 3 | 4,687 | 45 | 4,732 | 129 | 8 | 137 | ||||||||||||||||||||||||||||||||
| Total BIG | $ | 7,293 | $ | 63 | $ | 7,356 | 262 | 11 | 273 | |||||||||||||||||||||||||||||
_____________________
(1)Includes FG 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.
When the Company insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. The Company seeks to maintain a diversified portfolio of insured obligations designed to spread its risk across a number of geographic areas.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Financial Guaranty Portfolio
Geographic Distribution of
Net Par Outstanding
As of December 31, 20192022
| Number of Risks | Net Par Outstanding | Percent of Total Net Par Outstanding | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| U.S.: | |||||||||||||||||
| U.S. Public finance: | |||||||||||||||||
| California | 1,256 | $ | 36,818 | 15.8 | % | ||||||||||||
| Texas | 1,026 | 18,973 | 8.1 | ||||||||||||||
| Pennsylvania | 543 | 16,142 | 6.9 | ||||||||||||||
| New York | 584 | 15,580 | 6.7 | ||||||||||||||
| Illinois | 498 | 12,824 | 5.5 | ||||||||||||||
| New Jersey | 265 | 9,610 | 4.1 | ||||||||||||||
| Florida | 211 | 7,790 | 3.4 | ||||||||||||||
| Louisiana | 129 | 4,979 | 2.1 | ||||||||||||||
| Michigan | 235 | 4,943 | 2.1 | ||||||||||||||
| Alabama | 240 | 3,763 | 1.6 | ||||||||||||||
| Other | 1,883 | 48,214 | 20.7 | ||||||||||||||
| Total U.S. public finance | 6,870 | 179,636 | 77.0 | ||||||||||||||
| U.S. Structured finance (multiple states) | 371 | 8,228 | 3.5 | ||||||||||||||
| Total U.S. | 7,241 | 187,864 | 80.5 | ||||||||||||||
| Non-U.S.: | |||||||||||||||||
| United Kingdom | 280 | 34,903 | 15.0 | ||||||||||||||
| Canada | 5 | 1,728 | 0.7 | ||||||||||||||
| Spain | 7 | 1,575 | 0.7 | ||||||||||||||
| Australia | 6 | 1,506 | 0.6 | ||||||||||||||
| France | 7 | 1,437 | 0.7 | ||||||||||||||
| Other | 37 | 4,245 | 1.8 | ||||||||||||||
| Total non-U.S. | 342 | 45,394 | 19.5 | ||||||||||||||
| Total | 7,583 | $ | 233,258 | 100.0 | % | ||||||||||||
| Number of Risks | Net Par Outstanding | Percent of Total Net Par Outstanding | |||||||
| (dollars in millions) | |||||||||
| U.S.: | |||||||||
| U.S. Public finance: | |||||||||
| California | 1,318 | $ | 33,368 | 14.1 | % | ||||
| Pennsylvania | 665 | 15,895 | 6.7 | ||||||
| Texas | 1,090 | 14,860 | 6.3 | ||||||
| New York | 749 | 14,682 | 6.2 | ||||||
| Illinois | 602 | 13,977 | 5.9 | ||||||
| New Jersey | 337 | 10,504 | 4.4 | ||||||
| Florida | 266 | 7,107 | 3.0 | ||||||
| Michigan | 305 | 5,345 | 2.3 | ||||||
| Puerto Rico | 17 | 4,270 | 1.8 | ||||||
| Louisiana | 162 | 4,167 | 1.8 | ||||||
| Other | 2,529 | 51,312 | 21.7 | ||||||
| Total U.S. public finance | 8,040 | 175,487 | 74.2 | ||||||
| U.S. Structured finance (multiple states) | 450 | 9,300 | 3.9 | ||||||
| Total U.S. | 8,490 | 184,787 | 78.1 | ||||||
| Non-U.S.: | |||||||||
| United Kingdom | 288 | 38,450 | 16.2 | ||||||
| France | 7 | 3,130 | 1.3 | ||||||
| Canada | 8 | 2,495 | 1.1 | ||||||
| Australia | 11 | 2,112 | 0.9 | ||||||
| Austria | 3 | 1,250 | 0.5 | ||||||
| Other | 42 | 4,583 | 1.9 | ||||||
| Total non-U.S. | 359 | 52,020 | 21.9 | ||||||
| Total | 8,849 | $ | 236,807 | 100.0 | % | ||||
Exposure to Puerto Rico
The Company had insured exposure to general obligation bondsobligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations ofas well as its related authorities and public corporationsgeneral obligation bonds aggregating $4.3$1.4 billion net par outstanding as of December 31, 2019, all2022, a decrease of which was$2.2 billion from the $3.6 billion net par outstanding as of December 31, 2021. All of the Company’s insured exposure to Puerto Rico is rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and theThe Company has now paid claims as a result of payment defaults on all of its outstanding Puerto Rico exposures except forthe Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), Municipal Finance Agency (MFA) and the University of Puerto Rico (U of PR)., which have made their debt service payments on time.
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)Financial Oversight and Management Board (the FOMB) 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 chapterChapter 9 of the United States Bankruptcy Code.Code (Bankruptcy Code).
After over five years of negotiations, in 2022 a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico):
159
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•On January 18, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority (GO/PBA Plan).
•On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of the Puerto Rico Convention Center District Authority (PRCCDA).
•On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered another order under Title VI of PROMESA (PRIFA Modification) modifying certain debt of the Puerto Rico Infrastructure Financing Authority (PRIFA).
•On October 12, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the Modified Fifth Amended Title III Plan of Adjustment (HTA Plan) of the Puerto Rico Highways and Transportation Authority (PRHTA).
As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced.
The effect on the consolidated financial statements of the 2022 Puerto Rico Resolutions was a reduction in net par outstanding of $2.0 billion. The Company received cash, new general obligation bonds (under the GO/PBA Plan) (New GO Bonds) and new bonds backed by toll revenues (under the HTA Plan) (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds) and contingent value instruments (CVIs). The New Recovery Bonds and CVIs were reported as either available-for-sale or trading fixed-maturities in either the investment portfolio or FG VIE assets. The portion of the assets that are reported in FG VIE assets relate to the portion of the GO, PBA and PRHTA insured obligations for which bondholders elected to receive custody receipts as described below.
The Company believesis continuing its efforts to resolve the one remaining Puerto Rico insured exposure that a numberis in payment default, the Puerto Rico Electric Power Authority (PREPA).
Economic, political and legal developments, including inflation, increases in the cost of petroleum products and developments related to the COVID-19 pandemic, may impact any resolution of the actions taken byCompany’s PREPA insured exposure and the Commonwealth,value of the Oversight Board and others with respect to obligationsconsideration the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal actionreceived in connection with 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.
| General Obligation Bonds | Assured Guaranty Net Par Outstanding as of December 31, 2019 | Assured Guaranty Total Net Principal Claims Paid as of December 31, 2019 | Assured Guaranty Total Net Interest Claims Paid as of December 31, 2019 | Base Recovery as a % of Pre-Petition Claims | |||||||||||
| (in millions) | (percent) | ||||||||||||||
| Vintage GO | $ | 669 | $ | 383 | $ | 147 | 74.9 | % | |||||||
| 2011 GO (Series D, E and PIB) | 5 | 6 | 1 | 73.8 | |||||||||||
| 2011 GO (Series C) | 210 | — | 42 | 70.4 | |||||||||||
| 2012 GO | 369 | — | 63 | 69.9 | |||||||||||
| 2014 GO | — | — | — | 65.4 | |||||||||||
All Puerto Rico exposures are internally rated BIG. The following tables show the Oversight Board filed with the Title III court a Plan of Adjustment (POA)Company’s insured exposure to restructure approximately $35 billion of debt (including the GO bonds) and other claims against the governmentgeneral obligation bonds of Puerto Rico and certain entitiesvarious obligations of its related authorities and $50 billion in pension obligations. The POA is expectedpublic corporations.
Puerto Rico
Gross Par and Gross Debt Service Outstanding
| Gross Par Outstanding | Gross Debt Service Outstanding | ||||||||||||||||||||||
| As of December 31, | As of December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Exposure to Puerto Rico | $ | 1,378 | $ | 3,629 | $ | 1,899 | $ | 5,322 | |||||||||||||||
160
Assured Guaranty Ltd.
Notes to be amended to incorporate the terms relatedConsolidated Financial Statements, Continued
Puerto Rico
Net Par Outstanding
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Resolved Puerto Rico Exposures | |||||||||||
| PRHTA (Transportation revenue) (1) | $ | 298 | $ | 799 | |||||||
| PRHTA (Highway revenue) (1) | 182 | 457 | |||||||||
| Commonwealth of Puerto Rico - GO (2) | 25 | 1,097 | |||||||||
| PBA (2) | 4 | 122 | |||||||||
| PRCCDA (3) | — | 152 | |||||||||
| PRIFA (3) | — | 16 | |||||||||
| Total Resolved | 509 | 2,643 | |||||||||
| Other Puerto Rico Exposures | |||||||||||
| PREPA (4) | 720 | 748 | |||||||||
| MFA (5) | 131 | 179 | |||||||||
| PRASA and U of PR (5) | 1 | 2 | |||||||||
| Total Other | 852 | 929 | |||||||||
| Total net exposure to Puerto Rico | $ | 1,361 | $ | 3,572 | |||||||
____________________
(1) Resolved on December 6, 2022, pursuant to the GO bonds proposed underModified Fifth Amended Title III Plan of Adjustment of the Puerto Rico Highways and Transportation Authority.
(2) Resolved on March 15, 2022, pursuant to the Modified Eighth Amended GO PSA. The Company believesTitle III Plan of Adjustment of the POA, as currently constituted, does not comply withCommonwealth of Puerto Rico, the laws and constitutionEmployees Retirement System of the Government of the Commonwealth of Puerto Rico, and the provisionsPuerto Rico Public Buildings Authority.
(3) Modified on March 15, 2022, pursuant to an order of PROMESA and does not satisfy the statutory requirements for confirmationFederal District Court of a plan of adjustmentPuerto Rico acting under Title IIIVI of PROMESA.
(5) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
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 payment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.
161
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Amortization Schedule of Puerto Rico
Net Par Outstanding and Net Debt Service Outstanding
As of December 31, 2019, 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 POA.2022
| Scheduled Net Par Amortization | Scheduled Net Debt Service Amortization | ||||||||||
| (in millions) | |||||||||||
| 2023 (January 1 - March 31) | $ | — | $ | 30 | |||||||
| 2023 (April 1 - June 30) | — | 3 | |||||||||
| 2023 (July 1 - September 30) | 125 | 156 | |||||||||
| 2023 (October 1 - December 31) | — | 3 | |||||||||
| Subtotal 2023 | 125 | 192 | |||||||||
| 2024 | 112 | 173 | |||||||||
| 2025 | 96 | 150 | |||||||||
| 2026 | 152 | 202 | |||||||||
| 2027 | 124 | 169 | |||||||||
| 2028-2032 | 378 | 529 | |||||||||
| 2033-2037 | 241 | 312 | |||||||||
| 2038-2042 | 133 | 151 | |||||||||
| Total | $ | 1,361 | $ | 1,878 | |||||||
| PBA Bonds | Assured Guaranty Net Par Outstanding as of December 31, 2019 | Assured Guaranty Total Net Principal Claims Paid as of December 31, 2019 | Assured Guaranty Total Net Interest Claims Paid as of December 31, 2019 | Base Recovery as % of Pre-Petition Claims | |||||||||||
| (in millions) | (percent) | ||||||||||||||
| Vintage PBA | $ | 140 | $ | 32 | $ | 24 | 77.6 | % | |||||||
| 2011 PBA | — | — | — | 76.8 | |||||||||||
| 2012 PBA | — | — | — | 72.2 | |||||||||||
As of December 31, 2019,2022, the Company had $811 million insured net par outstanding of PRHTA (transportation revenue) bonds and $454 million insured net par outstanding of PRHTA (highways 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 highways 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 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 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 and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the Oversight Board,terms and conditions of mediation, including 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
The last revised fiscal plan for PREPA was certified by the securitization exchange bonds, which may then be offeredFOMB on June 28, 2022.
Puerto Rico GO 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.
As of December 31, 2019,2022, the Company had $373remaining $25 million of insured net par outstanding of PRASAGO bonds and $4 million of insured net par outstanding of PBA bonds.
Under the GO/PBA Plan and in connection with its direct exposure the Company received cash, new general obligation bonds and CVIs (in aggregate, GO/PBA Plan Consideration) (including amounts received in connection with the second election described further below, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
162
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•$605 million of New GO Bonds (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and
•$258 million of CVIs (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the original notional value, net of ceded reinsurance.
The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time.
The Company has sold most of the New GO Bonds and CVIs it received on March 15, 2022, and may sell in the future any New GO Bonds or CVIs it continues to hold. The fair value of any New GO Bonds or CVIs the Company retains will fluctuate. Any gains or losses on sales of New GO Bonds and CVIs in the investment portfolio, were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of payments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the principal of all GO bonds and PBA bonds insured by the Company was accelerated against the Commonwealth and became due and payable as of March 15, 2022. Insured holders of noncallable insured bonds covered by the GO/PBA Plan (representing $102 million of net par outstanding as of December 31, 2021) were permitted to elect either: (i) to receive on March 15, 2022, 100% of the then outstanding principal amount of insured bonds plus accrued interest; or (ii) to receive custody receipts that represent an interest in the legacy insurance policy plus GO/PBA Plan Consideration that constitute distributions under the GO/PBA Plan. For those who made the second election, distributions of GO/PBA Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of GO/PBA Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. As of December 31, 2022, the net insured par outstanding under the legacy GO and PBA insurance policies was $29 million, and constituted all of the Company’s remaining net par exposure to the GO and PBA bonds it had insured.
PRHTA
As of December 31, 2022, the Company had $480 million of insured net par outstanding of PRHTA bonds: $298 million insured net par outstanding of PRHTA (transportation revenue) bonds and $182 million insured net par outstanding of PRHTA (highway revenue) bonds.
In connection with the resolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received cash, new bonds backed by toll revenue and CVIs (in aggregate, HTA Plan Consideration and, together with GO/PBA Plan Consideration, Plan Consideration) (including amounts received in connection with the election described further below, but excluding amounts received in connection with second-to-pay exposures):
•$251 million in cash,
•$807 million of Toll Bonds (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and
•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company has sold a portion of those Toll Bonds and CVIs, and may sell in the future any Toll Bonds or CVIs it continues to hold. The fair value of any Toll Bonds and CVIs that the Company retains will fluctuate from their date of acquisition. Any gains or losses on sales of Toll Bonds and CVIs in the investment portfolio were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
The HTA Plan, similar to the GO/PBA Plan, provided an option for holders of noncallable bonds insured by the Company to elect to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds, and insured bondholders representing $451 million net par outstanding as of December 31, 2022 elected this option. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of HTA Plan Consideration are insufficient to pay or prepay such amounts.
PRCCDA and PRIFA
As of December 31, 2022, the Company had no insured net par outstanding of PRCCDA or PRIFA obligations remaining. Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $47 million in cash and $98 million in notional amount of CVIs.
Other Puerto Rico Exposures
All debt service payments for the Company’s remaining Puerto Rico exposures of $132 million insured net par outstanding have been made in full by the obligors as of the date of this filing. These exposures consist primarily of $131 million net par outstanding of MFA bonds, which are secured by a lien on the gross revenues of the water and sewer system. On June 29, 2019, the Oversight Board certified a revised fiscal plan for PRASA. 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.
Puerto Rico LitigationPar and Debt Service Schedules
All Puerto Rico exposures are internally rated BIG. The Company believes that a number offollowing tables show the actions taken by the Commonwealth, the Oversight Board and others with respectCompany’s insured exposure 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.
Puerto Rico) held an omnibus hearingRico
Gross Par and Gross Debt Service Outstanding
| Gross Par Outstanding | Gross Debt Service Outstanding | ||||||||||||||||||||||
| As of December 31, | As of December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Exposure to Puerto Rico | $ | 1,378 | $ | 3,629 | $ | 1,899 | $ | 5,322 | |||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Puerto Rico
Net Par Outstanding
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Resolved Puerto Rico Exposures | |||||||||||
| PRHTA (Transportation revenue) (1) | $ | 298 | $ | 799 | |||||||
| PRHTA (Highway revenue) (1) | 182 | 457 | |||||||||
| Commonwealth of Puerto Rico - GO (2) | 25 | 1,097 | |||||||||
| PBA (2) | 4 | 122 | |||||||||
| PRCCDA (3) | — | 152 | |||||||||
| PRIFA (3) | — | 16 | |||||||||
| Total Resolved | 509 | 2,643 | |||||||||
| Other Puerto Rico Exposures | |||||||||||
| PREPA (4) | 720 | 748 | |||||||||
| MFA (5) | 131 | 179 | |||||||||
| PRASA and U of PR (5) | 1 | 2 | |||||||||
| Total Other | 852 | 929 | |||||||||
| Total net exposure to Puerto Rico | $ | 1,361 | $ | 3,572 | |||||||
____________________
(1) Resolved on litigation matters relatingDecember 6, 2022, pursuant to the Commonwealth. At that hearing, she imposed a stay through November 30, 2019, on a seriesModified Fifth Amended Title III Plan 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 further extended the stay until March 11, 2020 for certain matters (as noted below). Among the goalsAdjustment of the mediation isPuerto Rico Highways and Transportation Authority.
(2) Resolved on March 15, 2022, pursuant to reach an agreed-upon schedule for addressing the resolutionModified Eighth Amended Title III Plan of numerous issues, including, among others: (a) issues related to
(3) Modified on March 15, 2022, pursuant to secure the paymentan order 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.
(4) This exposure is in payment default.
(5) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
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 payment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.
161
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Amortization Schedule of Puerto Rico
Net Par Outstanding and Net Debt Service Outstanding
As of December 31, 2022
| Scheduled Net Par Amortization | Scheduled Net Debt Service Amortization | ||||||||||
| (in millions) | |||||||||||
| 2023 (January 1 - March 31) | $ | — | $ | 30 | |||||||
| 2023 (April 1 - June 30) | — | 3 | |||||||||
| 2023 (July 1 - September 30) | 125 | 156 | |||||||||
| 2023 (October 1 - December 31) | — | 3 | |||||||||
| Subtotal 2023 | 125 | 192 | |||||||||
| 2024 | 112 | 173 | |||||||||
| 2025 | 96 | 150 | |||||||||
| 2026 | 152 | 202 | |||||||||
| 2027 | 124 | 169 | |||||||||
| 2028-2032 | 378 | 529 | |||||||||
| 2033-2037 | 241 | 312 | |||||||||
| 2038-2042 | 133 | 151 | |||||||||
| Total | $ | 1,361 | $ | 1,878 | |||||||
PREPA
As of December 31, 2022, the Company had $720 million insured net par outstanding of PREPA obligations. The PREPA obligations are secured by a judgment declaringlien on the revenues of the electric system. On May 3, 2019, AGM and AGC entered into a restructuring support agreement with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that the applicationmediation would terminate on June 1, 2022. Judge Swain has since extended the term of pledged special revenuessuch mediation several times, most recently on January 26, 2023 extending the term to April 28, 2023. On September 29, 2022, Judge Swain ordered the FOMB to file a plan of adjustment and disclosure statement by December 1, 2022 and set a schedule for litigating bondholders’ lien status. After receiving an extension from Judge Swain, the FOMB initially filed a plan of adjustment and disclosure statement for PREPA with the Federal District Court of Puerto Rico on December 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan). The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation and agree that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. Dueling summary judgment motions were made in respect of the bondholders’ lien status by the FOMB and by the PREPA bondholders on October 24, 2022. As of February 28, 2023, the Federal District Court of Puerto Rico had not issued any decisions on the motions for summary judgment on the bondholders’ lien status. The Federal District Court of Puerto Rico approved the FOMB disclosure statement on February 28, 2023, which allows bondholder solicitation on the FOMB PREPA Plan to begin.
The last revised fiscal plan for PREPA was certified by the FOMB on June 28, 2022.
Puerto Rico GO and PBA
As of December 31, 2022, the Company had remaining $25 million of insured net par outstanding of GO bonds and $4 million of insured net par outstanding of PBA bonds.
Under the GO/PBA Plan and in connection with its direct exposure the Company received cash, new general obligation bonds and CVIs (in aggregate, GO/PBA Plan Consideration) (including amounts received in connection with the second election described further below, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•$605 million of New GO Bonds (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and
•$258 million of CVIs (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the original notional value, net of ceded reinsurance.
The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time.
The Company has sold most of the New GO Bonds and CVIs it received on March 15, 2022, and may sell in the future any New GO Bonds or CVIs it continues to hold. The fair value of any New GO Bonds or CVIs the Company retains will fluctuate. Any gains or losses on sales of New GO Bonds and CVIs in the investment portfolio, were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of payments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the PRHTAprincipal of all GO bonds is not subjectand PBA bonds insured by the Company was accelerated against the Commonwealth and became due and payable as of March 15, 2022. Insured holders of noncallable insured bonds covered by the GO/PBA Plan (representing $102 million of net par outstanding as of December 31, 2021) were permitted to elect either: (i) to receive on March 15, 2022, 100% of the then outstanding principal amount of insured bonds plus accrued interest; or (ii) to receive custody receipts that represent an interest in the legacy insurance policy plus GO/PBA Plan Consideration that constitute distributions under the GO/PBA Plan. For those who made the second election, distributions of GO/PBA Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the PROMESA Title III automatic stayextent of any cash or proceeds of new securities held in the custodial trust and that the Commonwealth has violated the special revenue protections providedare applied to the PRHTA bondsmake payments and/or prepayments of amounts due under the United States Bankruptcy Code (Bankruptcy Code); (ii) an injunction enjoininglegacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on 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 PRHTAlegacy insured bonds in accordance with the terms of such insurance policy on the special revenue provisions set forthoriginally scheduled legacy bond interest and principal payment dates to the extent that distributions of GO/PBA Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the Bankruptcy Code. On Januaryimmediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 2018, the court rendered an opinion dismissing the complaint and holding, among other things, that (x) even though the special revenue provisionsdays’ notice, by paying 100% of the Bankruptcy Code protect a lien on pledged special revenues, those provisions do not mandate the turnoverthen outstanding principal amount of pledged special revenues to the payment ofinsured 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 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.
PRHTA
As of December 31, 2022, the Company had $480 million of insured net par outstanding of PRHTA bonds: $298 million insured net par outstanding of PRHTA (transportation revenue) bonds and $182 million insured net par outstanding of PRHTA (highway revenue) bonds.
In connection with the general obligationresolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received cash, new bonds of Puerto Rico were issued on or after March 2012. On May 21, 2019,backed by toll revenue and CVIs (in aggregate, HTA Plan Consideration and, together with GO/PBA Plan Consideration, Plan Consideration) (including amounts received in connection with the Official Committee of Unsecuredelection described further below, but excluding amounts received in connection with second-to-pay exposures):
•$807 million of Toll Bonds (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which arerepresents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and
•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.
163
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company has sold a portion of those Toll Bonds and CVIs, and may sell in the future any Toll Bonds or CVIs it continues to hold. The fair value of any Toll Bonds and CVIs that the Company retains will fluctuate from their date of acquisition. Any gains or losses on sales of Toll Bonds and CVIs in the investment portfolio were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
The HTA Plan, similar to the GO/PBA Plan, provided an option for holders of noncallable bonds insured by the Company to elect to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds, and insured bondholders representing $451 million net par outstanding as of December 31, 2019,2022 elected this option. The Company’s insurance policy continues to guarantee principal and interest coming due on substantially the same bases aslegacy insured bonds in accordance with the January 14, 2019 filing,terms of such insurance policy on the originally scheduled legacy bond interest 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.
PRCCDA and PRIFA
As 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 extended the stay until December 31, 2019, but did not further extend2022, the stay with respect to this matter.
Other Puerto Rico againstExposures
All debt service payments for 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 scopeCompany’s remaining Puerto Rico exposures of any lien only applies to revenues that$132 million insured net par outstanding have been both received by PRHTA and depositedmade in certain accounts heldfull 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 Codeobligors as of the petition date. On July 24, 2019, Judge Swain announceddate of this filing. These exposures consist primarily of $131 million net par outstanding of MFA bonds, which are secured by 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.
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 December 31, | As of December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Exposure to Puerto Rico | $ | 1,378 | $ | 3,629 | $ | 1,899 | $ | 5,322 | |||||||||||||||
| Gross Par Outstanding | Gross Debt Service Outstanding | ||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||||||||||
| (in millions) | |||||||||||||||
| Exposure to Puerto Rico | $ | 4,458 | $ | 4,971 | $ | 6,956 | $ | 8,035 | |||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Puerto Rico
Net Par Outstanding
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Resolved Puerto Rico Exposures | |||||||||||
| PRHTA (Transportation revenue) (1) | $ | 298 | $ | 799 | |||||||
| PRHTA (Highway revenue) (1) | 182 | 457 | |||||||||
| Commonwealth of Puerto Rico - GO (2) | 25 | 1,097 | |||||||||
| PBA (2) | 4 | 122 | |||||||||
| PRCCDA (3) | — | 152 | |||||||||
| PRIFA (3) | — | 16 | |||||||||
| Total Resolved | 509 | 2,643 | |||||||||
| Other Puerto Rico Exposures | |||||||||||
| PREPA (4) | 720 | 748 | |||||||||
| MFA (5) | 131 | 179 | |||||||||
| PRASA and U of PR (5) | 1 | 2 | |||||||||
| Total Other | 852 | 929 | |||||||||
| Total net exposure to Puerto Rico | $ | 1,361 | $ | 3,572 | |||||||
____________________
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Commonwealth Constitutionally Guaranteed | |||||||
| Commonwealth of Puerto Rico - General Obligation Bonds (1) | $ | 1,253 | $ | 1,340 | |||
| PBA | 140 | 142 | |||||
| Public Corporations - Certain Revenues Potentially Subject to Clawback | |||||||
| PRHTA (Transportation revenue) (1) | 811 | 844 | |||||
| PRHTA (Highways revenue) (1) | 454 | 475 | |||||
| PRCCDA | 152 | 152 | |||||
| PRIFA | 16 | 16 | |||||
| Other Public Corporations | |||||||
| PREPA (1) | 822 | 848 | |||||
| PRASA | 373 | 373 | |||||
| MFA | 248 | 303 | |||||
| COFINA | — | 273 | |||||
| U of PR | 1 | 1 | |||||
| Total net exposure to Puerto Rico | $ | 4,270 | $ | 4,767 | |||
(2) Resolved on March 15, 2022, pursuant to the Modified Eighth Amended Title III Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority.
(3) Modified on March 15, 2022, pursuant to an order of the Federal District Court of Puerto Rico acting under Title VI of PROMESA.
(4) This exposure is in payment default.
(5) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
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 paymentspayment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis.basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the principal and interestdebt service due in any given period and the amount paid by the obligors.
161
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Amortization Schedule of Puerto Rico
Net Par Outstanding
and Net Debt Service Outstanding
As of December 31, 20192022
| Scheduled Net Par Amortization | Scheduled Net Debt Service Amortization | ||||||||||
| (in millions) | |||||||||||
| 2023 (January 1 - March 31) | $ | — | $ | 30 | |||||||
| 2023 (April 1 - June 30) | — | 3 | |||||||||
| 2023 (July 1 - September 30) | 125 | 156 | |||||||||
| 2023 (October 1 - December 31) | — | 3 | |||||||||
| Subtotal 2023 | 125 | 192 | |||||||||
| 2024 | 112 | 173 | |||||||||
| 2025 | 96 | 150 | |||||||||
| 2026 | 152 | 202 | |||||||||
| 2027 | 124 | 169 | |||||||||
| 2028-2032 | 378 | 529 | |||||||||
| 2033-2037 | 241 | 312 | |||||||||
| 2038-2042 | 133 | 151 | |||||||||
| Total | $ | 1,361 | $ | 1,878 | |||||||
| Scheduled Net Par Amortization | Scheduled Net Debt Service Amortization | ||||||
| (in millions) | |||||||
| 2020 (January 1 - March 31) | $ | — | $ | 106 | |||
| 2020 (April 1 - June 30) | — | 3 | |||||
| 2020 (July 1 - September 30) | 286 | 392 | |||||
| 2020 (October 1 - December 31) | — | 3 | |||||
| Subtotal 2020 | 286 | 504 | |||||
| 2021 | 149 | 351 | |||||
| 2022 | 139 | 332 | |||||
| 2023 | 205 | 392 | |||||
| 2024 | 222 | 398 | |||||
| 2025-2029 | 1,158 | 1,862 | |||||
| 2030-2034 | 1,021 | 1,484 | |||||
| 2035-2039 | 740 | 917 | |||||
| 2040-2044 | 104 | 179 | |||||
| 2045-2047 | 246 | 272 | |||||
| Total | $ | 4,270 | $ | 6,691 | |||
PREPA
As of December 31, 2019,2022, the Company had $485$720 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rated $218 million BIG.PREPA obligations. The $267 million USVI net par the Company rated investment grade primarily consisted of bondsPREPA obligations are secured by a lien on matching fundthe revenues relatedof the electric system. On May 3, 2019, AGM and AGC entered into a restructuring support agreement with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that the mediation would terminate on June 1, 2022. Judge Swain has since extended the term of such mediation several times, most recently on January 26, 2023 extending the term to excise taxesApril 28, 2023. On September 29, 2022, Judge Swain ordered the FOMB to file a plan of adjustment and disclosure statement by December 1, 2022 and set a schedule for litigating bondholders’ lien status. After receiving an extension from Judge Swain, the FOMB initially filed a plan of adjustment and disclosure statement for PREPA with the Federal District Court of Puerto Rico on products producedDecember 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan). The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation and agree that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. Dueling summary judgment motions were made in respect of the bondholders’ lien status by the FOMB and by the PREPA bondholders on October 24, 2022. As of February 28, 2023, the Federal District Court of Puerto Rico had not issued any decisions on the motions for summary judgment on the bondholders’ lien status. The Federal District Court of Puerto Rico approved the FOMB disclosure statement on February 28, 2023, which allows bondholder solicitation on the FOMB PREPA Plan to begin.
The last revised fiscal plan for PREPA was certified by the FOMB on June 28, 2022.
Puerto Rico GO and PBA
As of December 31, 2022, the Company had remaining $25 million of insured net par outstanding of GO bonds and $4 million of insured net par outstanding of PBA bonds.
Under the GO/PBA Plan and in connection with its direct exposure the Company received cash, new general obligation bonds and CVIs (in aggregate, GO/PBA Plan Consideration) (including amounts received in connection with the second election described further below, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
162
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•$605 million of New GO Bonds (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and
•$258 million of CVIs (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the original notional value, net of ceded reinsurance.
The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time.
The Company has sold most of the New GO Bonds and CVIs it received on March 15, 2022, and may sell in the USVIfuture any New GO Bonds or CVIs it continues to hold. The fair value of any New GO Bonds or CVIs the Company retains will fluctuate. Any gains or losses on sales of New GO Bonds and exportedCVIs in the investment portfolio, were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of payments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the principal of all GO bonds and PBA bonds insured by the Company was accelerated against the Commonwealth and became due and payable as of March 15, 2022. Insured holders of noncallable insured bonds covered by the GO/PBA Plan (representing $102 million of net par outstanding as of December 31, 2021) were permitted to elect either: (i) to receive on March 15, 2022, 100% of the then outstanding principal amount of insured bonds plus accrued interest; or (ii) to receive custody receipts that represent an interest in the legacy insurance policy plus GO/PBA Plan Consideration that constitute distributions under the GO/PBA Plan. For those who made the second election, distributions of GO/PBA Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the U.S., primarily rum.extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The $218Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of GO/PBA Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. As of December 31, 2022, the net insured par outstanding under the legacy GO and PBA insurance policies was $29 million, BIG USVIand constituted all of the Company’s remaining net par consistedexposure to the GO and PBA bonds it had insured.
PRHTA
As of (a) Public Finance AuthorityDecember 31, 2022, the Company had $480 million of insured net par outstanding of PRHTA bonds: $298 million insured net par outstanding of PRHTA (transportation revenue) bonds and $182 million insured net par outstanding of PRHTA (highway revenue) bonds.
In connection with the resolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received cash, new bonds backed by toll revenue and CVIs (in aggregate, HTA Plan Consideration and, together with GO/PBA Plan Consideration, Plan Consideration) (including amounts received in connection with the election described further below, but excluding amounts received in connection with second-to-pay exposures):
•$251 million in cash,
•$807 million of Toll Bonds (see Note 7, Investments and Cash, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and
•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company has sold a portion of those Toll Bonds and CVIs, and may sell in the future any Toll Bonds or CVIs it continues to hold. The fair value of any Toll Bonds and CVIs that the Company retains will fluctuate from their date of acquisition. Any gains or losses on sales of Toll Bonds and CVIs in the investment portfolio were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
The HTA Plan, similar to the GO/PBA Plan, provided an option for holders of noncallable bonds insured by the Company to elect to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds, and insured bondholders representing $451 million net par outstanding as of December 31, 2022 elected this option. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of HTA Plan Consideration are insufficient to pay or prepay such amounts.
PRCCDA and PRIFA
As of December 31, 2022, the Company had no insured net par outstanding of PRCCDA or PRIFA obligations remaining. Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $47 million in cash and $98 million in notional amount of CVIs.
Other Puerto Rico Exposures
All debt service payments for the Company’s remaining Puerto Rico exposures of $132 million insured net par outstanding have been made in full by the obligors as of the date of this filing. These exposures consist primarily of $131 million net par outstanding of MFA bonds, which are secured by a gross receiptslien on local 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.revenues.
Puerto Rico Litigation
A number of legal actions involving the Company and relating to PRCCDA and PRIFA, as well as claims related to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022 in connection with the consummation of the 2022 Puerto Rico Resolutions. All other proceedings remain stayed pending the Court’s determination on plans of adjustment or other proceedings related to PRHTA and PREPA.
Remaining Stayed Proceedings. The following Puerto Rico proceedings in which the Company is involved remain stayed:
•On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court of Puerto Rico to compel the FOMB to certify the PREPA RSA for implementation under Title VI of PROMESA. On July 21, 2017, considering its PREPA Title III petition on July 2, 2017, the FOMB filed a notice of stay under PROMESA.
•On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the
automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14,
2017, but on August 8, 2018, the United States Court of Appeals for 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.
•On May 20, 2019, the FOMB and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court of Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. 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 subsequently extended the stay again pending further order of the court on the understanding that these issues will be resolved in other proceedings. On October 12, 2022, the court entered an order and judgment confirming the amended plan of adjustment for PRHTA
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
filed by the FOMB with the court on September 6, 2022 (HTA Confirmation Order). The HTA Confirmation Order provides that this adversary proceeding must be dismissed with prejudice within five business days of the HTA Confirmation Order becoming a final order, which should occur after all appeals of the HTA Confirmation Order have been resolved.
•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 against the FOMB and other parties, including AGC and AGM, seeking subordination of PREPA bondholder claims to Fuel Line Lenders’ claims. On November 12, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. The FOMB 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 scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Federal District Court of Puerto Rico issued an order to that effect. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.
•On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. On November 7, 2019, the court granted a motion to intervene by AGC and AGM. On November 13, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. The FOMB 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 scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Federal District Court of Puerto Rico issued an order to that effect. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.
•On January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court of Puerto Rico against AGM and 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. Considering the plan support agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC. On October 12, 2022, the court entered the HTA Confirmation Order, which provides that this adversary proceeding must be dismissed with prejudice within five business days of the HTA Confirmation Order becoming a final order, which should occur after all appeals of the HTA Confirmation Order have been resolved.
•On July 1, 2019, the FOMB initiated an adversary proceeding against U.S. Bank National Association, as trustee for PREPA’s bonds, objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing those bonds and seeking other relief. On September 30, 2022, the FOMB filed an amended complaint against the trustee (i) objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing PREPA’s bonds and (ii) arguing that PREPA bondholders’ recourse was limited to certain deposit accounts held by the trustee. On October 7, 2022, the court approved a stipulation permitting AGM and AGC to intervene as defendants.
Specialty Insurance and Reinsurance ExposureBusiness
The Company also providesguarantees specialty insurance and reinsurance on transactionsbusiness with similar risk profiles similar to those of its structured finance exposures written in financial guaranty form.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Specialty Insurance, Reinsurance and Guaranties
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Gross Exposure | Net Exposure | Gross Exposure | Net Exposure | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Life insurance transactions (1) | $ | 1,314 | $ | 986 | $ | 1,250 | $ | 871 | ||||||||||||||||||
| Aircraft residual value insurance policies | 355 | 200 | 355 | 200 | ||||||||||||||||||||||
| Other guaranties | 228 | 228 | — | — | ||||||||||||||||||||||
____________________
(1) The life insurance transactions net exposure is projected to reach $1.1 billion by June 30, 2024.
As of both December 31, 2022 and December 31, 2021, gross exposure of $144 million and net exposure of $84 million of aircraft residual value insurance was rated BIG. All specialty insurance and reinsuranceother exposures shown in the table belowabove are rated investment grade internally.investment-grade quality.
| Gross Exposure | Net Exposure | |||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2019 | As of December 31, 2018 | |||||||||||||
| (in millions) | ||||||||||||||||
| Life insurance transactions (1) | $ | 1,046 | $ | 880 | $ | 898 | $ | 763 | ||||||||
| Aircraft residual value insurance policies | 398 | 340 | 243 | 218 | ||||||||||||
4. Expected Loss to be Paid (Recovered)
Expected loss to be paid is important from a liquidity perspective in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts. The expected loss to be paid(recovered) is equal to the present value of expected future cash outflows for claimloss and LAE payments, net ofof: (i) inflows for expected salvage, and subrogation and other recoveries including future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments,recoveries; and (ii) excess spread on underlying collateral, and other estimated recoveries, including those from restructuring bonds and for breaches of representations and warranties (R&W). Expected lossesas applicable. Cash flows are discounted at current risk-free rates. Expected cash outflows and inflows are probability weighted cash flows that reflect management's assumptions about the likelihood of all possible outcomes based on all information available to it. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company's risk-management activities. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is defined asnet of amounts ceded to reinsurers. The Company’s net expected loss to be paid net(recovered) incorporates management’s probability weighted scenarios.
Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk-management activities. Expected loss to be paid (recovered) is important in that it represents the present value of amounts cededthat the Company expects to reinsurers.pay or recover in future periods for all contracts.
In circumstances where the Company has purchased its own insured obligations that havehad expected losses, and in certain cases
where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
underlying collateral, or insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and
the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the proportionate share of the insured obligation that is heldCompany are referred to as Loss Mitigation Securities and are recorded in the investment portfolio. Theportfolio at fair value, excluding the value of the Company’s insurance. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company'sCompany’s insurance (on the date of acquisition) is treated as a paid loss. Insured obligations with expected losses that are purchased by the Company are referred to as loss mitigation securities and are recorded in the investment portfolio, at fair value excluding the value of the Company's insurance. See Note 10,7, Investments and Cash, and Note 9, Fair Value Measurement.
Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects
of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic
effects of loss mitigation efforts.
In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. The insured portfolio includes policies accounted for under three separatevarious accounting models depending on the characteristics of the contract and the Company'sCompany’s control rights. The three primary models are: (1) insurance, as described in "Financial Guaranty Insurance Losses" in Note 7,5, Contracts Accounted for as Insurance,Insurance; (2) derivativederivatives, as described in Note 9, Fair Value Measurement and Note 11,6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 14,8, Financial Guaranty Variable Interest Entities.Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of the threethese accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Loss Estimation Process
The Company’s loss reserve committees estimate expected loss to be paid (recovered) 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 quarterperiod 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'sCompany’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 (recovered) 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, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, 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 ashave a resultmaterial effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss estimates may change materially over that same period.mitigation activities.
Changes over a reporting period in the Company’s loss estimates for municipalpublic finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company'sCompany’s loss mitigation efforts and other variables.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company'sCompany’s loss mitigation activities, and other variables.
Changes to estimates of net expected loss to be paid (recovered) and net economic loss development (benefit) over a reporting period may be attributable to a number of interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates, and dispute resolution. Actual losses will ultimately depend on future events, or transaction performance and may be influenced by many interrelatedor other factors that are difficult to predict. As a result, the Company'sCompany’s current projections of losses may be subject to considerable volatility and may not reflect the Company'sCompany’s ultimate claims paid.
In some instances, the terms of the Company'sCompany’s policy givesor the terms of certain workout orders and resolutions 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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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Accounting Model | 2022 | 2021 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Insurance (see Note 5) | $ | 205 | $ | 364 | $ | (112) | $ | (281) | $ | 142 | ||||||||||||||||||||||
| FG VIEs (see Note 8) | 314 | (1) | 42 | (17) | (20) | 1 | ||||||||||||||||||||||||||
| Credit derivatives (see Note 6) | 3 | 5 | 4 | 14 | 2 | |||||||||||||||||||||||||||
| Total | $ | 522 | $ | 411 | $ | (125) | $ | (287) | $ | 145 | ||||||||||||||||||||||
____________________
(1) The increase in expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated as a result of the 2022 Puerto Rico Resolutions. Prior to the 2022 Puerto Rico Resolutions, all Puerto Rico Exposures were accounted for as insurance.
The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts.contracts, which are accounted for under one of the following accounting models: insurance, derivative and FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.00%3.82% to 2.45%4.69% with a weighted average of 1.94%4.08% as of December 31, 20192022 and 0.00% to 3.06%1.98% with a weighted average of 2.74%1.02% as of December 31, 2018.2021. Expected losses to be paid for transactions denominated in currencies other than the U.S. dollar denominated transactions represented approximately 3.2%98.5% and 2.7%97.2% of the total as of December 31, 20192022 and December 31, 2018,2021, respectively.
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
| Net expected loss to be paid, beginning of period | $ | 1,183 | $ | 1,303 | |||
| Net expected loss to be paid on the SGI portfolio as of June 1, 2018 (see Note 2) | — | 131 | |||||
| Economic loss development (benefit) due to: | |||||||
| Accretion of discount | 22 | 36 | |||||
| Changes in discount rates | (11 | ) | (17 | ) | |||
| Changes in timing and assumptions | (12 | ) | (24 | ) | |||
| Total economic loss development (benefit) | (1 | ) | (5 | ) | |||
| Net (paid) recovered losses | (445 | ) | (246 | ) | |||
| Net expected loss to be paid, end of period | $ | 737 | $ | 1,183 | |||
| Year Ended December 31, 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 December 31, 2019 | ||||||||||||
| (in millions) | |||||||||||||||
| Public finance: | |||||||||||||||
| U.S. public finance | $ | 832 | $ | 224 | $ | (525 | ) | $ | 531 | ||||||
| Non-U.S. public finance | 32 | (9 | ) | — | 23 | ||||||||||
| Public finance | 864 | 215 | (525 | ) | 554 | ||||||||||
| Structured finance: | |||||||||||||||
| U.S. RMBS | 293 | (234 | ) | 87 | 146 | ||||||||||
| Other structured finance | 26 | 18 | (7 | ) | 37 | ||||||||||
| Structured finance | 319 | (216 | ) | 80 | 183 | ||||||||||
| Total | $ | 1,183 | $ | (1 | ) | $ | (445 | ) | $ | 737 | |||||
| Year Ended December 31, 2018 | |||||||||||||||||||
| Net Expected Loss to be Paid (Recovered) as of December 31, 2017 | Net Expected Loss to be Paid on SGI portfolio as of June 1, 2018 | Economic Loss Development / (Benefit) | (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Public finance: | |||||||||||||||||||
| U.S. public finance | $ | 1,157 | $ | — | $ | 70 | $ | (395 | ) | $ | 832 | ||||||||
| Non-U.S. public finance | 46 | 1 | (14 | ) | (1 | ) | 32 | ||||||||||||
| Public finance | 1,203 | 1 | 56 | (396 | ) | 864 | |||||||||||||
| Structured finance: | |||||||||||||||||||
| U.S. RMBS | 73 | 130 | (69 | ) | 159 | 293 | |||||||||||||
| Other structured finance | 27 | — | 8 | (9 | ) | 26 | |||||||||||||
| Structured finance | 100 | 130 | (61 | ) | 150 | 319 | |||||||||||||
| Total | $ | 1,303 | $ | 131 | $ | (5 | ) | $ | (246 | ) | $ | 1,183 | |||||||
Net Expected Loss to be Paid (Recovered) and
Roll Forward
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net expected loss to be paid (recovered), beginning of period | $ | 411 | $ | 529 | $ | 737 | |||||||||||
| Economic loss development (benefit) due to: | |||||||||||||||||
| Accretion of discount | 16 | 7 | 9 | ||||||||||||||
| Changes in discount rates | (115) | (33) | 13 | ||||||||||||||
| Changes in timing and assumptions | (26) | (261) | 123 | ||||||||||||||
| Total economic loss development (benefit) | (125) | (287) | 145 | ||||||||||||||
| Net (paid) recovered losses (1) | 236 | 169 | (353) | ||||||||||||||
| Net expected loss to be paid (recovered), end of period | $ | 522 | $ | 411 | $ | 529 | |||||||||||
____________________
(1) Net Economic Loss Development (Benefit)(paid) recovered losses in 2022 include the net amounts received pursuant to the Puerto Rico Resolutions, as described in Note 3, Outstanding Exposure.
| Net Expected Loss to be Paid (Recovered) | Net Economic Loss Development (Benefit) | ||||||||||||||
| As of December 31, | Year Ended December 31, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| (in millions) | |||||||||||||||
| Insurance | $ | 683 | $ | 1,110 | $ | 14 | $ | (9 | ) | ||||||
| FG VIEs (See Note 14) | 58 | 75 | (29 | ) | (13 | ) | |||||||||
| Credit derivatives (See Note 11) | (4 | ) | (2 | ) | 14 | 17 | |||||||||
| Total | $ | 737 | $ | 1,183 | $ | (1 | ) | $ | (5 | ) | |||||
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Assured Guaranty Ltd.
Roll Forward by Sector
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 197 | $ | 19 | $ | 187 | $ | 403 | ||||||||||||||||||
| Non-U.S. public finance | 12 | (2) | (1) | 9 | ||||||||||||||||||||||
| Public finance | 209 | 17 | 186 | 412 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 150 | (143) | 59 | 66 | ||||||||||||||||||||||
| Other structured finance | 52 | 1 | (9) | 44 | ||||||||||||||||||||||
| Structured finance | 202 | (142) | 50 | 110 | ||||||||||||||||||||||
| Total | $ | 411 | $ | (125) | $ | 236 | $ | 522 | ||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 305 | $ | (182) | $ | 74 | $ | 197 | ||||||||||||||||||
| Non-U.S. public finance | 36 | (22) | (2) | 12 | ||||||||||||||||||||||
| Public finance | 341 | (204) | 72 | 209 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 148 | (100) | 102 | 150 | ||||||||||||||||||||||
| Other structured finance | 40 | 17 | (5) | 52 | ||||||||||||||||||||||
| Structured finance | 188 | (83) | 97 | 202 | ||||||||||||||||||||||
| Total | $ | 529 | $ | (287) | $ | 169 | $ | 411 | ||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2019 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 531 | $ | 190 | $ | (416) | $ | 305 | ||||||||||||||||||
| Non-U.S. public finance | 23 | 13 | — | 36 | ||||||||||||||||||||||
| Public finance | 554 | 203 | (416) | 341 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 146 | (71) | 73 | 148 | ||||||||||||||||||||||
| Other structured finance | 37 | 13 | (10) | 40 | ||||||||||||||||||||||
| Structured finance | 183 | (58) | 63 | 188 | ||||||||||||||||||||||
| Total | $ | 737 | $ | 145 | $ | (353) | $ | 529 | ||||||||||||||||||
(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 Company insured general obligation bondstables above include: (a) net LAE paid of $33 million, $36 million and $25 million for the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.3 billion net par as of years ended
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Notes to Consolidated Financial Statements, Continued
December 31, 2019, all of which was BIG. For additional information regarding the Company's Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 5, Outstanding Insurance Exposure.
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&Wrepresentation and warranty 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.
The further behind a mortgage borrower fallsborrowers fall in making payments, the more likely it is that he or shethey will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
Mortgage borrowers that are not behind on payments and have not fallen two or more than 1 paymentpayments behind in the last two years (generally considered performing borrowers) have demonstrated an ability and willingness to pay through the recession and mortgage crisis,challenging economic periods, and as a result are viewed as less likely to default than delinquent borrowers.borrowers or those that have experienced delinquency recently. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates (CDR), then projecting how the CDR will develop over time. Loans that are defaulted pursuant to the CDR after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A CDR is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral(collateral pool balance”)balance). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector and vintage based on its experience to date. The Company continues to update its evaluation of these loss severities as new information becomes available.
The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above; assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.
Net Economic Loss Development (Benefit)
U.S. RMBS
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| First lien U.S. RMBS | $ | (36) | $ | — | $ | (45) | |||||||||||
| Second lien U.S. RMBS | (107) | (100) | (26) | ||||||||||||||
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| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
| First lien U.S. RMBS | $ | (77 | ) | $ | 16 | ||
| Second lien U.S. RMBS | (157 | ) | (85 | ) | |||
The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have recently been 2two 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 partythird-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 and re-performing categories.
First Lien U.S. RMBS Liquidation Rates
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Current but recently delinquent: | |||||||||||
| Alt-A and Prime | 20% | 20% | |||||||||
| Option ARM | 20% | 20% | |||||||||
| Subprime | 20% | 20% | |||||||||
| 30 – 59 Days Delinquent: | |||||||||||
| Alt-A and Prime | 35% | 35% | |||||||||
| Option ARM | 35% | 35% | |||||||||
| Subprime | 30% | 30% | |||||||||
| 60 – 89 Days Delinquent: | |||||||||||
| Alt-A and Prime | 40% | 40% | |||||||||
| Option ARM | 45% | 45% | |||||||||
| Subprime | 40% | 40% | |||||||||
| 90+ Days Delinquent: | |||||||||||
| Alt-A and Prime | 55% | 55% | |||||||||
| Option ARM | 60% | 60% | |||||||||
| Subprime | 45% | 45% | |||||||||
| Bankruptcy: | |||||||||||
| Alt-A and Prime | 45% | 45% | |||||||||
| Option ARM | 50% | 50% | |||||||||
| Subprime | 40% | 40% | |||||||||
| Foreclosure: | |||||||||||
| Alt-A and Prime | 60% | 60% | |||||||||
| Option ARM | 65% | 65% | |||||||||
| Subprime | 55% | 55% | |||||||||
| Real Estate Owned | |||||||||||
| All | 100% | 100% | |||||||||
| As of December 31, | |||||
| 2019 | 2018 | 2017 | |||
| 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 | 30 | 30 | 30 | ||
| Option ARM | 35 | 35 | 35 | ||
| Subprime | 35 | 40 | 40 | ||
| 60 – 89 Days Delinquent | |||||
| Alt-A and Prime | 40 | 40 | 40 | ||
| Option ARM | 45 | 45 | 50 | ||
| Subprime | 45 | 45 | 50 | ||
| 90+ Days Delinquent | |||||
| Alt-A and Prime | 55 | 50 | 55 | ||
| Option ARM | 55 | 55 | 60 | ||
| Subprime | 50 | 50 | 55 | ||
| Bankruptcy | |||||
| Alt-A and Prime | 45 | 45 | 45 | ||
| Option ARM | 50 | 50 | 50 | ||
| Subprime | 40 | 40 | 40 | ||
| Foreclosure | |||||
| Alt-A and Prime | 65 | 60 | 65 | ||
| Option ARM | 65 | 65 | 70 | ||
| Subprime | 60 | 60 | 65 | ||
| Real Estate Owned | |||||
| All | 100 | 100 | 100 | ||
While the Company uses the liquidation rates as described above to project defaults of non-performing loans (including current loans that were recently modified or delinquent within the last 12 months)delinquent), it projects defaults on presently current loans by applying a CDR trend.curve. The start of that CDR trendcurve 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)scenario), 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 for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau.plateau CDR. In the base case,scenario, the Company
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Notes to Consolidated Financial Statements, Continued
assumes the final CDR will be reached 3.5 years1 year after the initial 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently 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 month36-month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.re-perform.
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. LossThe Company assumes in the base scenario that recent (still historically elevated) loss severities experienced in first lien
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 (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base CaseScenario Expected Loss Estimates
First Lien U.S. RMBS
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Alt-A and Prime: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 1.6 | % | – | 11.5% | 5.1% | 0.9 | % | – | 11.6% | 5.9% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.6% | 0.3% | 0.0 | % | – | 0.6% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| Option ARM: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 2.0 | % | – | 7.7% | 4.3% | 1.8 | % | – | 11.9% | 5.6% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.4% | 0.2% | 0.1 | % | – | 0.6% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| Subprime: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 2.7 | % | – | 9.7% | 5.6% | 2.9 | % | – | 10.0% | 6.0% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.5% | 0.3% | 0.1 | % | – | 0.5% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | |||||||||||||||
| Alt-A First Lien | ||||||||||||||||||||
| Plateau CDR | 0.3 | % | – | 8.4% | 4.1% | 1.2 | % | – | 11.4% | 4.6% | 1.3 | % | – | 9.8% | 5.2% | |||||
| Final CDR | 0.0 | % | – | 0.4% | 0.2% | 0.1 | % | – | 0.6% | 0.2% | 0.1 | % | – | 0.5% | 0.3% | |||||
| Initial loss severity: | ||||||||||||||||||||
| 2005 and prior | 60% | 60% | 60% | |||||||||||||||||
| 2006 | 70% | 70% | 80% | |||||||||||||||||
| 2007+ | 70% | 70% | 70% | |||||||||||||||||
| Option ARM | ||||||||||||||||||||
| Plateau CDR | 1.8 | % | – | 8.4% | 5.4% | 1.8 | % | – | 8.3% | 5.6% | 2.5 | % | – | 7.0% | 5.9% | |||||
| Final CDR | 0.1 | % | – | 0.4% | 0.3% | 0.1 | % | – | 0.4% | 0.3% | 0.1 | % | – | 0.3% | 0.3% | |||||
| Initial loss severity: | ||||||||||||||||||||
| 2005 and prior | 60% | 60% | 60% | |||||||||||||||||
| 2006 | 60% | 60% | 70% | |||||||||||||||||
| 2007+ | 70% | 70% | 75% | |||||||||||||||||
| Subprime | ||||||||||||||||||||
| Plateau CDR | 1.6 | % | – | 18.1% | 5.6% | 1.8 | % | – | 23.2% | 6.2% | 3.5 | % | – | 13.1% | 7.8% | |||||
| Final CDR | 0.1 | % | – | 0.9% | 0.3% | 0.1 | % | – | 1.2% | 0.3% | 0.2 | % | – | 0.7% | 0.4% | |||||
| Initial loss severity: | ||||||||||||||||||||
| 2005 and prior | 75% | 80% | 80% | |||||||||||||||||
| 2006 | 75% | 75% | 90% | |||||||||||||||||
| 2007+ | 75% | 95% | 95% | |||||||||||||||||
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 pattern 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.scenario. 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, 2018.2021.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes that 20% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans.
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien U.S. RMBS 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 initialplateau CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of 5five scenarios as of December 31, 20192022 and December 31, 2018.2021.
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of December 31, 20192022 as it used as of December 31, 2018,2021, 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.
scenario. In the Company'sCompany’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 1516 months, expected loss to be paid would increase from current projections by approximately $43$13 million for all first lien U.S. RMBS transactions.
In the Company'sCompany’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 nineeight months), expected loss to be paid would decrease from current projections by approximately $38$8 million for all first lien U.S. RMBS transactions.
Second lien U.S. 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.transactions (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the CPRprepayment speeds of the collateral, the interest rate environment and assumptions about loss severity.
Similar to first liens,lien U.S. RMBS transactions, the Company then calculates a CDR for six months, which isthat will cause the period over whichtargeted amount of liquidations to occur during the currently delinquent collateral is expectedplateau period.
Prior to be liquidated. That CDR is then used as the basisthird quarter of 2022, for the plateau CDR period that follows the embedded plateau losses.
The Company has observed lower than expected default rates and longer liquidation timelines due to significant home price appreciation and special servicing activity which now favors modifications and foreclosure actions rather than charge-offs at 180 days delinquent. In the third quarter of 2022, the Company extended the time over which a portion of the delinquent loans default from six months of delinquent loan liquidations, followed by 28to 36 months of decreasein the base scenario (conforming to the steady statemethodology used for first lien U.S. RMBS transactions). After the plateau period, as with first lien U.S. RMBS transactions, the CDR trends down over one year to 5% of the same asplateau CDR. These changes in the shape of December 31, 2018.the CDR curve result in a longer period of stress defaults (48 months in the base scenario), but at lower default levels leading to lower overall levels of expected losses.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
HELOC loans generally permitpermitted 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 percentageA substantial number of loans reaching their principal amortization periods would default aroundin the time of the payment increase.
Recently, the Company does not apply a CDR increase when suchhas observed the performance of the modified loans reach their principalthat have finally reset to full amortization period. In addition, based on(which represent the averagemajority of extended loans), and noted low levels of delinquency, even with substantial increases in monthly payments. This observed performance history,lowers the Company applies a CDR floorlevel of 2.5% foruncertainty regarding this modified cohort as the future steady state CDR on all its HELOC transactions.remainder continue to reset.
When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of December 31, 20192022 and December 31, 2018,2021, 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'sCompany’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 periodicallyquarterly based on actual recoveries of charged-off loans observed from period to period.period and reasonable expectations of future recoveries. 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 projected future recoveries on theseCompany’s recovery assumption for charged-off loans is 30%, as shown in the table below, based on observed trends and reasonable expectations of 20% as of December 31, 2019 and 10% as of December 31, 2018, with suchfuture recoveries. Such recoveries are assumed to be received evenly over the next five years. The increase in recovery assumptions is attributable to the higher actual recovery rates observed in certain transactions during the year. IncreasingIf the recovery rate decreases to 30%20% expected loss to be paid would result in an economic benefit of $57 million, while decreasingincrease from current projections by approximately $37 million. If the recovery rate backincreases to 10%40%, expected loss to be paid would result in an economic loss of $57decrease from current projections by approximately $37 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,scenario, 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 U.S. RMBS transactions (in the base case)scenario), 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, 2018.2021. 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 5five 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 behindof the amount of losses the collateral will likely suffer.
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 (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.
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Key Assumptions in Base CaseScenario Expected Loss Estimates
HELOCs
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Plateau CDR | 0.4 | % | – | 8.4% | 3.5% | 6.5 | % | – | 39.6% | 16.4% | |||||||||||||||||||||||||
| Final CDR trended down to | 0.0 | % | – | 0.4% | 0.2% | 1.0% | |||||||||||||||||||||||||||||
| Liquidation rates: | |||||||||||||||||||||||||||||||||||
| Current but recently delinquent | 20% | 20% | |||||||||||||||||||||||||||||||||
| 30 – 59 Days Delinquent | 30 | 30 | |||||||||||||||||||||||||||||||||
| 60 – 89 Days Delinquent | 40 | 40 | |||||||||||||||||||||||||||||||||
| 90+ Days Delinquent | 60 | 60 | |||||||||||||||||||||||||||||||||
| Bankruptcy | 55 | 55 | |||||||||||||||||||||||||||||||||
| Foreclosure | 55 | 55 | |||||||||||||||||||||||||||||||||
| Real Estate Owned | 100 | 100 | |||||||||||||||||||||||||||||||||
| Loss severity on future defaults | 98% | 98% | |||||||||||||||||||||||||||||||||
| Projected future recoveries on previously charged-off loans | 30% | 30% | |||||||||||||||||||||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | |||||||||||||||
| Plateau CDR | 5.9 | % | – | 24.6% | 9.5% | 4.6 | % | – | 26.8% | 10.1% | 2.7 | % | – | 19.9% | 11.4% | |||||
| 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 | 35 | 45 | |||||||||||||||||
| 60 – 89 Days Delinquent | 45 | 50 | 60 | |||||||||||||||||
| 90+ Days Delinquent | 65 | 70 | 75 | |||||||||||||||||
| Bankruptcy | 55 | 55 | 55 | |||||||||||||||||
| Foreclosure | 55 | 65 | 70 | |||||||||||||||||
| Real Estate Owned | 100 | 100 | 100 | |||||||||||||||||
| Loss severity (1) | 98% | 98% | 98% | |||||||||||||||||
The Company updated its assumptions related to the CDR plateau and ramp-down during the third quarter of 2022. The Company’s base casescenario assumed a six month36-month CDR plateau and a 28 month12-month ramp-down (for a total stress period of 48 months), compared to a six-month CDR plateau and a 28-month ramp-down (for a total stress period of 34 months). The Company also modeled a scenarioscenarios with a longer period of elevated defaults and anotherothers with a shorter period of elevated defaults. In the Company'sCompany’s most stressful scenario, increasing the CDR plateau to eight42 months and increasing the
ramp-down by threefour months to 3116 months (for a total stress period of 3958 months) would increasedecrease the expected lossrecovery by approximately $6$1 million for HELOC transactions. On the other hand, in the Company'sCompany’s least stressful scenario, reducing the CDR plateau to four30 months and decreasing the length of the CDR ramp-down to 25eight months (for a total stress period of 2938 months), and lowering the ultimate prepayment rate to 10% would decreaseincrease the expected lossrecovery by approximately $7$2 million for HELOC transactions.
The Company projected that its total net expected loss to be paid across its troubled other structured finance exposures excluding U.S. RMBS as of December 31, 20192022 was $37 million and is primarily attributable to $84 million in BIG net par$44 million. The largest component of these structured finance losses were student loan securitizations issued by private issuers that are classified as structured finance.with $47 million in BIG net par outstanding. In general, the projected losses of these transactionsstudent loan securitizations are due to: (i) the poor credit performance of private student loan collateral and high loss severities,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 December 31, 2019, the Company'stransactions with BIG net par in these transactions wasof $40 million, which was lower than the $85 million as of December 31, 2018 because of the settlement of a transaction.2022.
Recovery Litigation and Dispute Resolution
In the ordinary course of their respective businesses, certain of AGL'sAGL’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received 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 ultimately 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 5,3, Outstanding Insurance Exposure, for a discussion of the Company'sCompany’s exposure to Puerto Rico and related recovery litigation being pursued by the Company.
The portfolio of outstanding exposures discussed in Note 5,3, Outstanding Insurance Exposure, and Note 6,4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Amounts presented in this note relate only to contracts accounted for as insurance.insurance, unless otherwise specified. See Note 11,6, Contracts Accounted for as Credit Derivatives, for amounts that relaterelated to CDS and Note 14,8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs.
Premiums
Accounting PoliciesPolicy
Premiums receivable represent the present value of contractual or expected future premium collections discounted using risk freerisk-free rates. Unearned premium reserve represents deferred premium revenue less claim payments made and(net of recoveries receivedreceived) that have not yet been recognized in the statement of operations (contra-paid). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below under "Financial Guaranty Insurance Losses."“Losses and Recoveries”.
The amount of deferred premium revenue at contract inception is determined as follows:
•For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.
•For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value (discounted at risk free rates) of either (1)either: (i) contractual premiums duedue; or (2)(ii) in cases where the underlying collateral is composed of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually allowable, the amount of prepayments must be probable, and the timing and amount of prepayments must be reasonably estimable. Installment premiums typically relate to structured finance and infrastructure transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the transaction.
•For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the Company'sCompany’s stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections primarily due to fair value adjustments recorded in connection with a business combination.
When the Company adjusts prepayment assumptions or expected premium collections for obligations backed by homogeneous pools of assets, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premiumpremiums receivable. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity. Accretion of the discount on premiums receivable is reported in “net earned premiums”.
The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured par amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured par amounts outstanding in the reporting period compared with the sum of each of the insured principalpar amounts outstanding for all periods. When an insured
financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Anyextinguished, and any nonrefundable deferred premium revenue related to that contract is accelerated and recognized as premium revenue. When a premium receivable balance is deemed uncollectible, it is written offThe Company assesses the need for an allowance for credit loss on premiums receivables each reporting period.
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Assured Guaranty Ltd.
Notes to bad debt expense.Consolidated Financial Statements, Continued
For assumed reinsurance contracts, net earned premiums reported in the consolidated statements of operations are calculated based upon data received from ceding companies; however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates net earned premiums for the lag period. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to assumed reinsurance contracts, the Company assesses the credit quality and available liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.
Ceded unearned premium reserve is recorded as an asset. Direct, assumed and ceded earned premiums are presented together as net earned premiums in the statement of operations. See Note 8, Reinsurance, for a breakout of direct, assumed and ceded premiums. The components of net earned
Any premiums related to FG VIEs are shown in the table below:eliminated upon consolidation.
Insurance Contracts’ Premium Information
Net Earned Premiums
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Financial guaranty insurance: | |||||||||||||||||
| Scheduled net earned premiums | $ | 287 | $ | 322 | $ | 334 | |||||||||||
| Accelerations from refundings and terminations (1) | 179 | 59 | 129 | ||||||||||||||
| Accretion of discount on net premiums receivable | 24 | 30 | 20 | ||||||||||||||
| Financial guaranty insurance net earned premiums | 490 | 411 | 483 | ||||||||||||||
| Specialty net earned premiums | 4 | 3 | 2 | ||||||||||||||
| Net earned premiums | $ | 494 | $ | 414 | $ | 485 | |||||||||||
(1) 2022 accelerations include $133 million related to the 2022 Puerto Rico Resolutions. See Note 3, Outstanding Exposure, for additional information.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Financial guaranty: | |||||||||||
| Scheduled net earned premiums | $ | 331 | $ | 367 | $ | 385 | |||||
| Accelerations from refundings and terminations | 122 | 159 | 286 | ||||||||
| Accretion of discount on net premiums receivable | 17 | 18 | 17 | ||||||||
| Financial guaranty insurance net earned premiums | 470 | 544 | 688 | ||||||||
| Specialty net earned premiums | 6 | 4 | 2 | ||||||||
| Net earned premiums (1) | $ | 476 | $ | 548 | $ | 690 | |||||
Gross Premium Receivable,
Net of Commissions Payable on Assumed Business
Roll Forward
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning of year | $ | 1,372 | $ | 1,372 | $ | 1,286 | |||||||||||
| Less: Specialty insurance premium receivable | 1 | 1 | 2 | ||||||||||||||
| Financial guaranty insurance premiums receivable | 1,371 | 1,371 | 1,284 | ||||||||||||||
| Gross written premiums on new business, net of commissions | 356 | 369 | 462 | ||||||||||||||
| Gross premiums received, net of commissions | (345) | (383) | (426) | ||||||||||||||
| Adjustments: | |||||||||||||||||
| Changes in the expected term and debt service assumptions | 2 | 6 | (10) | ||||||||||||||
| Accretion of discount, net of commissions on assumed business | 24 | 26 | 18 | ||||||||||||||
| Foreign exchange gain (loss) on remeasurement | (111) | (22) | 43 | ||||||||||||||
| Expected recovery of premiums previously written off | — | 4 | — | ||||||||||||||
| Financial guaranty insurance premium receivable | 1,297 | 1,371 | 1,371 | ||||||||||||||
| Specialty insurance premium receivable | 1 | 1 | 1 | ||||||||||||||
| December 31, | $ | 1,298 | $ | 1,372 | $ | 1,372 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Beginning of year | $ | 904 | $ | 915 | $ | 576 | |||||
| Less: Specialty insurance premium receivable | 1 | 1 | — | ||||||||
| Financial guaranty insurance premiums receivable | 903 | 914 | 576 | ||||||||
| Premiums receivable from acquisitions (see Note 2) | — | — | 270 | ||||||||
| Gross written premiums on new business, net of commissions (1) | 689 | 610 | 301 | ||||||||
| Gross premiums received, net of commissions | (318 | ) | (577 | ) | (301 | ) | |||||
| Adjustments: | |||||||||||
| Changes in the expected term | (21 | ) | (8 | ) | (8 | ) | |||||
| Accretion of discount, net of commissions on assumed business | 10 | 9 | 12 | ||||||||
| Foreign exchange translation and remeasurement (2) | 21 | (35 | ) | 64 | |||||||
| Cancellation of assumed reinsurance | — | (10 | ) | — | |||||||
| Financial guaranty insurance premium receivable (3) | 1,284 | 903 | 914 | ||||||||
| Specialty insurance premium receivable | 2 | 1 | 1 | ||||||||
| December 31, | $ | 1,286 | $ | 904 | $ | 915 | |||||
Approximately 74% and 78% and 72% of installmentgross premiums receivable, net of commissions payable at December 31, 20192022 and December 31, 2018,2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in the consumer price index changes in expected lives and new business.
Financial Guaranty Insurance Gross Premiums Receivable,
Expected Future Premium Collections and Earnings
| As of December 31, 2022 | |||||||||||
| Future Premiums to be Collected (1) | Future Net Premiums to be Earned (2) | ||||||||||
| (in millions) | |||||||||||
| 2023 (January 1 - March 31) | $ | 43 | $ | 69 | |||||||
| 2023 (April 1 - June 30) | 32 | 69 | |||||||||
| 2023 (July 1 - September 30) | 25 | 69 | |||||||||
| 2023 (October 1 - December 31) | 29 | 68 | |||||||||
| Subtotal 2023 | 129 | 275 | |||||||||
| 2024 | 92 | 260 | |||||||||
| 2025 | 90 | 244 | |||||||||
| 2026 | 87 | 229 | |||||||||
| 2027 | 82 | 214 | |||||||||
| 2028-2032 | 348 | 898 | |||||||||
| 2033-2037 | 241 | 608 | |||||||||
| 2038-2042 | 167 | 370 | |||||||||
| After 2042 | 352 | 521 | |||||||||
| Total | $ | 1,588 | 3,619 | ||||||||
| Future accretion | 293 | ||||||||||
| Total future net earned premiums | $ | 3,912 | |||||||||
____________________
(1) Net of Commissions on Assumed Businessassumed commissions payable.
| As of December 31, 2019 | |||
| (in millions) | |||
| 2020 (January 1 - March 31) | $ | 35 | |
| 2020 (April 1 - June 30) | 47 | ||
| 2020 (July 1 - September 30) | 30 | ||
| 2020 (October 1 - December 31) | 18 | ||
| 2021 | 92 | ||
| 2022 | 94 | ||
| 2023 | 82 | ||
| 2024 | 82 | ||
| 2025-2029 | 343 | ||
| 2030-2034 | 240 | ||
| 2035-2039 | 151 | ||
| After 2039 | 352 | ||
| Total (1) | $ | 1,566 | |
| As of December 31, 2019 | |||
| (in millions) | |||
| 2020 (January 1 - March 31) | $ | 80 | |
| 2020 (April 1 - June 30) | 79 | ||
| 2020 (July 1 - September 30) | 77 | ||
| 2020 (October 1 - December 31) | 75 | ||
| Subtotal 2020 | 311 | ||
| 2021 | 284 | ||
| 2022 | 263 | ||
| 2023 | 245 | ||
| 2024 | 227 | ||
| 2025-2029 | 909 | ||
| 2030-2034 | 634 | ||
| 2035-2039 | 368 | ||
| After 2039 | 494 | ||
| Net deferred premium revenue (1) | 3,735 | ||
| Future accretion | 281 | ||
| Total future net earned premiums | $ | 4,016 | |
Selected Information for Financial Guaranty Insurance
Policies with Premiums Paid in Installments
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in millions) | |||||||||||
| Premiums receivable, net of commissions payable | $ | 1,297 | $ | 1,371 | |||||||
| Deferred premium revenue | $ | 1,663 | $ | 1,663 | |||||||
| Weighted-average risk-free rate used to discount premiums | 1.8% | 1.6% | |||||||||
| Weighted-average period of premiums receivable (in years) | 12.9 | 12.7 | |||||||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (dollars in millions) | |||||||
| Premiums receivable, net of commission payable | $ | 1,284 | $ | 903 | |||
| Gross deferred premium revenue | 1,637 | 1,313 | |||||
| Weighted-average risk-free rate used to discount premiums | 1.7 | % | 2.3 | % | |||
| Weighted-average period of premiums receivable (in years) | 13.3 | 9.1 | |||||
Accounting Policy
Policy acquisition costs that are directly related and essential to successful insurance contract acquisition, as well as ceding commission income and expense on ceded and assumed reinsurance contracts, are deferred and reported net.
Capitalized policy acquisition costs include the cost of underwriting personnel attributable to successful underwriting efforts. Management uses its judgment in determiningThe Company conducts an annual time study, which requires the type anduse of judgement, to estimate the amount of costs to be deferred. The Company conducts an annual study to determine deferral rates.
Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with premiums received in installments are calculated at their contractually defined commission
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
rates, discounted consistent with premiums receivable for all future periods, and included in DAC, with a corresponding offset to net premiums receivable or reinsurance balances payable.
DAC is amortized in proportion to net earned premiums. Amortization of deferred policy acquisition costs includes the accretion of discount on ceding commission receivable and payable. When an insured obligation is retired early, the remaining related DAC is recognizedexpensed at that time.
Costs incurred for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs are charged to expense as incurred.
Expected losses and LAE, investment income, and the remaining costs of servicing the insured or reinsured business, are considered in determining the recoverability of DAC.
Roll Forward of
Deferred Acquisition Costs
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning of year | $ | 131 | $ | 119 | $ | 111 | |||||||||||
| Costs deferred during the period | 30 | 26 | 24 | ||||||||||||||
| Costs amortized during the period | (14) | (14) | (16) | ||||||||||||||
| December 31, | $ | 147 | $ | 131 | $ | 119 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Beginning of year | $ | 105 | $ | 101 | $ | 106 | |||||
| DAC adjustments from acquisitions (see Note 2) | — | — | (2 | ) | |||||||
| Costs deferred during the period | 23 | 19 | 16 | ||||||||
| Costs amortized during the period | (17 | ) | (15 | ) | (19 | ) | |||||
| December 31, | $ | 111 | $ | 105 | $ | 101 | |||||
Accounting Policies
Loss and LAE Reserve
Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses and reported in other assets. As discussed in Note 9, Fair Value Measurement, contracts that meet the definition of a derivative, as well as consolidated FG VIEs’ assetsAny loss and liabilities, are recorded separately at fair value. Any expected lossesLAE reserves related to consolidated FG VIEs are eliminated upon consolidation. Any expected losses to be paid (recovered) on credit derivatives are reflected in the fair value of credit derivatives.
Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company'sCompany’s stand‑ready obligation. At contract inception, the entire stand-ready obligation is represented entirely by unearned premium reserve. Unearned premium reserve is deferred premium revenue, less claim payments and(net of recoveries receivedreceived) that have not yet been recognized in the statement of operations (contra-paid). At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. A loss and LAE reserve for ana financial guaranty insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (“total losses”)(total losses) exceed the deferred premium revenue, on a contract by contractcontract-by-contract basis. As a result, the Company has expected loss to be paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes into income.
When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent there is noinsufficient loss and LAE reserve on a contract, then such claim payment is recorded as “contra-paid,”contra-paid, which reduces the unearned premium reserve. The contra-paid is recognized in the line item “loss and LAE”loss adjustment expenses (benefit)” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. Loss“Loss and LAEloss adjustment expenses (benefit)” in the consolidated statement of operations is presented net of cessions to reinsurers.
Salvage and Subrogation Recoverable
When the Company becomes entitled to the cash flow from the underlying collateral of, or other recoveries in relation to, an insured exposure under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the following:
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
following: (i) a reduction in the corresponding loss and LAE reserve with a benefit to the incomeconsolidated statement
of operations; (ii) no entry recorded,effect on the consolidated balance sheet or statements of operations, if “total loss”total loss is not in excess of deferred premium revenue,revenue; or
(iii) the recording of a salvage asset with a benefit to the income statementconsolidated statements of operations if the transaction is in a net recovery position at the reporting date.
The ceded component of salvage and subrogation recoverable is recordedreported in the line item other liabilities.“other liabilities”.
Specialty Business
The Company also guarantees specialty business with risk profiles similar to those of its structured finance exposures written in financial guaranty form.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Specialty Insurance, Reinsurance and Guaranties
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Gross Exposure | Net Exposure | Gross Exposure | Net Exposure | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Life insurance transactions (1) | $ | 1,314 | $ | 986 | $ | 1,250 | $ | 871 | ||||||||||||||||||
| Aircraft residual value insurance policies | 355 | 200 | 355 | 200 | ||||||||||||||||||||||
| Other guaranties | 228 | 228 | — | — | ||||||||||||||||||||||
____________________
(1) The life insurance transactions net exposure is projected to reach $1.1 billion by June 30, 2024.
As of both December 31, 2022 and December 31, 2021, gross exposure of $144 million and net exposure of $84 million of aircraft residual value insurance was rated BIG. All other exposures in the table above are investment-grade quality.
4. Expected Loss to be ExpensedPaid (Recovered)
Accounting Policy
Expected loss to be expensed represents past orpaid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net claim paymentsof: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted scenarios.
Expected cash outflows and inflows are probability weighted cash flows that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into incomereflect management’s assumptions about the likelihood of all possible outcomes based on financial guaranty insurance policies.all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk-management activities. Expected loss to be expensedpaid (recovered) is important in that it represents the Company's projectionpresent value of incurred lossesamounts that will be recognizedthe Company expects to pay or recover in future periods for all contracts.
In circumstances where the Company purchased its own insured obligations that had expected losses, and in cases
where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and
the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the Company are referred to as Loss Mitigation Securities and are recorded in the investment portfolio at fair value, excluding the value of the Company’s insurance. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 7, Investments and Cash, and Note 9, Fair Value Measurement.
Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects
of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount.discount and the economic
In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. The insured portfolio includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary models are: (1) insurance, as described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of these accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Loss InformationEstimation Process
The Company’s loss reserve committees estimate expected loss to be paid (recovered) 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 period 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 (recovered) 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, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, 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 have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities.
Changes over a reporting period in the Company’s loss estimates for public finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables.
Changes to estimates of net expected loss to be paid (recovered) and net economic loss development (benefit) over a reporting period may be attributable to a number of interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates, and dispute resolution. Actual losses will ultimately depend on future events, transaction performance or other factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to considerable volatility and may not reflect the Company’s ultimate claims paid.
In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions 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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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Accounting Model | 2022 | 2021 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Insurance (see Note 5) | $ | 205 | $ | 364 | $ | (112) | $ | (281) | $ | 142 | ||||||||||||||||||||||
| FG VIEs (see Note 8) | 314 | (1) | 42 | (17) | (20) | 1 | ||||||||||||||||||||||||||
| Credit derivatives (see Note 6) | 3 | 5 | 4 | 14 | 2 | |||||||||||||||||||||||||||
| Total | $ | 522 | $ | 411 | $ | (125) | $ | (287) | $ | 145 | ||||||||||||||||||||||
____________________
(1) The increase in expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated as a result of the 2022 Puerto Rico Resolutions. Prior to the 2022 Puerto Rico Resolutions, all Puerto Rico Exposures were accounted for as insurance.
The following table provides information ontables present a roll forward of net reserve (salvage),expected loss to be paid (recovered) for all contracts, which includes lossare accounted for under one of the following accounting models: insurance, derivative and LAE reserves and salvage and subrogation recoverable, both net of reinsurance. To discount loss reserves, theFG VIE. The Company used risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0%3.82% to 2.45%4.69% with a weighted average of 1.94%4.08% as of December 31, 20192022 and 0.0%0.00% to 3.06%1.98% with a weighted average of 2.74%1.02% as of December 31, 2018.2021. Expected losses to be paid for U.S. dollar denominated transactions represented approximately 98.5% and 97.2% of the total as of December 31, 2022 and December 31, 2021, respectively.
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Public finance: | |||||||
| U.S. public finance | $ | 328 | $ | 612 | |||
| Non-U.S. public finance | 5 | 14 | |||||
| Public finance | 333 | 626 | |||||
| Structured finance: | |||||||
| U.S. RMBS (1) | (78 | ) | 21 | ||||
| Other structured finance | 40 | 30 | |||||
| Structured finance | (38 | ) | 51 | ||||
| Subtotal | 295 | 677 | |||||
| Other payable (recoverable) | — | (3 | ) | ||||
| Total | $ | 295 | $ | 674 | |||
Net Expected Loss to be Paid (Recovered)
Roll Forward
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net expected loss to be paid (recovered), beginning of period | $ | 411 | $ | 529 | $ | 737 | |||||||||||
| Economic loss development (benefit) due to: | |||||||||||||||||
| Accretion of discount | 16 | 7 | 9 | ||||||||||||||
| Changes in discount rates | (115) | (33) | 13 | ||||||||||||||
| Changes in timing and assumptions | (26) | (261) | 123 | ||||||||||||||
| Total economic loss development (benefit) | (125) | (287) | 145 | ||||||||||||||
| Net (paid) recovered losses (1) | 236 | 169 | (353) | ||||||||||||||
| Net expected loss to be paid (recovered), end of period | $ | 522 | $ | 411 | $ | 529 | |||||||||||
____________________
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Loss and LAE reserve | $ | 1,050 | $ | 1,177 | |||
| Reinsurance recoverable on unpaid losses (1) | (38 | ) | (34 | ) | |||
| Loss and LAE reserve, net | 1,012 | 1,143 | |||||
| Salvage and subrogation recoverable | (747 | ) | (490 | ) | |||
| Salvage and subrogation reinsurance payable (2) | 30 | 24 | |||||
| Other payable (recoverable) (1) | — | (3 | ) | ||||
| Salvage and subrogation recoverable, net and other recoverable | (717 | ) | (469 | ) | |||
| Net reserves (salvage) | $ | 295 | $ | 674 | |||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 197 | $ | 19 | $ | 187 | $ | 403 | ||||||||||||||||||
| Non-U.S. public finance | 12 | (2) | (1) | 9 | ||||||||||||||||||||||
| Public finance | 209 | 17 | 186 | 412 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 150 | (143) | 59 | 66 | ||||||||||||||||||||||
| Other structured finance | 52 | 1 | (9) | 44 | ||||||||||||||||||||||
| Structured finance | 202 | (142) | 50 | 110 | ||||||||||||||||||||||
| Total | $ | 411 | $ | (125) | $ | 236 | $ | 522 | ||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 305 | $ | (182) | $ | 74 | $ | 197 | ||||||||||||||||||
| Non-U.S. public finance | 36 | (22) | (2) | 12 | ||||||||||||||||||||||
| Public finance | 341 | (204) | 72 | 209 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 148 | (100) | 102 | 150 | ||||||||||||||||||||||
| Other structured finance | 40 | 17 | (5) | 52 | ||||||||||||||||||||||
| Structured finance | 188 | (83) | 97 | 202 | ||||||||||||||||||||||
| Total | $ | 529 | $ | (287) | $ | 169 | $ | 411 | ||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2019 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 531 | $ | 190 | $ | (416) | $ | 305 | ||||||||||||||||||
| Non-U.S. public finance | 23 | 13 | — | 36 | ||||||||||||||||||||||
| Public finance | 554 | 203 | (416) | 341 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 146 | (71) | 73 | 148 | ||||||||||||||||||||||
| Other structured finance | 37 | 13 | (10) | 40 | ||||||||||||||||||||||
| Structured finance | 183 | (58) | 63 | 188 | ||||||||||||||||||||||
| Total | $ | 737 | $ | 145 | $ | (353) | $ | 529 | ||||||||||||||||||
(1) RecordedNet 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 tables above include: (a) net LAE paid of $33 million, $36 million and $25 million for the years ended
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
December 31, 2022, 2021 and 2020, respectively; and (b) net expected LAE to be paid of $11 million as of December 31, 2022 and $26 million as of December 31, 2021.
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 representation and warranty 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.
The further behind mortgage borrowers fall in making payments, the more likely it is that they will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
Mortgage borrowers that are not behind on payments and have not fallen two or more payments behind in the last two years (generally considered performing borrowers) have demonstrated an ability and willingness to pay through challenging economic periods, and as a componentresult are viewed as less likely to default than delinquent borrowers or those that have experienced delinquency recently. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of other assetsthe currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates (CDR), then projecting how the CDR will develop over time. Loans that are defaulted pursuant to the CDR after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A CDR is the outstanding principal amount of defaulted loans liquidated in the consolidatedcurrent month divided by the remaining outstanding amount of the whole pool of loans (collateral pool balance). The collateral pool balance sheets.
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector and vintage based on its experience to date. The Company continues to update its evaluation of these loss severities as new information becomes available.
The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above; assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.
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 consolidated balance sheets.sections below.
Net Economic Loss Development (Benefit)
U.S. RMBS
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| First lien U.S. RMBS | $ | (36) | $ | — | $ | (45) | |||||||||||
| Second lien U.S. RMBS | (107) | (100) | (26) | ||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime
The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two 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 recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories.
First Lien U.S. RMBS Liquidation Rates
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Current but recently delinquent: | |||||||||||
| Alt-A and Prime | 20% | 20% | |||||||||
| Option ARM | 20% | 20% | |||||||||
| Subprime | 20% | 20% | |||||||||
| 30 – 59 Days Delinquent: | |||||||||||
| Alt-A and Prime | 35% | 35% | |||||||||
| Option ARM | 35% | 35% | |||||||||
| Subprime | 30% | 30% | |||||||||
| 60 – 89 Days Delinquent: | |||||||||||
| Alt-A and Prime | 40% | 40% | |||||||||
| Option ARM | 45% | 45% | |||||||||
| Subprime | 40% | 40% | |||||||||
| 90+ Days Delinquent: | |||||||||||
| Alt-A and Prime | 55% | 55% | |||||||||
| Option ARM | 60% | 60% | |||||||||
| Subprime | 45% | 45% | |||||||||
| Bankruptcy: | |||||||||||
| Alt-A and Prime | 45% | 45% | |||||||||
| Option ARM | 50% | 50% | |||||||||
| Subprime | 40% | 40% | |||||||||
| Foreclosure: | |||||||||||
| Alt-A and Prime | 60% | 60% | |||||||||
| Option ARM | 65% | 65% | |||||||||
| Subprime | 55% | 55% | |||||||||
| Real Estate Owned | |||||||||||
| All | 100% | 100% | |||||||||
While the Company uses the liquidation rates above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a CDR curve. The start of that CDR curve 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 scenario), after the 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to a final CDR of 5% of the plateau CDR. In the base scenario, the Company
171
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
assumes the final CDR will be reached 1 year after the 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, 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 re-perform.
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. The Company assumes in the base scenario that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base scenario that the recent 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 scenario 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 (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base Scenario Expected Loss Estimates
First Lien U.S. RMBS
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Alt-A and Prime: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 1.6 | % | – | 11.5% | 5.1% | 0.9 | % | – | 11.6% | 5.9% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.6% | 0.3% | 0.0 | % | – | 0.6% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| Option ARM: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 2.0 | % | – | 7.7% | 4.3% | 1.8 | % | – | 11.9% | 5.6% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.4% | 0.2% | 0.1 | % | – | 0.6% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| Subprime: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 2.7 | % | – | 9.7% | 5.6% | 2.9 | % | – | 10.0% | 6.0% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.5% | 0.3% | 0.1 | % | – | 0.5% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
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 pattern similar 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 scenario. 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, 2021.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes that 20% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans.
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien U.S. RMBS 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 plateau CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of December 31, 2022 and December 31, 2021.
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. An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. ICE Benchmark Administration (IBA) and the Financial Conduct Authority have announced that LIBOR will be discontinued after June 30, 2023. The Company believes that the reference to LIBOR in such floating rate RMBS debt will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on the Secured Overnight Finance Rate (SOFR).
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of December 31, 2022 as it used as of December 31, 2021, increasing and decreasing the periods of stress from those used in the base scenario. 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 16 months, expected loss to be paid would increase from current projections by approximately $13 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 eight months), expected loss to be paid would decrease from current projections by approximately $8 million for all first lien U.S. RMBS transactions.
Second Lien U.S. RMBS Loss Projections
Second lien U.S. 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 (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the prepayment speeds of the collateral, the interest rate environment and assumptions about loss severity.
The Company estimates the amount of loans that will default over the next several years by first calculating expected liquidation rates for delinquent loans, and applying liquidation rates to currently delinquent loans in order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults).
Similar to first lien U.S. RMBS transactions, the Company then calculates a CDR that will cause the targeted amount of liquidations to occur during the plateau period.
Prior to the third quarter of 2022, for the base scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period had ended, the CDR was assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR was calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting, subject to a floor). In the base case scenario, the time over which the CDR trended down to its final CDR was 28 months. Therefore, the total stress period for second lien transactions was 34 months.
The Company has observed lower than expected default rates and longer liquidation timelines due to significant home price appreciation and special servicing activity which now favors modifications and foreclosure actions rather than charge-offs at 180 days delinquent. In the third quarter of 2022, the Company extended the time over which a portion of the delinquent loans default from six months to 36 months in the base scenario (conforming to the methodology used for first lien U.S. RMBS transactions). After the plateau period, as with first lien U.S. RMBS transactions, the CDR trends down over one year to 5% of the plateau CDR. These changes in the shape of the CDR curve result in a longer period of stress defaults (48 months in the base scenario), but at lower default levels leading to lower overall levels of expected losses.
173
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
HELOC loans generally permitted 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. A substantial number of loans in the Company’s insured transactions had been modified to extend the interest-only period to 15 years. Approximately 80% of the modified loans had reset to fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years.
Recently, the Company has observed the performance of the modified loans that have finally reset to full amortization (which represent the majority of extended loans), and noted low levels of delinquency, even with substantial increases in monthly payments. This observed performance lowers the level of uncertainty regarding this modified cohort as the remainder continue to reset.
When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of December 31, 2022 and December 31, 2021, 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 quarterly based on actual recoveries of charged-off loans observed from period to period and reasonable expectations of future recoveries. 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’s recovery assumption for charged-off loans is 30%, as shown in the table below, providesbased on observed trends and reasonable expectations of future recoveries. Such recoveries are assumed to be received evenly over the next five years. If the recovery rate decreases to 20% expected loss to be paid would increase from current projections by approximately $37 million. If the recovery rate increases to 40%, expected loss to be paid would decrease from current projections by approximately $37 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 scenario, 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 U.S. RMBS transactions (in the base scenario), 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, 2021. 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 five scenarios, each with a reconciliationdifferent 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 of the amount of losses the collateral will likely suffer.
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 (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Key Assumptions in Base Scenario Expected Loss Estimates
HELOCs
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Plateau CDR | 0.4 | % | – | 8.4% | 3.5% | 6.5 | % | – | 39.6% | 16.4% | |||||||||||||||||||||||||
| Final CDR trended down to | 0.0 | % | – | 0.4% | 0.2% | 1.0% | |||||||||||||||||||||||||||||
| Liquidation rates: | |||||||||||||||||||||||||||||||||||
| Current but recently delinquent | 20% | 20% | |||||||||||||||||||||||||||||||||
| 30 – 59 Days Delinquent | 30 | 30 | |||||||||||||||||||||||||||||||||
| 60 – 89 Days Delinquent | 40 | 40 | |||||||||||||||||||||||||||||||||
| 90+ Days Delinquent | 60 | 60 | |||||||||||||||||||||||||||||||||
| Bankruptcy | 55 | 55 | |||||||||||||||||||||||||||||||||
| Foreclosure | 55 | 55 | |||||||||||||||||||||||||||||||||
| Real Estate Owned | 100 | 100 | |||||||||||||||||||||||||||||||||
| Loss severity on future defaults | 98% | 98% | |||||||||||||||||||||||||||||||||
| Projected future recoveries on previously charged-off loans | 30% | 30% | |||||||||||||||||||||||||||||||||
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.
The Company updated its assumptions related to the CDR plateau and ramp-down during the third quarter of 2022. The Company’s base scenario assumed a 36-month CDR plateau and a 12-month ramp-down (for a total stress period of 48 months), compared to a six-month CDR plateau and a 28-month ramp-down (for a total stress period of 34 months). The Company modeled scenarios with a longer period of elevated defaults and others with a shorter period of elevated defaults. In the Company’s most stressful scenario, increasing the CDR plateau to 42 months and increasing the ramp-down by four months to 16 months (for a total stress period of 58 months) would decrease the expected recovery by approximately $1 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, reducing the CDR plateau to 30 months and decreasing the length of the CDR ramp-down to eight months (for a total stress period of 38 months), and lowering the ultimate prepayment rate to 10% would increase the expected recovery by approximately $2 million for HELOC transactions.
Structured Finance Excluding U.S. RMBS
The Company projected that its total net expected loss to be paid toacross its troubled structured finance exposures excluding U.S. RMBS as of December 31, 2022 was $44 million. The largest component of these structured finance losses were student loan securitizations issued by private issuers with $47 million in BIG net expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensedpar outstanding. In general, the projected losses of these student loan securitizations are due to: (i) the contra-paidpoor 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 with BIG net par of $40 million as of December 31, 2022.
Recovery Litigation and Dispute Resolution
In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received 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 ultimately 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 financial statements.
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding 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
The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs.
175
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 6, Contracts Accounted for as Credit Derivatives, for amounts related to CDS and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs.
Premiums
Accounting Policy
Financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition is consistent whether contracts are written on a direct basis, assumed from another financial guarantor, ceded to another insurer, or acquired in a business combination.
Premiums receivable represent the present value of contractual or expected future premium collections discounted using risk-free rates. Unearned premium reserve represents thedeferred premium revenue less claim payments made and(net of recoveries receivedreceived) that have not yet been recognized in the statement of operations (contra-paid). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below under “Losses and Recoveries”.
The amount of deferred premium revenue at contract inception is determined as follows:
•For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.
•For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value (discounted at risk free rates) of either: (i) contractual premiums due; or (ii) salvagein cases where the underlying collateral is composed of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually allowable, the amount of prepayments must be probable, and subrogation recoverable forthe timing and amount of prepayments must be reasonably estimable. Installment premiums typically relate to structured finance and infrastructure transactions, that arewhere the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the transaction.
•For financial guaranty insurance contracts acquired in a net recovery position wherebusiness combination, deferred premium revenue is equal to the fair value of the Company’s stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections primarily due to fair value adjustments recorded in connection with a business combination.
When the Company has not yet received recoveriesadjusts prepayment assumptions or expected premium collections for obligations backed by homogeneous pools of assets, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to premiums receivable. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity. Accretion of the discount on claims previously paid (and thereforepremiums receivable is reported in “net earned premiums”.
The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured par amount outstanding. Accordingly, the proportionate share of premium revenue recognized in income but not yet received),a given reporting period is a constant rate calculated based on the relationship between the insured par amounts outstanding in the reporting period compared with the sum of each of the insured par amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished, and (iii)any nonrefundable deferred premium revenue related to that contract is accelerated and recognized as premium revenue. The Company assesses the need for an allowance for credit loss reserves that have already been established (and therefore expensed but not yet paid).on premiums receivables each reporting period.
176
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
For assumed reinsurance contracts, net earned premiums reported in the consolidated statements of Net Expected Lossoperations are calculated based upon data received from ceding companies; however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates net earned premiums for the lag period. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to be Paidassumed reinsurance contracts, the Company assesses the credit quality and available liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.
Ceded unearned premium reserve is recorded as an asset. Direct, assumed and ceded earned premiums are presented together as net earned premiums in the statement of operations.
Any premiums related to FG VIEs are eliminated upon consolidation.
Insurance Contracts’ Premium Information
Net Expected LossEarned Premiums
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Financial guaranty insurance: | |||||||||||||||||
| Scheduled net earned premiums | $ | 287 | $ | 322 | $ | 334 | |||||||||||
| Accelerations from refundings and terminations (1) | 179 | 59 | 129 | ||||||||||||||
| Accretion of discount on net premiums receivable | 24 | 30 | 20 | ||||||||||||||
| Financial guaranty insurance net earned premiums | 490 | 411 | 483 | ||||||||||||||
| Specialty net earned premiums | 4 | 3 | 2 | ||||||||||||||
| Net earned premiums | $ | 494 | $ | 414 | $ | 485 | |||||||||||
(1) 2022 accelerations include $133 million related to be Expensedthe 2022 Puerto Rico Resolutions. See Note 3, Outstanding Exposure, for additional information.
Gross Premium Receivable, Net of Commissions Payable on Assumed Business
Roll Forward
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning of year | $ | 1,372 | $ | 1,372 | $ | 1,286 | |||||||||||
| Less: Specialty insurance premium receivable | 1 | 1 | 2 | ||||||||||||||
| Financial guaranty insurance premiums receivable | 1,371 | 1,371 | 1,284 | ||||||||||||||
| Gross written premiums on new business, net of commissions | 356 | 369 | 462 | ||||||||||||||
| Gross premiums received, net of commissions | (345) | (383) | (426) | ||||||||||||||
| Adjustments: | |||||||||||||||||
| Changes in the expected term and debt service assumptions | 2 | 6 | (10) | ||||||||||||||
| Accretion of discount, net of commissions on assumed business | 24 | 26 | 18 | ||||||||||||||
| Foreign exchange gain (loss) on remeasurement | (111) | (22) | 43 | ||||||||||||||
| Expected recovery of premiums previously written off | — | 4 | — | ||||||||||||||
| Financial guaranty insurance premium receivable | 1,297 | 1,371 | 1,371 | ||||||||||||||
| Specialty insurance premium receivable | 1 | 1 | 1 | ||||||||||||||
| December 31, | $ | 1,298 | $ | 1,372 | $ | 1,372 | |||||||||||
Approximately 74% and 78% of gross premiums receivable, net of commissions payable at December 31, 2022 and December 31, 2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
177
| As of December 31, 2019 | |||
| (in millions) | |||
| Net expected loss to be paid - financial guaranty insurance | $ | 683 | |
| Contra-paid, net | 51 | ||
| Salvage and subrogation recoverable, net, and other recoverable | 717 | ||
| Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance | (1,012 | ) | |
| Net expected loss to be expensed (present value) (1) | $ | 439 | |
Assured Guaranty Ltd.
The following table provides a schedule of the expected timing of net expected losses to be expensed. Theand cumulative amount and timing of actual losscollections and LAEnet earned premiums may differ from those of expected collections and of expected net earned premiums in the estimates showntable below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in the consumer price index changes in expected lives and updatesnew business.
Financial Guaranty Insurance
Expected Future Premium Collections and Earnings
| As of December 31, 2022 | |||||||||||
| Future Premiums to be Collected (1) | Future Net Premiums to be Earned (2) | ||||||||||
| (in millions) | |||||||||||
| 2023 (January 1 - March 31) | $ | 43 | $ | 69 | |||||||
| 2023 (April 1 - June 30) | 32 | 69 | |||||||||
| 2023 (July 1 - September 30) | 25 | 69 | |||||||||
| 2023 (October 1 - December 31) | 29 | 68 | |||||||||
| Subtotal 2023 | 129 | 275 | |||||||||
| 2024 | 92 | 260 | |||||||||
| 2025 | 90 | 244 | |||||||||
| 2026 | 87 | 229 | |||||||||
| 2027 | 82 | 214 | |||||||||
| 2028-2032 | 348 | 898 | |||||||||
| 2033-2037 | 241 | 608 | |||||||||
| 2038-2042 | 167 | 370 | |||||||||
| After 2042 | 352 | 521 | |||||||||
| Total | $ | 1,588 | 3,619 | ||||||||
| Future accretion | 293 | ||||||||||
| Total future net earned premiums | $ | 3,912 | |||||||||
____________________
(1) Net of assumed commissions payable.
(2) Net of reinsurance.
Selected Information for Financial Guaranty Insurance Policies with Premiums Paid in Installments
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in millions) | |||||||||||
| Premiums receivable, net of commissions payable | $ | 1,297 | $ | 1,371 | |||||||
| Deferred premium revenue | $ | 1,663 | $ | 1,663 | |||||||
| Weighted-average risk-free rate used to discount premiums | 1.8% | 1.6% | |||||||||
| Weighted-average period of premiums receivable (in years) | 12.9 | 12.7 | |||||||||
Policy Acquisition Costs
Accounting Policy
Policy acquisition costs that are directly related and essential to successful insurance contract acquisition, as well as ceding commission income and expense on ceded and assumed reinsurance contracts, are deferred and reported net.
Capitalized policy acquisition costs include the cost of underwriting personnel attributable to successful underwriting efforts. The Company conducts an annual time study, which requires the use of judgement, to estimate the amount of costs to be deferred.
Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with premiums received in installments are calculated at their contractually defined commission
178
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
rates, discounted consistent with premiums receivable for all future periods, and included in DAC, with a corresponding offset to net premiums receivable or reinsurance balances payable.
DAC is amortized in proportion to net earned premiums. Amortization of deferred policy acquisition costs includes the accretion of discount on ceding commission receivable and payable. When an insured obligation is retired early, the remaining related DAC is expensed at that time.
Costs incurred for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as overhead costs are charged to expense as incurred.
Expected losses and LAE, investment income, and the remaining costs of servicing the insured or reinsured business, are considered in determining the recoverability of DAC.
Policy Acquisition Costs
Roll Forward of Deferred Acquisition Costs
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning of year | $ | 131 | $ | 119 | $ | 111 | |||||||||||
| Costs deferred during the period | 30 | 26 | 24 | ||||||||||||||
| Costs amortized during the period | (14) | (14) | (16) | ||||||||||||||
| December 31, | $ | 147 | $ | 131 | $ | 119 | |||||||||||
Losses and Recoveries
Accounting Policies
Loss and LAE Reserve
Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses and reported in other assets. Any loss estimates. This table excludes amountsand LAE reserves related to FG VIEs which are eliminated inupon consolidation.
| As of December 31, 2019 | |||
| (in millions) | |||
| 2020 (January 1 - March 31) | $ | 9 | |
| 2020 (April 1 - June 30) | 9 | ||
| 2020 (July 1 - September 30) | 9 | ||
| 2020 (October 1 - December 31) | 9 | ||
| Subtotal 2020 | 36 | ||
| 2021 | 35 | ||
| 2022 | 34 | ||
| 2023 | 32 | ||
| 2024 | 33 | ||
| 2025-2029 | 138 | ||
| 2030-2034 | 91 | ||
| 2035-2039 | 32 | ||
| After 2039 | 8 | ||
| Net expected loss to be expensed | 439 | ||
| Future accretion | 105 | ||
| Total expected future loss and LAE | $ | 544 | |
When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent there is insufficient loss and LAE reserve on a contract, then such claim payment is recorded as contra-paid, which reduces the unearned premium reserve. The contra-paid is recognized in “loss and loss adjustment expenses (benefit)” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. “Loss and loss adjustment expenses (benefit)” in the consolidated statement of operations is presented net of cessions to reinsurers.
Salvage and Subrogation Recoverable
When the Company becomes entitled to the cash flow from the underlying collateral of, or other recoveries in relation to, an insured exposure under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the
179
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
following: (i) a reduction in the corresponding loss and LAE reserve with a benefit to the consolidated statement of operations; (ii) no effect on the consolidated balance sheet or statements of operations, if total loss is not in excess of deferred premium revenue; or (iii) the recording of a salvage asset with a benefit to the consolidated statements of operations by sector for insurance contracts. Amounts presented areif the transaction is in a net recovery position at the reporting date. The ceded component of reinsurance.salvage and subrogation recoverable is reported in “other liabilities”.
| Loss (Benefit) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Public finance: | |||||||||||
| U.S. public finance | $ | 247 | $ | 90 | $ | 553 | |||||
| Non-U.S. public finance | (7 | ) | (7 | ) | (4 | ) | |||||
| Public finance | 240 | 83 | 549 | ||||||||
| Structured finance: | |||||||||||
| U.S. RMBS (1) | (154 | ) | (15 | ) | (113 | ) | |||||
| Other structured finance | 7 | (4 | ) | (48 | ) | ||||||
| Structured finance | (147 | ) | (19 | ) | (161 | ) | |||||
| Loss and LAE | $ | 93 | $ | 64 | $ | 388 | |||||
| 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 contract 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 | ||||||||||||||
| 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) | 128 | (8 | ) | 39 | (1 | ) | 145 | (7 | ) | 312 | — | 312 | |||||||||||||||||||||||
| Remaining weighted-average contract period (in years) | 7.9 | 6.5 | 13.2 | 2.1 | 10.1 | 9.1 | 9.8 | — | 9.8 | ||||||||||||||||||||||||||
| Outstanding exposure: | |||||||||||||||||||||||||||||||||||
| Par | $ | 3,052 | $ | (71 | ) | $ | 938 | $ | (6 | ) | $ | 6,249 | $ | (159 | ) | $ | 10,003 | $ | — | $ | 10,003 | ||||||||||||||
| Interest | 1,319 | (29 | ) | 592 | (1 | ) | 3,140 | (72 | ) | 4,949 | — | 4,949 | |||||||||||||||||||||||
| Total (2) | $ | 4,371 | $ | (100 | ) | $ | 1,530 | $ | (7 | ) | $ | 9,389 | $ | (231 | ) | $ | 14,952 | $ | — | $ | 14,952 | ||||||||||||||
| Expected cash outflows (inflows) | $ | 98 | $ | (5 | ) | $ | 264 | $ | (1 | ) | $ | 4,029 | $ | (80 | ) | $ | 4,305 | $ | (290 | ) | $ | 4,015 | |||||||||||||
| Potential recoveries (3) | (465 | ) | 23 | (81 | ) | — | (2,542 | ) | 55 | (3,010 | ) | 192 | (2,818 | ) | |||||||||||||||||||||
| Subtotal | (367 | ) | 18 | 183 | (1 | ) | 1,487 | (25 | ) | 1,295 | (98 | ) | 1,197 | ||||||||||||||||||||||
| Discount | 83 | (5 | ) | (53 | ) | — | (134 | ) | (2 | ) | (111 | ) | 23 | (88 | ) | ||||||||||||||||||||
| Present value of expected cash flows | $ | (284 | ) | $ | 13 | $ | 130 | $ | (1 | ) | $ | 1,353 | $ | (27 | ) | $ | 1,184 | $ | (75 | ) | $ | 1,109 | |||||||||||||
| Deferred premium revenue | $ | 125 | $ | (4 | ) | $ | 151 | $ | — | $ | 518 | $ | (2 | ) | $ | 788 | $ | (64 | ) | $ | 724 | ||||||||||||||
| Reserves (salvage) | $ | (311 | ) | $ | 15 | $ | 48 | $ | (1 | ) | $ | 993 | $ | (24 | ) | $ | 720 | $ | (47 | ) | $ | 673 | |||||||||||||
Specialty Business
The Company also guarantees specialty business with risk profiles similar to those of its structured finance exposures written in financial guaranty form.
165
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Specialty Insurance, Reinsurance and Guaranties
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Gross Exposure | Net Exposure | Gross Exposure | Net Exposure | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Life insurance transactions (1) | $ | 1,314 | $ | 986 | $ | 1,250 | $ | 871 | ||||||||||||||||||
| Aircraft residual value insurance policies | 355 | 200 | 355 | 200 | ||||||||||||||||||||||
| Other guaranties | 228 | 228 | — | — | ||||||||||||||||||||||
____________________
(1) The life insurance transactions net exposure is projected to reach $1.1 billion by June 30, 2024.
As of both December 31, 2022 and December 31, 2021, gross exposure of $144 million and net exposure of $84 million of aircraft residual value insurance was rated BIG. All other exposures in the table above are investment-grade quality.
4. Expected Loss to be Paid (Recovered)
Accounting Policy
Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted scenarios.
Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through AGRO,the Company’s risk-management activities. Expected loss to be paid (recovered) is important in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts.
In circumstances where the Company purchased its own insured obligations that had expected losses, and in cases
where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and
the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the Company are referred to as Loss Mitigation Securities and are recorded in the investment portfolio at fair value, excluding the value of the Company’s insurance. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 7, Investments and Cash, and Note 9, Fair Value Measurement.
Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects
of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic
effects of loss mitigation efforts.
In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. The insured portfolio includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary models are: (1) insurance, as described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of these accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio.
166
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Loss Estimation Process
The Company’s loss reserve committees estimate expected loss to be paid (recovered) 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 period 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 (recovered) 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, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, 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 have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities.
Changes over a reporting period in the Company’s loss estimates for public finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables.
Changes to estimates of net expected loss to be paid (recovered) and net economic loss development (benefit) over a reporting period may be attributable to a number of interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates, and dispute resolution. Actual losses will ultimately depend on future events, transaction performance or other factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to considerable volatility and may not reflect the Company’s ultimate claims paid.
In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions 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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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 December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Accounting Model | 2022 | 2021 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Insurance (see Note 5) | $ | 205 | $ | 364 | $ | (112) | $ | (281) | $ | 142 | ||||||||||||||||||||||
| FG VIEs (see Note 8) | 314 | (1) | 42 | (17) | (20) | 1 | ||||||||||||||||||||||||||
| Credit derivatives (see Note 6) | 3 | 5 | 4 | 14 | 2 | |||||||||||||||||||||||||||
| Total | $ | 522 | $ | 411 | $ | (125) | $ | (287) | $ | 145 | ||||||||||||||||||||||
____________________
(1) The increase in expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated as a result of the 2022 Puerto Rico Resolutions. Prior to the 2022 Puerto Rico Resolutions, all Puerto Rico Exposures were accounted for as insurance.
The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts, which are accounted for under one of the following accounting models: insurance, derivative and FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 3.82% to 4.69% with a weighted average of 4.08% as of December 31, 2022 and 0.00% to 1.98% with a weighted average of 1.02% as of December 31, 2021. Expected losses to be paid for U.S. dollar denominated transactions represented approximately 98.5% and 97.2% of the total as of December 31, 2022 and December 31, 2021, respectively.
Net Expected Loss to be Paid (Recovered)
Roll Forward
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net expected loss to be paid (recovered), beginning of period | $ | 411 | $ | 529 | $ | 737 | |||||||||||
| Economic loss development (benefit) due to: | |||||||||||||||||
| Accretion of discount | 16 | 7 | 9 | ||||||||||||||
| Changes in discount rates | (115) | (33) | 13 | ||||||||||||||
| Changes in timing and assumptions | (26) | (261) | 123 | ||||||||||||||
| Total economic loss development (benefit) | (125) | (287) | 145 | ||||||||||||||
| Net (paid) recovered losses (1) | 236 | 169 | (353) | ||||||||||||||
| Net expected loss to be paid (recovered), end of period | $ | 522 | $ | 411 | $ | 529 | |||||||||||
____________________
(1) Net (paid) recovered losses in 2022 include the net amounts received pursuant to the Puerto Rico Resolutions, as described in Note 3, Outstanding Exposure.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 197 | $ | 19 | $ | 187 | $ | 403 | ||||||||||||||||||
| Non-U.S. public finance | 12 | (2) | (1) | 9 | ||||||||||||||||||||||
| Public finance | 209 | 17 | 186 | 412 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 150 | (143) | 59 | 66 | ||||||||||||||||||||||
| Other structured finance | 52 | 1 | (9) | 44 | ||||||||||||||||||||||
| Structured finance | 202 | (142) | 50 | 110 | ||||||||||||||||||||||
| Total | $ | 411 | $ | (125) | $ | 236 | $ | 522 | ||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 305 | $ | (182) | $ | 74 | $ | 197 | ||||||||||||||||||
| Non-U.S. public finance | 36 | (22) | (2) | 12 | ||||||||||||||||||||||
| Public finance | 341 | (204) | 72 | 209 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 148 | (100) | 102 | 150 | ||||||||||||||||||||||
| Other structured finance | 40 | 17 | (5) | 52 | ||||||||||||||||||||||
| Structured finance | 188 | (83) | 97 | 202 | ||||||||||||||||||||||
| Total | $ | 529 | $ | (287) | $ | 169 | $ | 411 | ||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Sector | Net Expected Loss to be Paid (Recovered) as of December 31, 2019 | Economic Loss Development (Benefit) | Net (Paid) Recovered Losses (1) | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Public finance: | ||||||||||||||||||||||||||
| U.S. public finance | $ | 531 | $ | 190 | $ | (416) | $ | 305 | ||||||||||||||||||
| Non-U.S. public finance | 23 | 13 | — | 36 | ||||||||||||||||||||||
| Public finance | 554 | 203 | (416) | 341 | ||||||||||||||||||||||
| Structured finance: | ||||||||||||||||||||||||||
| U.S. RMBS | 146 | (71) | 73 | 148 | ||||||||||||||||||||||
| Other structured finance | 37 | 13 | (10) | 40 | ||||||||||||||||||||||
| Structured finance | 183 | (58) | 63 | 188 | ||||||||||||||||||||||
| Total | $ | 737 | $ | 145 | $ | (353) | $ | 529 | ||||||||||||||||||
(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 tables above include: (a) net LAE paid of $33 million, $36 million and $25 million for the years ended
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December 31, 2022, 2021 and 2020, respectively; and (b) net expected LAE to be paid of $11 million as of December 31, 2022 and $26 million as of December 31, 2021.
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 representation and warranty 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.
The further behind mortgage borrowers fall in making payments, the more likely it is that they will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
Mortgage borrowers that are not behind on payments and have not fallen two or more payments behind in the last two years (generally considered performing borrowers) have demonstrated an ability and willingness to pay through challenging economic periods, and as a result are viewed as less likely to default than delinquent borrowers or those that have experienced delinquency recently. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates (CDR), then projecting how the CDR will develop over time. Loans that are defaulted pursuant to the CDR after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A CDR is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (collateral pool balance). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector and vintage based on its experience to date. The Company continues to update its evaluation of these loss severities as new information becomes available.
The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above; assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.
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.
Net Economic Loss Development (Benefit)
U.S. RMBS
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| First lien U.S. RMBS | $ | (36) | $ | — | $ | (45) | |||||||||||
| Second lien U.S. RMBS | (107) | (100) | (26) | ||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime
The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two 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 recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories.
First Lien U.S. RMBS Liquidation Rates
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Current but recently delinquent: | |||||||||||
| Alt-A and Prime | 20% | 20% | |||||||||
| Option ARM | 20% | 20% | |||||||||
| Subprime | 20% | 20% | |||||||||
| 30 – 59 Days Delinquent: | |||||||||||
| Alt-A and Prime | 35% | 35% | |||||||||
| Option ARM | 35% | 35% | |||||||||
| Subprime | 30% | 30% | |||||||||
| 60 – 89 Days Delinquent: | |||||||||||
| Alt-A and Prime | 40% | 40% | |||||||||
| Option ARM | 45% | 45% | |||||||||
| Subprime | 40% | 40% | |||||||||
| 90+ Days Delinquent: | |||||||||||
| Alt-A and Prime | 55% | 55% | |||||||||
| Option ARM | 60% | 60% | |||||||||
| Subprime | 45% | 45% | |||||||||
| Bankruptcy: | |||||||||||
| Alt-A and Prime | 45% | 45% | |||||||||
| Option ARM | 50% | 50% | |||||||||
| Subprime | 40% | 40% | |||||||||
| Foreclosure: | |||||||||||
| Alt-A and Prime | 60% | 60% | |||||||||
| Option ARM | 65% | 65% | |||||||||
| Subprime | 55% | 55% | |||||||||
| Real Estate Owned | |||||||||||
| All | 100% | 100% | |||||||||
While the Company uses the liquidation rates above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a CDR curve. The start of that CDR curve 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 scenario), after the 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to a final CDR of 5% of the plateau CDR. In the base scenario, the Company
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
assumes the final CDR will be reached 1 year after the 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, 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 re-perform.
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. The Company assumes in the base scenario that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base scenario that the recent 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 scenario 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 (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base Scenario Expected Loss Estimates
First Lien U.S. RMBS
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Alt-A and Prime: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 1.6 | % | – | 11.5% | 5.1% | 0.9 | % | – | 11.6% | 5.9% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.6% | 0.3% | 0.0 | % | – | 0.6% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| Option ARM: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 2.0 | % | – | 7.7% | 4.3% | 1.8 | % | – | 11.9% | 5.6% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.4% | 0.2% | 0.1 | % | – | 0.6% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
| Subprime: | |||||||||||||||||||||||||||||||||||
| Plateau CDR | 2.7 | % | – | 9.7% | 5.6% | 2.9 | % | – | 10.0% | 6.0% | |||||||||||||||||||||||||
| Final CDR | 0.1 | % | – | 0.5% | 0.3% | 0.1 | % | – | 0.5% | 0.3% | |||||||||||||||||||||||||
| Initial loss severity: | |||||||||||||||||||||||||||||||||||
| 2005 and prior | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2006 | 50% | 60% | |||||||||||||||||||||||||||||||||
| 2007+ | 50% | 60% | |||||||||||||||||||||||||||||||||
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 pattern similar 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 scenario. 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, 2021.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes that 20% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans.
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien U.S. RMBS 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 plateau CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of December 31, 2022 and December 31, 2021.
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. An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. ICE Benchmark Administration (IBA) and the Financial Conduct Authority have announced that LIBOR will be discontinued after June 30, 2023. The Company believes that the reference to LIBOR in such floating rate RMBS debt will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on the Secured Overnight Finance Rate (SOFR).
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of December 31, 2022 as it used as of December 31, 2021, increasing and decreasing the periods of stress from those used in the base scenario. 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 16 months, expected loss to be paid would increase from current projections by approximately $13 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 eight months), expected loss to be paid would decrease from current projections by approximately $8 million for all first lien U.S. RMBS transactions.
Second Lien U.S. RMBS Loss Projections
Second lien U.S. 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 (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the prepayment speeds of the collateral, the interest rate environment and assumptions about loss severity.
The Company estimates the amount of loans that will default over the next several years by first calculating expected liquidation rates for delinquent loans, and applying liquidation rates to currently delinquent loans in order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults).
Similar to first lien U.S. RMBS transactions, the Company then calculates a CDR that will cause the targeted amount of liquidations to occur during the plateau period.
Prior to the third quarter of 2022, for the base scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period had ended, the CDR was assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR was calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting, subject to a floor). In the base case scenario, the time over which the CDR trended down to its final CDR was 28 months. Therefore, the total stress period for second lien transactions was 34 months.
The Company has observed lower than expected default rates and longer liquidation timelines due to significant home price appreciation and special servicing activity which now favors modifications and foreclosure actions rather than charge-offs at 180 days delinquent. In the third quarter of 2022, the Company extended the time over which a portion of the delinquent loans default from six months to 36 months in the base scenario (conforming to the methodology used for first lien U.S. RMBS transactions). After the plateau period, as with first lien U.S. RMBS transactions, the CDR trends down over one year to 5% of the plateau CDR. These changes in the shape of the CDR curve result in a longer period of stress defaults (48 months in the base scenario), but at lower default levels leading to lower overall levels of expected losses.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
HELOC loans generally permitted 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. A substantial number of loans in the Company’s insured transactions had been modified to extend the interest-only period to 15 years. Approximately 80% of the modified loans had reset to fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years.
Recently, the Company has observed the performance of the modified loans that have finally reset to full amortization (which represent the majority of extended loans), and noted low levels of delinquency, even with substantial increases in monthly payments. This observed performance lowers the level of uncertainty regarding this modified cohort as the remainder continue to reset.
When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of December 31, 2022 and December 31, 2021, 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 quarterly based on actual recoveries of charged-off loans observed from period to period and reasonable expectations of future recoveries. 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’s recovery assumption for charged-off loans is 30%, as shown in the table below, based on observed trends and reasonable expectations of future recoveries. Such recoveries are assumed to be received evenly over the next five years. If the recovery rate decreases to 20% expected loss to be paid would increase from current projections by approximately $37 million. If the recovery rate increases to 40%, expected loss to be paid would decrease from current projections by approximately $37 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 scenario, 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 U.S. RMBS transactions (in the base scenario), 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, 2021. 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 five 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 of the amount of losses the collateral will likely suffer.
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 (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Key Assumptions in Base Scenario Expected Loss Estimates
HELOCs
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | ||||||||||||||||||||||||||||||||
| Plateau CDR | 0.4 | % | – | 8.4% | 3.5% | 6.5 | % | – | 39.6% | 16.4% | |||||||||||||||||||||||||
| Final CDR trended down to | 0.0 | % | – | 0.4% | 0.2% | 1.0% | |||||||||||||||||||||||||||||
| Liquidation rates: | |||||||||||||||||||||||||||||||||||
| Current but recently delinquent | 20% | 20% | |||||||||||||||||||||||||||||||||
| 30 – 59 Days Delinquent | 30 | 30 | |||||||||||||||||||||||||||||||||
| 60 – 89 Days Delinquent | 40 | 40 | |||||||||||||||||||||||||||||||||
| 90+ Days Delinquent | 60 | 60 | |||||||||||||||||||||||||||||||||
| Bankruptcy | 55 | 55 | |||||||||||||||||||||||||||||||||
| Foreclosure | 55 | 55 | |||||||||||||||||||||||||||||||||
| Real Estate Owned | 100 | 100 | |||||||||||||||||||||||||||||||||
| Loss severity on future defaults | 98% | 98% | |||||||||||||||||||||||||||||||||
| Projected future recoveries on previously charged-off loans | 30% | 30% | |||||||||||||||||||||||||||||||||
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.
The Company updated its assumptions related to the CDR plateau and ramp-down during the third quarter of 2022. The Company’s base scenario assumed a 36-month CDR plateau and a 12-month ramp-down (for a total stress period of 48 months), compared to a six-month CDR plateau and a 28-month ramp-down (for a total stress period of 34 months). The Company modeled scenarios with a longer period of elevated defaults and others with a shorter period of elevated defaults. In the Company’s most stressful scenario, increasing the CDR plateau to 42 months and increasing the ramp-down by four months to 16 months (for a total stress period of 58 months) would decrease the expected recovery by approximately $1 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, reducing the CDR plateau to 30 months and decreasing the length of the CDR ramp-down to eight months (for a total stress period of 38 months), and lowering the ultimate prepayment rate to 10% would increase the expected recovery by approximately $2 million for HELOC transactions.
Structured Finance Excluding U.S. RMBS
The Company projected that its total net expected loss to be paid across its troubled structured finance exposures excluding U.S. RMBS as of December 31, 2022 was $44 million. The largest component of these structured finance losses were student loan securitizations issued by private issuers with $47 million in BIG net par outstanding. In general, the projected losses of these student loan securitizations 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 with BIG net par of $40 million as of December 31, 2022.
Recovery Litigation and Dispute Resolution
In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received 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 ultimately 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 financial statements.
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding 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
The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 6, Contracts Accounted for as Credit Derivatives, for amounts related to CDS and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs.
Premiums
Accounting Policy
Financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition is consistent whether contracts are written on a direct basis, assumed from another financial guarantor, ceded to another insurer, or acquired in a business combination.
Premiums receivable represent the present value of contractual or expected future premium collections discounted using risk-free rates. Unearned premium reserve represents deferred premium revenue less claim payments made (net of recoveries received) that have not yet been recognized in the statement of operations (contra-paid). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below under “Losses and Recoveries”.
The amount of deferred premium revenue at contract inception is determined as follows:
•For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.
•For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value (discounted at risk free rates) of either: (i) contractual premiums due; or (ii) in cases where the underlying collateral is composed of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually allowable, the amount of prepayments must be probable, and the timing and amount of prepayments must be reasonably estimable. Installment premiums typically relate to structured finance and infrastructure transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the transaction.
•For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the Company’s stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections primarily due to fair value adjustments recorded in connection with a business combination.
When the Company adjusts prepayment assumptions or expected premium collections for obligations backed by homogeneous pools of assets, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to premiums receivable. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity. Accretion of the discount on premiums receivable is reported in “net earned premiums”.
The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured par amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured par amounts outstanding in the reporting period compared with the sum of each of the insured par amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished, and any nonrefundable deferred premium revenue related to that contract is accelerated and recognized as premium revenue. The Company assesses the need for an allowance for credit loss on premiums receivables each reporting period.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
For assumed reinsurance contracts, net earned premiums reported in the consolidated statements of operations are calculated based upon data received from ceding companies; however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates net earned premiums for the lag period. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to assumed reinsurance contracts, the Company assesses the credit quality and available liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.
Ceded unearned premium reserve is recorded as an asset. Direct, assumed and ceded earned premiums are presented together as net earned premiums in the statement of operations.
Any premiums related to FG VIEs are eliminated upon consolidation.
Insurance Contracts’ Premium Information
Net Earned Premiums
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Financial guaranty insurance: | |||||||||||||||||
| Scheduled net earned premiums | $ | 287 | $ | 322 | $ | 334 | |||||||||||
| Accelerations from refundings and terminations (1) | 179 | 59 | 129 | ||||||||||||||
| Accretion of discount on net premiums receivable | 24 | 30 | 20 | ||||||||||||||
| Financial guaranty insurance net earned premiums | 490 | 411 | 483 | ||||||||||||||
| Specialty net earned premiums | 4 | 3 | 2 | ||||||||||||||
| Net earned premiums | $ | 494 | $ | 414 | $ | 485 | |||||||||||
(1) 2022 accelerations include $133 million related to the 2022 Puerto Rico Resolutions. See Note 3, Outstanding Exposure, for additional information.
Gross Premium Receivable, Net of Commissions Payable on Assumed Business
Roll Forward
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning of year | $ | 1,372 | $ | 1,372 | $ | 1,286 | |||||||||||
| Less: Specialty insurance premium receivable | 1 | 1 | 2 | ||||||||||||||
| Financial guaranty insurance premiums receivable | 1,371 | 1,371 | 1,284 | ||||||||||||||
| Gross written premiums on new business, net of commissions | 356 | 369 | 462 | ||||||||||||||
| Gross premiums received, net of commissions | (345) | (383) | (426) | ||||||||||||||
| Adjustments: | |||||||||||||||||
| Changes in the expected term and debt service assumptions | 2 | 6 | (10) | ||||||||||||||
| Accretion of discount, net of commissions on assumed business | 24 | 26 | 18 | ||||||||||||||
| Foreign exchange gain (loss) on remeasurement | (111) | (22) | 43 | ||||||||||||||
| Expected recovery of premiums previously written off | — | 4 | — | ||||||||||||||
| Financial guaranty insurance premium receivable | 1,297 | 1,371 | 1,371 | ||||||||||||||
| Specialty insurance premium receivable | 1 | 1 | 1 | ||||||||||||||
| December 31, | $ | 1,298 | $ | 1,372 | $ | 1,372 | |||||||||||
Approximately 74% and 78% of gross premiums receivable, net of commissions payable at December 31, 2022 and December 31, 2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in the consumer price index changes in expected lives and new business.
Financial Guaranty Insurance
Expected Future Premium Collections and Earnings
| As of December 31, 2022 | |||||||||||
| Future Premiums to be Collected (1) | Future Net Premiums to be Earned (2) | ||||||||||
| (in millions) | |||||||||||
| 2023 (January 1 - March 31) | $ | 43 | $ | 69 | |||||||
| 2023 (April 1 - June 30) | 32 | 69 | |||||||||
| 2023 (July 1 - September 30) | 25 | 69 | |||||||||
| 2023 (October 1 - December 31) | 29 | 68 | |||||||||
| Subtotal 2023 | 129 | 275 | |||||||||
| 2024 | 92 | 260 | |||||||||
| 2025 | 90 | 244 | |||||||||
| 2026 | 87 | 229 | |||||||||
| 2027 | 82 | 214 | |||||||||
| 2028-2032 | 348 | 898 | |||||||||
| 2033-2037 | 241 | 608 | |||||||||
| 2038-2042 | 167 | 370 | |||||||||
| After 2042 | 352 | 521 | |||||||||
| Total | $ | 1,588 | 3,619 | ||||||||
| Future accretion | 293 | ||||||||||
| Total future net earned premiums | $ | 3,912 | |||||||||
____________________
(1) Net of assumed commissions payable.
(2) Net of reinsurance.
Selected Information for Financial Guaranty Insurance Policies with Premiums Paid in Installments
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (dollars in millions) | |||||||||||
| Premiums receivable, net of commissions payable | $ | 1,297 | $ | 1,371 | |||||||
| Deferred premium revenue | $ | 1,663 | $ | 1,663 | |||||||
| Weighted-average risk-free rate used to discount premiums | 1.8% | 1.6% | |||||||||
| Weighted-average period of premiums receivable (in years) | 12.9 | 12.7 | |||||||||
Policy Acquisition Costs
Accounting Policy
Policy acquisition costs that are directly related and essential to successful insurance contract acquisition, as well as ceding commission income and expense on ceded and assumed reinsurance contracts, are deferred and reported net.
Capitalized policy acquisition costs include the cost of underwriting personnel attributable to successful underwriting efforts. The Company conducts an annual time study, which requires the use of judgement, to estimate the amount of costs to be deferred.
Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with premiums received in installments are calculated at their contractually defined commission
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
rates, discounted consistent with premiums receivable for all future periods, and included in DAC, with a corresponding offset to net premiums receivable or reinsurance balances payable.
DAC is amortized in proportion to net earned premiums. Amortization of deferred policy acquisition costs includes the accretion of discount on ceding commission receivable and payable. When an insured obligation is retired early, the remaining related DAC is expensed at that time.
Costs incurred for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as overhead costs are charged to expense as incurred.
Expected losses and LAE, investment income, and the remaining costs of servicing the insured or reinsured business, are considered in determining the recoverability of DAC.
Policy Acquisition Costs
Roll Forward of Deferred Acquisition Costs
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning of year | $ | 131 | $ | 119 | $ | 111 | |||||||||||
| Costs deferred during the period | 30 | 26 | 24 | ||||||||||||||
| Costs amortized during the period | (14) | (14) | (16) | ||||||||||||||
| December 31, | $ | 147 | $ | 131 | $ | 119 | |||||||||||
Losses and Recoveries
Accounting Policies
Loss and LAE Reserve
Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses and reported in other assets. Any loss and LAE reserves related to FG VIEs are eliminated upon consolidation. Any expected losses to be paid (recovered) on credit derivatives are reflected in the fair value of credit derivatives.
Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company’s stand‑ready obligation. At contract inception, the entire stand-ready obligation is represented entirely by unearned premium reserve. Unearned premium reserve is deferred premium revenue, less claim payments (net of recoveries received) that have not yet been recognized in the statement of operations (contra-paid). A loss and LAE reserve for a financial guaranty insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (total losses) exceed the deferred premium revenue, on a contract-by-contract basis. As a result, the Company has expected loss to be paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes into income.
When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent there is insufficient loss and LAE reserve on a contract, then such claim payment is recorded as contra-paid, which reduces the unearned premium reserve. The contra-paid is recognized in “loss and loss adjustment expenses (benefit)” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. “Loss and loss adjustment expenses (benefit)” in the consolidated statement of operations is presented net of cessions to reinsurers.
Salvage and Subrogation Recoverable
When the Company becomes entitled to the cash flow from the underlying collateral of, or other recoveries in relation to, an insured exposure under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
following: (i) a reduction in the corresponding loss and LAE reserve with a benefit to the consolidated statement of operations; (ii) no effect on the consolidated balance sheet or statements of operations, if total loss is not in excess of deferred premium revenue; or (iii) the recording of a salvage asset with a benefit to the consolidated statements of operations if the transaction is in a net recovery position at the reporting date. The ceded component of salvage and subrogation recoverable is reported in “other liabilities”.
Expected Loss to be Expensed
Expected loss to be expensed represents past or expected future financial guaranty insurance net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount.
Insurance Contracts’ Loss Information
Loss reserves and salvage are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 3.82% to 4.69% with a weighted average of 4.15% as of December 31, 2022, and 0.0% to 1.98% with a weighted average of 1.02% as of December 31, 2021.
The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.
Net Reserve (Salvage) by Sector
| As of December 31, | ||||||||||||||
| Sector | 2022 | 2021 | ||||||||||||
| (in millions) | ||||||||||||||
| Public finance: | ||||||||||||||
| U.S. public finance | $ | 71 | $ | 60 | ||||||||||
| Non-U.S. public finance | 1 | 1 | ||||||||||||
| Public finance | 72 | 61 | ||||||||||||
| Structured finance: | ||||||||||||||
| U.S. RMBS | (77) | (24) | ||||||||||||
| Other structured finance | 42 | 42 | ||||||||||||
| Structured finance | (35) | 18 | ||||||||||||
| Total | $ | 37 | $ | 79 | ||||||||||
Components of Net Reserve (Salvage)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Loss and LAE reserve | $ | 296 | $ | 869 | |||||||
| Reinsurance recoverable on unpaid losses (1) | (3) | (5) | |||||||||
| Loss and LAE reserve, net | 293 | 864 | |||||||||
| Salvage and subrogation recoverable | (257) | (801) | |||||||||
| Salvage and subrogation reinsurance payable (2) | 1 | 16 | |||||||||
| Salvage and subrogation recoverable, net | (256) | (785) | |||||||||
| Net reserve (salvage) | $ | 37 | $ | 79 | |||||||
____________________
(1) Reported in “other assets” on the consolidated balance sheets.
(2) Reported in “other liabilities” on the consolidated balance sheets.
The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) 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
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
received that have not yet been recognized in the statements 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).
Reconciliation of Net Expected Loss to be Paid (Recovered)
to Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
| As of December 31, 2022 | |||||
| (in millions) | |||||
| Net expected loss to be paid (recovered) - financial guaranty insurance | $ | 201 | |||
| Contra-paid, net | 23 | ||||
| Salvage and subrogation recoverable, net | 256 | ||||
| Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance | (289) | ||||
| Net expected loss to be expensed (present value) | $ | 191 | |||
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 December 31, 2022 | |||||
| (in millions) | |||||
| 2023 (January 1 - March 31) | $ | 2 | |||
| 2023 (April 1 - June 30) | 2 | ||||
| 2023 (July 1 - September 30) | 3 | ||||
| 2023 (October 1 - December 31) | 3 | ||||
| Subtotal 2023 | 10 | ||||
| 2024 | 12 | ||||
| 2025 | 13 | ||||
| 2026 | 17 | ||||
| 2027 | 15 | ||||
| 2028-2032 | 61 | ||||
| 2033-2037 | 43 | ||||
| 2038-2042 | 8 | ||||
| After 2042 | 12 | ||||
| Net expected loss to be expensed | 191 | ||||
| Future accretion | 82 | ||||
| Total expected future loss and LAE | $ | 273 | |||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The following table presents the loss and LAE (benefit) reported in the consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.
Loss and LAE (Benefit) by Sector
| Year Ended December 31, | ||||||||||||||||||||
| Sector | 2022 | 2021 | 2020 | |||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Public finance: | ||||||||||||||||||||
| U.S. public finance | $ | 125 | $ | (146) | $ | 225 | ||||||||||||||
| Non-U.S. public finance | — | (9) | 5 | |||||||||||||||||
| Public finance | 125 | (155) | 230 | |||||||||||||||||
| Structured finance: | ||||||||||||||||||||
| U.S. RMBS | (112) | (69) | (34) | |||||||||||||||||
| Other structured finance | 3 | 4 | 7 | |||||||||||||||||
| Structured finance | (109) | (65) | (27) | |||||||||||||||||
| Loss and LAE (benefit) | $ | 16 | $ | (220) | $ | 203 | ||||||||||||||
In each of the years presented, the primary component of U.S. public finance loss and LAE (benefit) was Puerto Rico exposures.
The following tables provide information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2022
| Gross | Net Total BIG | ||||||||||||||||||||||||||||
| BIG 1 | BIG 2 | BIG 3 | Total BIG | ||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Number of risks (1) | 122 | 14 | 111 | 247 | 247 | ||||||||||||||||||||||||
| Remaining weighted-average period (in years) | 11.3 | 8.7 | 7.6 | 9.8 | 9.8 | ||||||||||||||||||||||||
| Outstanding exposure: | |||||||||||||||||||||||||||||
| Par | $ | 3,363 | $ | 171 | $ | 2,318 | $ | 5,852 | $ | 5,835 | |||||||||||||||||||
| Interest | 2,177 | 77 | 894 | 3,148 | 3,144 | ||||||||||||||||||||||||
| Total (2) | $ | 5,540 | $ | 248 | $ | 3,212 | $ | 9,000 | $ | 8,979 | |||||||||||||||||||
| Expected cash outflows (inflows) | $ | 128 | $ | 121 | $ | 1,771 | $ | 2,020 | $ | 2,008 | |||||||||||||||||||
| Potential recoveries (3) | (294) | (79) | (1,364) | (1,737) | (1,725) | ||||||||||||||||||||||||
| Subtotal | (166) | 42 | 407 | 283 | 283 | ||||||||||||||||||||||||
| Discount | 35 | (13) | (104) | (82) | (82) | ||||||||||||||||||||||||
| Expected losses to be paid (recovered) | $ | (131) | $ | 29 | $ | 303 | $ | 201 | $ | 201 | |||||||||||||||||||
| Deferred premium revenue | $ | 170 | $ | 15 | $ | 160 | $ | 345 | $ | 345 | |||||||||||||||||||
| Reserves (salvage) | $ | (174) | $ | 21 | $ | 186 | $ | 33 | $ | 33 | |||||||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2021
| Gross | Net Total BIG | ||||||||||||||||||||||||||||
| BIG 1 | BIG 2 | BIG 3 | Total BIG | ||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Number of risks (1) | 117 | 16 | 129 | 262 | 262 | ||||||||||||||||||||||||
| Remaining weighted-average period (in years) | 7.6 | 8.9 | 8.9 | 8.5 | 8.5 | ||||||||||||||||||||||||
| Outstanding exposure: | |||||||||||||||||||||||||||||
| Par | $ | 2,437 | $ | 177 | $ | 4,745 | $ | 7,359 | $ | 7,293 | |||||||||||||||||||
| Interest | 1,000 | 36 | 1,942 | 2,978 | 2,962 | ||||||||||||||||||||||||
| Total (2) | $ | 3,437 | $ | 213 | $ | 6,687 | $ | 10,337 | $ | 10,255 | |||||||||||||||||||
| Expected cash outflows (inflows) | $ | 111 | $ | 40 | $ | 4,820 | $ | 4,971 | $ | 4,918 | |||||||||||||||||||
| Potential recoveries (3) | (656) | (10) | (3,829) | (4,495) | (4,430) | ||||||||||||||||||||||||
| Subtotal | (545) | 30 | 991 | 476 | 488 | ||||||||||||||||||||||||
| Discount | 19 | (3) | (145) | (129) | (129) | ||||||||||||||||||||||||
| Expected losses to be paid (recovered) | $ | (526) | $ | 27 | $ | 846 | $ | 347 | $ | 359 | |||||||||||||||||||
| Deferred premium revenue | $ | 85 | $ | 2 | $ | 350 | $ | 437 | $ | 435 | |||||||||||||||||||
| Reserves (salvage) | $ | (549) | $ | 25 | $ | 584 | $ | 60 | $ | 74 | |||||||||||||||||||
__________________
(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.
(2)Includes amounts related to FG VIEs.
(3)Represents expected inflows from future payments by obligors pursuant to restructuring agreements, settlements, 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.
Reinsurance
The Company assumes financial guaranty exposure (Assumed Financial Guaranty Business) from third-party insurers, primarily other monoline financial guaranty companies that currently are in runoff (Legacy Monoline Insurers). The Company’s Assumed Financial Guaranty Business represents $14.0 billion, or approximately 3.8%, of the Company’s total gross financial guaranty insured exposure of $370.2 billion, as measured by insured debt service, as of December 31, 2022.
The Company’s assumed reinsurance agreements with the Legacy Monoline Insurers are generally subject to termination at the option of the ceding company: (i) if the Company fails to meet certain financial and regulatory criteria; (ii) if the Company fails to maintain a specified minimum financial strength rating(s); or (iii) 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 Financial Guaranty 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 December 31, 2022, if each third-party insurer ceding financial guaranty 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 AGC and AG Re could be required to pay to all such companies would be approximately $234 million and $34 million, respectively.
The Company also assumes specialty business from third party insurers (Assumed Specialty Business). It also cedes and retrocedes someat AGRO. AGRO’s assumed reinsurance agreements in respect of itsthis specialty business generally require it to third party reinsurers. A downgradepost collateral for the ceding insurer if AGRO fails to maintain a specified minimum financial strength rating. If S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (S&P) downgrades AGRO’s financial strength rating by S&P(currently “AA”) below “A”“A-”, and A.M. Best Company, Inc. downgrades AGRO’s financial strength rating (currently “A+”) below “A-”, AGRO would require AGRObe required to post, as of December 31, 2019,2022, up to an estimated $0.1$12 million of collateral in respect of certainits assumed specialty business.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company cedes portions of its Assumed Specialty Business. A further downgradegross insured financial guaranty exposure (Ceded Financial Guaranty Business) to third-party insurers. This Ceded Financial Guaranty Business represents $221 million, or approximately 0.1%, 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 accompaniedCompany’s total gross insured exposure of $370.2 billion, as measured by a downgrade of AGRO's financial strength rating by A.M. Best Company, Inc. below A-, would also require AGRO to post,insured debt service, as of December 31, 2019, an estimated $142022. The Company also cedes $483 million of collateralits $1.7 billion in respectgross insured specialty business.
In 2020, the Company reassumed $336 million in par, including $118 million in net par of Puerto Rico exposures, from its largest remaining legacy third-party financial guaranty reinsurer, resulting in a different portioncommutation gain 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.$38 million.
Effect of Reinsurance
The following table presents the components of premiums and losses reported in the consolidated statements of operations andattributable to the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and specialty).
Effect of Reinsurance on Statement of OperationsPremiums Written, Premiums Earned and Loss and LAE (Benefit)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||
| Premiums Written: | Premiums Written: | |||||||||||||||||||||||||||
| Direct | $ | 663 | $ | 288 | $ | 297 | Direct | $ | 377 | $ | 355 | $ | 453 | |||||||||||||||
| Assumed | 14 | 324 | 10 | |||||||||||||||||||||||||
| Ceded (1) | 10 | 14 | 18 | |||||||||||||||||||||||||
| Assumed (1) | Assumed (1) | (17) | 22 | 1 | ||||||||||||||||||||||||
| Ceded (2) | Ceded (2) | — | — | 13 | ||||||||||||||||||||||||
| Net | $ | 687 | $ | 626 | $ | 325 | Net | $ | 360 | $ | 377 | $ | 467 | |||||||||||||||
| Premiums Earned: | Premiums Earned: | |||||||||||||||||||||||||||
| Direct | $ | 429 | $ | 509 | $ | 693 | Direct | $ | 469 | $ | 385 | $ | 448 | |||||||||||||||
| Assumed | 54 | 51 | 27 | Assumed | 28 | 32 | 41 | |||||||||||||||||||||
| Ceded | (7 | ) | (12 | ) | (30 | ) | Ceded | (3) | (3) | (4) | ||||||||||||||||||
| Net | $ | 476 | $ | 548 | $ | 690 | Net | $ | 494 | $ | 414 | $ | 485 | |||||||||||||||
| Loss and LAE: | ||||||||||||||||||||||||||||
| Direct | $ | 101 | $ | 68 | $ | 404 | ||||||||||||||||||||||
| Loss and LAE (benefit): | Loss and LAE (benefit): | |||||||||||||||||||||||||||
| Direct (3) | Direct (3) | $ | 32 | $ | (203) | $ | 182 | |||||||||||||||||||||
| Assumed | 2 | (1 | ) | 11 | Assumed | (17) | 5 | 24 | ||||||||||||||||||||
| Ceded | (10 | ) | (3 | ) | (27 | ) | Ceded | 1 | (22) | (3) | ||||||||||||||||||
| Net | $ | 93 | $ | 64 | $ | 388 | Net | $ | 16 | $ | (220) | $ | 203 | |||||||||||||||
____________________
(1) Negative assumed premiums written were due to terminations and changes in expected debt service schedules. (2) Positive ceded premiums written were due to commutations and changes in expected debt service schedules. (3) See Note 4, Expected Loss to be Paid (Recovered), for additional information on the economic loss development (benefit). 6. Contracts Accounted for as Credit Derivatives Amounts presented in this note relate only to contracts accounted for as derivatives. The Company’s credit derivatives (financial guaranty contracts that meet the definition of a derivative in |
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
| Ceded premium payable, net of commissions | $ | 20 | $ | 26 | |||
| Ceded expected loss to be recovered (paid) | 11 | 14 | |||||
| Financial guaranty ceded par outstanding (2) | 1,349 | 2,389 | |||||
| Specialty ceded exposure (see Note 5) | 303 | 239 | |||||
Credit derivative transactions, including CDS, are governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance lawscontracts. For example, the Company’s control rights with respect to a reference obligation under a CDS 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. In certain credit derivative transactions, the Company also specifically agreed to pay if the obligor were to become bankrupt or if the reference obligation were restructured. Furthermore, in certain credit derivative transactions, 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
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 credit derivative contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.
Accounting Policy
Credit derivatives are recorded at fair value. Changes in fair value are reported in “net change in fair value of credit derivatives” in the consolidated statement of operations. The fair value of credit derivatives is reflected as either net assets or net liabilities determined on a contract-by-contract basis in the Company’s consolidated balance sheets. See Note 9, Fair Value Measurement, for a discussion on the fair value methodology for credit derivatives.
Credit Derivative Net Par Outstanding and regulations,Fair Value
The components of the Company’s credit derivative net par outstanding by sector are presented in orderthe table below. The estimated remaining weighted average life of credit derivatives was 12.8 years and 13.2 years as of December 31, 2022 and December 31, 2021, respectively.
Credit Derivatives (1)
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Sector | Net Par Outstanding | Net Fair Value Asset (Liability) | Net Par Outstanding | Net Fair Value Asset (Liability) | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| U.S. public finance | $ | 1,175 | $ | (79) | $ | 1,705 | $ | (72) | ||||||||||||||||||
| Non-U.S. public finance | 1,565 | (58) | 1,800 | (48) | ||||||||||||||||||||||
| U.S. structured finance | 342 | (22) | 400 | (32) | ||||||||||||||||||||||
| Non-U.S. structured finance | 121 | (3) | 135 | (2) | ||||||||||||||||||||||
| Total | $ | 3,203 | $ | (162) | $ | 4,040 | $ | (154) | ||||||||||||||||||
____________________
(1) Expected loss to be paid was $3 million as of December 31, 2022 and $5 million as of December 31, 2021.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||
| Rating Category | Net Par Outstanding | % of Total | Net Par Outstanding | % of Total | ||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||
| AAA | $ | 1,260 | 39.3 | % | $ | 1,503 | 37.2 | % | ||||||||||||||||||
| AA | 1,064 | 33.2 | 1,283 | 31.8 | ||||||||||||||||||||||
| A | 232 | 7.2 | 514 | 12.7 | ||||||||||||||||||||||
| BBB | 590 | 18.5 | 677 | 16.7 | ||||||||||||||||||||||
| BIG | 57 | 1.8 | 63 | 1.6 | ||||||||||||||||||||||
| Credit derivative net par outstanding | $ | 3,203 | 100.0 | % | $ | 4,040 | 100.0 | % | ||||||||||||||||||
Fair Value Gains (Losses) on Credit Derivatives
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Realized gains (losses) and other settlements | $ | (2) | $ | (3) | $ | (4) | |||||||||||
| Net unrealized gains (losses) | (9) | (55) | 85 | ||||||||||||||
| Fair value gains (losses) on credit derivatives | $ | (11) | $ | (58) | $ | 81 | |||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date.
CDS Spread on AGC (in basis points)
| As of | |||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||
| Five-year CDS spread | 63 | 49 | 132 | ||||||||||||||
| One-year CDS spread | 26 | 16 | 36 | ||||||||||||||
Fair Value of Credit Derivative Assets (Liabilities) and Effect of AGC Credit Spread
| As of | |||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Fair value of credit derivatives before effect of AGC credit spread | $ | (207) | $ | (225) | |||||||
| Plus: Effect of AGC credit spread | 45 | 71 | |||||||||
| Net fair value of credit derivatives | $ | (162) | $ | (154) | |||||||
The fair value of CDS contracts as of December 31, 2022, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.
7. Investments and Cash
Accounting Policy
Fixed-maturity debt securities are classified as either available-for-sale or trading. All fixed-maturity securities are measured at fair value and reported on a trade-date basis. Unrealized gains and losses on available-for-sale fixed-maturity debt securities that are not associated with credit related factors are reported as a component of accumulated OCI (AOCI), net of deferred income taxes. Loss Mitigation Securities, which are a component of fixed-maturity debt securities, are accounted for based on their underlying investment type, excluding the effects of the Company’s insurance. Realized gains and losses on sales of available-for-sale fixed-maturity debt securities and credit losses are reported as a component of net income. Changes in fair value on trading fixed-maturity debt securities are reported as a component of net income.
Short-term investments, which are investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in certain money market funds.
Other invested assets primarily consist of equity method investments. The Company reports its interest in the earnings of equity method investments in “equity in earnings (losses) of investees” in the consolidated statement of operations. Certain equity method investments are reported on a lag because information is not received on a timely basis. The Company classifies distributions received from equity method investments using the cumulative earnings approach in the consolidated statements of cash flows. Under the cumulative earnings approach, distributions received up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows. All distributions from equity method investments for which the Company elected the fair value option (FVO) are classified as investing activities.
AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not reported in “investments” on the consolidated balance sheets, but rather, such AssuredIM Funds are consolidated and reported in “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles”, with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable noncontrolling interests (NCI). See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for further information regarding the CIVs.
Cash consists of cash on hand, demand deposits for all entities, and cash and cash equivalents for consolidated AssuredIM Funds. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
186
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Net investment income primarily includes the income earned on fixed-maturity securities and short-term investments, including amortization of premiums and accretion of discounts. For mortgage-backed securities and any other securities for which there is prepayment risk, prepayment assumptions are evaluated quarterly and revised as necessary. For securities other than purchased credit deteriorated (PCD) securities, any necessary adjustments due to changes in effective yields and expected maturities are recognized in net investment income using the retrospective method.
Net realized investment gains (losses) include sales of investments, which are determined using the specific identification method, reductions to amortized cost of available-for-sale investments that have been written down due to the Company’s intent to sell them or it being more likely than not that the Company will be required to sell them, and the change in allowance for credit losses (including accretion).
For all securities that were originally purchased with credit deterioration, 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”.
Credit Losses
For fixed-maturity securities classified as available for sale for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the Companydifference between the estimated recoverable value and amortized cost with a corresponding charge to receivenet realized investment gains (losses). The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The allowance for credit losses is limited to the difference between amortized cost and fair value. The difference between fair value and amortized cost that is not associated with credit related factors is presented as a component of AOCI.
When estimating future cash flows for liabilities cededfixed-maturity securities, management considers the historical performance of underlying assets and available market information as well as bond-specific considerations. In addition, the process of estimating future cash flows includes, but is not limited to, reinsurers domiciled outsidethe following critical inputs, which vary by security type:
•the extent to which fair value is less than amortized cost;
•credit ratings;
•any adverse conditions specifically related to the security, industry, and/or geographic area;
•changes in the financial condition of the U.S., such reinsurers must secure their liabilitiesissuer, or underlying loan obligors;
•general economic and political factors;
•remaining payment terms of the security;
•prepayment speeds;
•expected defaults; and
•the value of any embedded credit enhancements.
The length of time an instrument has been impaired or the effect of changes in foreign exchange rates are not considered in the Company’s assessment of credit loss. The assessment of whether a credit loss exists is performed each reporting period.
The allowance for credit losses and the corresponding charge to net realized investment gains (losses) may be reversed if conditions change, however, the allowance for credit losses is never reduced below zero. When the Company determines that all or a portion of a fixed-maturity security is uncollectible, the uncollectible amortized cost amount is written off with a corresponding reduction to the Company. These reinsurersallowance for credit losses. If cash flows that were previously written off are collected, the recovery is recognized in net realized investment gains (losses).
PCD securities are defined 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 the Company’s assessment. An allowance for credit losses is established upon initial recognition for available-for-sale PCD securities. On the date of acquisition, the amortized cost of PCD securities is equal to the purchase price plus the allowance for credit losses, with no credit loss expense recognized in the consolidated statements of operations. After the date of acquisition, deterioration or improvement in credit will result in an increase or decrease, respectively to the allowance and an offsetting credit loss expense (or benefit). To measure this, the Company performs a discounted cash flow analysis. For PCD securities that are also beneficial interests, favorable or adverse changes in expected cash flows are recognized as a change in the allowance for credit losses. Changes in expected cash flows that are not captured through the allowance are reflected as a prospective adjustment to the security’s yield within net investment income.
187
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company has elected to not measure credit losses on its accrued interest receivable and instead writes off accrued interest when it is six-months past due or on the date it is deemed uncollectible, if earlier. All write-offs of accrued interest are recorded as a reduction to net investment income in the consolidated statements of operations. For securities the Company intends to sell the amortized cost is written down to fair value with a corresponding charge to net realized investment gains (losses) if (1) it is more-likely-than-not that the Company will be required to post collateralsell before recovery of its amortized cost, and (2) the fair value of the security is below amortized cost. No allowance is established in these situations and any previously recorded allowance is reversed. The new cost basis is not adjusted for subsequent increases in estimated fair value.
Investment Portfolio
The investment portfolio consists of both externally and internally managed portfolios. The majority of the investment portfolio is managed by three outside managers and AssuredIM. The Company has established investment guidelines for its investment managers regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.
The internally managed portfolio primarily consists of the Company’s investments in: (i) Loss Mitigation Securities; (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM; (iii) New Recovery Bonds and CVIs received in connection with the consummation of the 2022 Puerto Rico Resolutions and (iv) other investments including certain fixed-maturity and short-term securities and equity method investments. Equity method investments primarily consist of generally less liquid alternative investments including: an investment in renewable and clean energy and private equity funds. The Company had unfunded commitments of $78 million as of December 31, 2022 related to certain of the Company’s alternative investments, other than AssuredIM Funds.
Investment Portfolio
Carrying Value
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Fixed-maturity securities, available-for-sale (1): | |||||||||||
| Externally managed | $ | 5,519 | $ | 6,843 | |||||||
| Loss Mitigation Securities and other | 705 | 818 | |||||||||
| AssuredIM managed | 537 | 541 | |||||||||
| Fixed-maturity securities - Puerto Rico New Recovery Bonds (2) | 358 | — | |||||||||
| Fixed-maturity securities, trading - Puerto Rico CIVs (2) | 303 | — | |||||||||
| Short-term investments (3) | 810 | 1,225 | |||||||||
| Other invested assets: | |||||||||||
| Equity method investments | 123 | 169 | |||||||||
| Other | 10 | 12 | |||||||||
| Total | $ | 8,365 | $ | 9,608 | |||||||
____________________
(1) 7.4% and 7.5% of fixed-maturity securities were rated BIG as of December 31, 2022 and December 31, 2021, respectively, consisting primarily of Loss Mitigation Securities. 5.9% and 0.9% were not rated, as of December 31, 2022 and December 31, 2021, respectively.
(2) These securities are not rated.
(3) Weighted average credit rating of AAA as of both December 31, 2022 and December 31, 2021, based on the lower of the Moody’s Investors Service, Inc. (Moody’s) and S&P classifications.
The U.S. Insurance Subsidiaries, through their jointly-owned investment subsidiary, AGAS, are authorized to invest up to $750 million in AssuredIM Funds. Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through AGAS. As of December 31, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, and healthcare structured capital. As of December 31, 2022 and December 31, 2021, the fair value of AGAS’ interest in AssuredIM Funds was $569 million and $543 million, respectively.
188
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not reported in “investments” on the consolidated balance sheets, but rather, such AssuredIM Funds are consolidated and reported in “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles,” with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable noncontrolling interests. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Accrued investment income was $71 million and $69 million as of December 31, 2022 and December 31, 2021, respectively. In 2022, 2021 and 2020, the Company did not write off any accrued investment income.
Available-for-Sale Fixed-Maturity Securities by Security Type
As of December 31, 2022
| Security Type | Percent of Total (1) | Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Weighted Average Credit Rating (2) | |||||||||||||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | 45 | % | $ | 3,509 | $ | (14) | $ | 37 | $ | (138) | $ | 3,394 | A | |||||||||||||||||||||||||||||||
| U.S. government and agencies | 2 | 118 | — | 1 | (8) | 111 | AA+ | |||||||||||||||||||||||||||||||||||||
| Corporate securities (3) | 31 | 2,387 | (6) | 2 | (299) | 2,084 | A | |||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities (4): | ||||||||||||||||||||||||||||||||||||||||||||
| RMBS | 5 | 418 | (19) | 3 | (62) | 340 | BBB | |||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities (CMBS) | 4 | 282 | — | — | (11) | 271 | AAA | |||||||||||||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||
| CLOs | 6 | 449 | — | — | (21) | 428 | A+ | |||||||||||||||||||||||||||||||||||||
| Other | 5 | 423 | (26) | 22 | (26) | 393 | CCC+ | |||||||||||||||||||||||||||||||||||||
| Non-U.S. government securities | 2 | 121 | — | — | (23) | 98 | AA- | |||||||||||||||||||||||||||||||||||||
| Total available-for-sale fixed-maturity securities | 100 | % | $ | 7,707 | $ | (65) | $ | 65 | $ | (588) | $ | 7,119 | A | |||||||||||||||||||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Available-for-Sale Fixed-Maturity Securities by Security Type
As of December 31, 2021
| Security Type | Percent of Total (1) | Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Weighted Average Credit Rating (2) | |||||||||||||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | 43 | % | $ | 3,386 | $ | (12) | $ | 290 | $ | (4) | $ | 3,660 | AA- | |||||||||||||||||||||||||||||||
| U.S. government and agencies | 2 | 123 | — | 7 | (2) | 128 | AA+ | |||||||||||||||||||||||||||||||||||||
| Corporate securities (3) | 32 | 2,516 | (1) | 111 | (21) | 2,605 | A | |||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities (4): | ||||||||||||||||||||||||||||||||||||||||||||
| RMBS | 6 | 454 | (17) | 24 | (24) | 437 | BBB+ | |||||||||||||||||||||||||||||||||||||
| CMBS | 4 | 332 | — | 14 | — | 346 | AAA | |||||||||||||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||
| CLOs | 6 | 457 | — | 1 | — | 458 | AA- | |||||||||||||||||||||||||||||||||||||
| Other | 5 | 420 | (12) | 26 | (2) | 432 | CCC+ | |||||||||||||||||||||||||||||||||||||
| Non-U.S. government securities | 2 | 134 | — | 5 | (3) | 136 | AA- | |||||||||||||||||||||||||||||||||||||
| Total available-for-sale fixed-maturity securities | 100 | % | $ | 7,822 | $ | (42) | $ | 478 | $ | (56) | $ | 8,202 | A+ | |||||||||||||||||||||||||||||||
____________________
(1)Based on amortized cost.
(2) Ratings represent the lower of the Moody’s and S&P classifications, except for Loss Mitigation Securities and certain other securities, which use internal ratings classifications. The Company’s portfolio primarily consists of high-quality, liquid instruments. New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions are not rated.
(3) Includes securities issued by taxable universities and hospitals.
(4) U.S. government-agency obligations were approximately 30% of mortgage-backed securities as of December 31, 2022 and 31% as of December 31, 2021, based on fair value.
Gross Unrealized Loss by Length of Time
for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of December 31, 2022
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 1,763 | $ | (79) | $ | 163 | $ | (56) | $ | 1,926 | $ | (135) | |||||||||||||||||||||||
| U.S. government and agencies | 32 | — | 52 | (8) | 84 | (8) | |||||||||||||||||||||||||||||
| Corporate securities | 1,276 | (95) | 519 | (147) | 1,795 | (242) | |||||||||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| RMBS | 147 | (9) | 3 | (1) | 150 | (10) | |||||||||||||||||||||||||||||
| CMBS | 270 | (11) | — | — | 270 | (11) | |||||||||||||||||||||||||||||
| Asset-backed securities: | |||||||||||||||||||||||||||||||||||
| CLOs | 171 | (7) | 250 | (14) | 421 | (21) | |||||||||||||||||||||||||||||
| Other | 27 | (2) | — | — | 27 | (2) | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 65 | (10) | 30 | (13) | 95 | (23) | |||||||||||||||||||||||||||||
| Total | $ | 3,751 | $ | (213) | $ | 1,017 | $ | (239) | $ | 4,768 | $ | (452) | |||||||||||||||||||||||
| Number of securities (1) | 1,340 | 466 | 1,776 | ||||||||||||||||||||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Gross Unrealized Loss by Length of Time
for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of December 31, 2021
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 117 | $ | (3) | $ | 10 | $ | (1) | $ | 127 | $ | (4) | |||||||||||||||||||||||
| U.S. government and agencies | 26 | — | 32 | (2) | 58 | (2) | |||||||||||||||||||||||||||||
| Corporate securities | 407 | (12) | 70 | (5) | 477 | (17) | |||||||||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| RMBS | 4 | — | — | — | 4 | — | |||||||||||||||||||||||||||||
| Asset-backed securities: | |||||||||||||||||||||||||||||||||||
| CLOs | 226 | — | — | — | 226 | — | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 24 | (2) | 8 | (1) | 32 | (3) | |||||||||||||||||||||||||||||
| Total | $ | 804 | $ | (17) | $ | 120 | $ | (9) | $ | 924 | $ | (26) | |||||||||||||||||||||||
| Number of securities (1) | 355 | 60 | 410 | ||||||||||||||||||||||||||||||||
___________________
(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.
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, 2022 and December 31, 2021 were not related to credit quality, and in the case of 2022, were primarily attributable to rising interest rates. As of December 31, 2022, the Company did not intend to and was not required to sell investments in an unrealized loss position prior to expected recovery in value. As of December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 567 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2021, 23 securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $329 million as of December 31, 2022 and $6 million as of December 31, 2021.
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of December 31, 2022 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 Available-for-Sale Fixed-Maturity Securities by Contractual Maturity
As of December 31, 2022
| Amortized Cost | Estimated Fair Value | ||||||||||
| (in millions) | |||||||||||
| Due within one year | $ | 290 | $ | 282 | |||||||
| Due after one year through five years | 1,713 | 1,585 | |||||||||
| Due after five years through 10 years | 1,778 | 1,667 | |||||||||
| Due after 10 years | 3,226 | 2,974 | |||||||||
| Mortgage-backed securities: | |||||||||||
| RMBS | 418 | 340 | |||||||||
| CMBS | 282 | 271 | |||||||||
| Total | $ | 7,707 | $ | 7,119 | |||||||
Based on fair value, investments and other assets that are either held in trust for the benefit of the Companythird-party ceding insurers in an amount at least equalaccordance with statutory requirements, placed on deposit to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers post collateral on terms negotiated with the Company.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Increase in net unearned premium reserve | $ | 15 | $ | 64 | $ | 82 | |||||
| Increase in net par outstanding | 1,069 | 1,457 | 5,107 | ||||||||
| Commutation gains (losses) | 1 | (16 | ) | 328 | |||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
portfolio also contains securities that are held in trust by Moody’scertain AGL subsidiaries or S&Potherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,169 million and $1,231 million based on fair value as of December 31, 2022 and December 31, 2021, respectively.
No material investments of the Company were non-income producing during the twelve months period ending December 31, 2022. There were no investments that were non-income producing during the twelve months period ending December 31, 2021.
Income from Investments
Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments, and the size of such portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.
Puerto Rico CVIs in the investment portfolio are classified as trading. Equity in earnings (losses) of investees represents the Company’s interest in the earnings of its equity method investments.
Income from Investments
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Investment income: | |||||||||||||||||
| Externally managed | $ | 189 | $ | 204 | $ | 231 | |||||||||||
| Loss Mitigation Securities and other | 63 | 55 | 65 | ||||||||||||||
| Managed by AssuredIM (1) | 22 | 16 | 8 | ||||||||||||||
| Investment income | 274 | 275 | 304 | ||||||||||||||
| Investment expenses | (5) | (6) | (7) | ||||||||||||||
| Net investment income | $ | 269 | $ | 269 | $ | 297 | |||||||||||
| Fair value gains (losses) on trading securities (2) | $ | (34) | $ | — | $ | — | |||||||||||
| Equity in earnings (losses) of investees | $ | (39) | $ | 94 | $ | 27 | |||||||||||
____________________
(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.
(2) Fair value losses on trading securities pertaining to securities still held as of December 31, 2022 were $29 million for 2022.
Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
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Assured Guaranty Ltd.
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Net Realized Investment Gains (Losses)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Gross realized gains on sales of available-for-sale securities | $ | 3 | $ | 20 | $ | 27 | |||||||||||
| Gross realized losses on sales of available-for-sale securities (1) | (45) | (5) | (5) | ||||||||||||||
| Net foreign currency gains (losses) | (4) | 2 | 6 | ||||||||||||||
| Change in the allowance for credit losses and intent to sell (2) | (21) | (7) | (17) | ||||||||||||||
| Other net realized gains (losses) (3) | 11 | 5 | 7 | ||||||||||||||
| Net realized investment gains (losses) | $ | (56) | $ | 15 | $ | 18 | |||||||||||
____________________
(1)2022 related primarily to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.
(2) Change in allowance for credit losses in 2022 and 2021 was primarily due to Loss Mitigation Securities. COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in 2020.
(3) Net realized gains in 2022 related primarily to the sale of one of the Company’s alternative investments.
The following table presents the roll forward of allowance for the credit losses on available-for-sale fixed-maturity securities.
Roll Forward of Allowance for Credit Losses
for Available-for-Sale Fixed-Maturity Securities
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Balance, beginning of period | $ | 42 | $ | 78 | $ | — | |||||||||||
| Effect of adoption of accounting guidance on credit losses on January 1, 2020 | — | — | 62 | ||||||||||||||
| Additions for securities for which credit losses were not previously recognized | 7 | 4 | 1 | ||||||||||||||
| Additions for purchases of securities accounted for as purchased financial assets with credit deterioration | 2 | — | — | ||||||||||||||
| Additions (reductions) for securities for which credit losses were previously recognized | 14 | 2 | 15 | ||||||||||||||
| Reductions for securities sold and other settlements | — | (42) | — | ||||||||||||||
| Balance, end of period | $ | 65 | $ | 42 | $ | 78 | |||||||||||
The Company recorded $21 million, $6 million and $16 million in credit loss expense for the years ended December 31, 2022, 2021 and 2020, respectively. During the 2022, the Company purchased a Loss Mitigation Security with a fair value of $22 million that was accounted for as a PCD security. At acquisition, this security had an unpaid principal on remaining collateral of $31 million, an allowance for credit losses of $2 million, and a non-credit related discount of $7 million. The Company did not purchase any other securities with credit deterioration during the periods presented. As of December 31, 2022 and 2021, the majority of allowance for credit losses relates to Loss Mitigation Securities.
Equity in Earnings (Losses) of Investees
Equity in Earnings (Losses) of Investees
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| AssuredIM Funds | $ | 2 | $ | 30 | $ | 14 | |||||||||||
| Other | (41) | 64 | 13 | ||||||||||||||
| Total equity in earnings (losses) of investees (1) | $ | (39) | $ | 94 | $ | 27 | |||||||||||
____________________
(1) Includes $36 million, and $14 million for the year ended December 31, 2021 and 2020, respectively, related to fair value gains on investments at FVO using net asset value (NAV), as a practical expedient.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Dividends received from equity method investments were $10 million, $15 million and $10 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The table below presents summarized financial information for equity method investments that meet, in aggregate, the requirements for reporting summarized disclosures. Amounts in the table below represent amounts reported in the consolidated financial statements as of December 31, 2022 and 2021, and for the years ended December 31, 2022, 2021 and 2020. The financial statements for the majority of these equity method investments are reported on a lag.
Aggregate Equity Investments’
Summarized Balance Sheet Data
| As of December, 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Total assets | $ | 697 | $ | 1,543 | |||||||
| Total liabilities | 76 | 412 | |||||||||
| Total equity | 621 | 1,131 | |||||||||
Aggregate Equity Investments’
Summarized Statement of Operations Data
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Total revenues | $ | (315) | $ | 548 | $ | 225 | |||||||||||
| Total expenses | 49 | 64 | 84 | ||||||||||||||
| Net income (loss) | (364) | 484 | 141 | ||||||||||||||
8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
Accounting Policy
The types of entities that the Company assesses for consolidation principally include: (i) financial guaranty variable interest entities which include entities whose debt obligations the insurance subsidiaries insure in its financial guaranty business, and Puerto Rico Trusts, and (ii) investment vehicles in which AGAS has a variable interest and which AssuredIM manages (including CLOs that are collateralized financing entities (CFEs), CLO warehouses and AssuredIM Funds). For each of these types of entities, the Company first determines whether the entity is a VIE or internallya voting interest entity (VOE) which involves assessing, amongst other conditions, whether the equity investment at risk is sufficient to cover the entity’s expected losses and whether the holders of the equity investment at risk (as a group) have substantive voting rights.
For entities determined to be a VIE, and for which the Company has a variable interest, the Company assesses whether it is the primary beneficiary of the VIE at the time it becomes involved with an entity and continuously reassesses whether it is the primary beneficiary. In determining whether it is the primary beneficiary, the Company considers all facts and circumstances, including an evaluation of economic interests in the VIE held directly and indirectly through related parties and entities under common control. The Company is the primary beneficiary of a VIE when it has both: (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
If the Company concludes that it is the primary beneficiary of the VIE, it consolidates the VIE in the Company’s consolidated financial statements. If, as part of its continual reassessment of the primary beneficiary determination, the Company concludes that it is no longer the primary beneficiary of a VIE, the Company deconsolidates the VIE and recognizes the impact of that change on the consolidated financial statements. If the entity being evaluated for consolidation is not initially determined to be a VIE (or, later, if a significant event occurs that causes an entity to no longer qualify as a VIE), then the entity would be a VOE. Consolidation generally is required when the Company, directly or indirectly, has a controlling financial interest of the VOE being assessed.
194
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
FG VIEs
For structured finance and certain other FG VIEs, the Company elected the FVO for all assets and liabilities. Upon initial adoption of the accounting guidance for VIEs in 2010, the Company elected to fair value its structured finance and other FG VIE assets and liabilities as the carrying amount transition method was not practical. To allow for consistency in the accounting for its consolidated structured finance and other FG VIE assets and liabilities, the Company elected the FVO for structured finance and other FG VIEs that it has subsequently consolidated. For the Puerto Rico Trusts described below, the assets primarily include fixed-maturity debt securities that are carried at fair value and the Company elected the FVO for the Puerto Rico Trusts’ liabilities in order to simplify the accounting for these instruments.
The change in fair value of FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the consolidated statement of operations, except for (i) the change in fair value attributable to change in instrument-specific credit risk (ISCR) on FG VIEs’ liabilities, and (ii) unrealized gains and losses on the New Recovery Bonds in the Puerto Rico Trusts, which are reported OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs.” Investment income on the New Recovery Bonds and changes in fair value on the CVIs in the Puerto Rico Trusts are all reported in “fair value gains (losses) on FG VIEs” on the consolidated statement of operations.
The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by AGC,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.
The Company has limited contractual rights to obtain the financial records of its consolidated structured finance and other FG VIEs. The structured finance and other FG VIEs do not prepare separate GAAP financial statements; therefore, the Company compiles the FG VIE GAAP financial information based on trustee reports prepared by and received from third parties. Such trustee reports are not available to the Company until approximately 30 days after the end of any given period. The time required to perform adequate reconciliations and analyses of the information in these trustee reports results in a one quarter lag in reporting the structured finance and other FG VIEs’ activities. As a result of the lag in reporting structured finance and other FG VIEs, cash and short-term investments do not reflect cash outflows to the holders of the debt issued by the structured finance and other FG VIEs for claim payments made by the Company’s insurance subsidiaries to the consolidated structured finance and other FG VIEs until the subsequent reporting period.
The cash flows generated by the FG VIEs’ assets, except for interest income, 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 MACAGC under their 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 AGM and AGC 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.
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 Exposure.
CIVs
CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses in which the Company is the primary beneficiary. The consolidated AssuredIM Funds are investment companies for accounting purposes and therefore account for their underlying investments at fair value. The consolidated CLOs are CFEs, and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured under the FVO using the CFE practical expedient. The assets and liabilities of consolidated CLO and CLO warehouses managed by AssuredIM (collectively, the consolidated CLOs) are also reported at fair value. Changes in the fair value of assets and liabilities of CIVs, interest income and interest expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates. Certain AssuredIM private equity funds and CLO warehouses, whose financial statements are not prepared in time for the Company’s periodic reporting, are reported on a lag.
195
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Upon consolidation of an AssuredIM Fund, the Company records NCI for the portion of each fund owned by employees and any third-party investors. Mandatorily redeemable NCI is classified as a liability. NCI that is redeemable outside of the control of the Company is classified as temporary equity or redeemable noncontrolling interests, and non-redeemable NCI is presented within shareholders’ equity in the consolidated balance sheets. Amendments to redemption features may result in reclassifications between permanent equity, temporary equity and liability.
Investment transactions in the consolidated AssuredIM Funds are recorded on a trade/contract date basis. Money market funds in consolidated AssuredIM Funds are classified as cash equivalents and carried at cost, consistent with those funds’ separately issued financial statements, and therefore the Company has included these amounts in the total amount of cash and cash equivalents on the consolidated statements of cash flows. Cash flows of the CIVs attributable to such entities’ investment purchases and dispositions, as well as operating expenses of the investment vehicles, are presented as cash flows from operating activities in the consolidated statements of cash flows. Borrowings under credit facilities, debt issuances and repayments, and capital cash flows to and from investors are presented as financing activities, consistent with investment company guidelines.
FG VIEs
Structured Finance and Other FG VIEs
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 structured finance and other FG VIEs (which excludes the Puerto Rico Trusts described below) 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 structured finance and other FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on structured finance and other FG VIEs’ liabilities.
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 transaction’s servicer or collateral manager, 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 to no longer have those protective rights, the VIE is deconsolidated.
The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets.
Number of Consolidated
Structured Finance and Other FG VIEs
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Beginning of year | 25 | 25 | 27 | ||||||||||||||
| Consolidated | 2 | 1 | 2 | ||||||||||||||
| Deconsolidated | (2) | (1) | (2) | ||||||||||||||
| Matured | — | — | (2) | ||||||||||||||
| December 31 | 25 | 25 | 25 | ||||||||||||||
Puerto Rico Trusts
As of December 31, 2022, the Company consolidated 45 custodial trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) discussed in Note 3, Outstanding Exposure, Exposures to Puerto Rico. During 2022, the Company consolidated 48 and deconsolidated three Puerto Rico Trusts. With respect to certain insured securities covered by the 2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and/or CVIs that constitute distributions under the 2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as each is paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts.
The assets within the Puerto Rico Trusts are classified as follows: New Recovery Bonds as available-for-sale securities ($204 million fair value and $204 million amortized cost as of December 31, 2022) and CVIs as trading securities ($5 million fair value as of December 31, 2022 and $1 million fair value losses on trading securities for 2022). As of December 31, 2022, the available-for-sale securities had gross unrealized gains of $4 million and gross unrealized losses of $4 million. Fourteen securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $4 million and had a fair value of $110 million. All of these securities were in a continuous unrealized loss position for less than 12 months. 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, 2022 were primarily attributable to rising interest rates, rather than credit quality. As of December 31, 2022, the Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, eight securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $3 million as of December 31, 2022.
The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of December 31, 2022 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.
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Notes to Consolidated Financial Statements, Continued
New Recovery Bonds in FG VIEs’ Assets
Distribution by Contractual Maturity
As of December 31, 2022
| Amortized Cost | Estimated Fair Value | ||||||||||
| (in millions) | |||||||||||
| Due within one year | $ | 1 | $ | 1 | |||||||
| Due after one year through five years | 6 | 5 | |||||||||
| Due after five years through 10 years | 41 | 41 | |||||||||
| Due after 10 years | 156 | 157 | |||||||||
| Total | $ | 204 | $ | 204 | |||||||
Components of FG VIE Assets and 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 contracts. 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).
The table below shows the carrying value of FG VIEs’ assets and liabilities, segregated by type of collateral.
Consolidated FG VIEs by Type of Collateral
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| FG VIEs’ assets: | |||||||||||
| U.S. RMBS first lien | $ | 167 | $ | 221 | |||||||
| U.S. RMBS second lien | 30 | 39 | |||||||||
| Puerto Rico Trusts’ assets (includes $209 million at fair value) (1) | 212 | — | |||||||||
| Other | 7 | — | |||||||||
| Total FG VIEs’ assets | $ | 416 | $ | 260 | |||||||
| FG VIEs’ liabilities with recourse: | |||||||||||
| U.S. RMBS first lien | $ | 176 | $ | 227 | |||||||
| U.S. RMBS second lien | 24 | 42 | |||||||||
| Puerto Rico Trusts’ liabilities | 495 | — | |||||||||
| Other | 7 | — | |||||||||
| Total FG VIEs’ liabilities with recourse | $ | 702 | $ | 269 | |||||||
| FG VIEs’ liabilities without recourse: | |||||||||||
| U.S. RMBS first lien | $ | 13 | $ | 20 | |||||||
| Total FG VIEs’ liabilities without recourse | $ | 13 | $ | 20 | |||||||
____________________
(1) Includes $2 million of cash.
The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIEs’ assets at FVO) held as of December 31, 2022, 2021 and 2020 that was reported in the consolidated statements of operations for 2022, 2021 and 2020 were gains of $10 million, $14 million and $6 million, respectively. 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 (all of which are measured at fair value under the FVO) 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.
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Notes to Consolidated Financial Statements, Continued
Selected Information for FG VIEs’ Assets and Liabilities
Measured under the FVO
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Excess of unpaid principal over fair value of: | |||||||||||
| FG VIEs’ assets | $ | 265 | $ | 255 | |||||||
| FG VIEs’ liabilities with recourse | 21 | 12 | |||||||||
| FG VIEs’ liabilities without recourse | 15 | 15 | |||||||||
| Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 34 | 52 | |||||||||
| Unpaid principal for FG VIEs’ liabilities with recourse (1) | 723 | 281 | |||||||||
____________________
(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2023 through 2041.
CIVs
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.
Number of Consolidated CIVs by Type
| As of December 31, | ||||||||||||||
| CIV Type | 2022 | 2021 | ||||||||||||
| Funds | 8 | 8 | ||||||||||||
| CLOs | 10 | 9 | ||||||||||||
| CLO warehouses | 4 | 3 | ||||||||||||
| Total number of consolidated CIVs (1) | 22 | 20 | ||||||||||||
____________________
(1) As of December 31, 2022, two CIVs were VOEs and as of December 31, 2021 one CIV was a VOE. Certain funds meet the criteria for a VOE because the Company possesses substantially all of the economics and all of the decision-making authority.
The table below summarizes the change in the number of consolidated CIVs during each of the periods. During 2022, 2021 and 2020, two, five and two, respectively, consolidated CLO warehouses became CLOs.
Roll Forward of Number of Consolidated CIVs
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Beginning of year | 20 | 11 | 4 | ||||||||||||||
| Consolidated | 4 | 10 | 7 | ||||||||||||||
| Deconsolidated (1) | (2) | (1) | — | ||||||||||||||
| December 31 | 22 | 20 | 11 | ||||||||||||||
____________________
(1) During 2022 the Company deconsolidated a CLO with assets and liabilities of $417 million.
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Notes to Consolidated Financial Statements, Continued
In the fourth quarter of 2021, an AssuredIM Fund secured additional capital commitments, triggering a reconsideration of the Company’s previous conclusion not to consolidate that AssuredIM Fund (the Fund). As a result of the reconsideration, the Company concluded that it became the Fund’s primary beneficiary, as the dilution of the Fund’s lead investor’s interest caused that investor to lose its substantive ability to dissolve the Fund and remove the Company as the Fund’s general partner. Accordingly, the Company consolidated the Fund and recognized a gain on consolidation of $31 million in 2021. Total assets and liabilities at the time of consolidation were $273 million and $33 million, respectively. In addition, the consolidation resulted in an NCI of $89 million at the time of consolidation. There were no other gains or losses on consolidation or deconsolidation during the periods presented.
The gain on consolidation is primarily the difference between: (i) the sum of the carrying value of the Company’s interest in the Fund immediately prior to consolidation; and (ii) the sum of the fair value of the partners’ capital allocated to the Company, relating to its limited partner and general partner interests in the Fund immediately prior to consolidation. The fair value of the general partner’s capital represents an allocation of undistributed carried interest. The carried interest has not yet been recorded by AssuredIM as the requirements for revenue recognition have not yet been met. Carried interest generated by the Fund will be recognized as revenue, by AssuredIM, once the probability of a significant reversal of revenue no longer exists. Meanwhile the compensation related to that carried interest, that is awarded to certain per credit limits. Amongemployees that manage the exposures excludedFund, would be recognized as an expense by AssuredIM to the extent that it is probable of being made and reasonably estimable. Any carried interest that is recognized as revenue, relating to a consolidated AssuredIM fund, is reported in the Asset Management segment, and eliminated in consolidation.
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Notes to Consolidated Financial Statements, Continued
Assets and Liabilities of CIVs
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Assets: | |||||||||||
| Fund assets: | |||||||||||
| Cash and cash equivalents | $ | 59 | $ | 64 | |||||||
| Fund investments, at fair value: | |||||||||||
| Equity securities and warrants | 434 | 252 | |||||||||
| Obligations of state and political subdivisions | — | 101 | |||||||||
| Corporate securities | 96 | 98 | |||||||||
| Structured products | 128 | 62 | |||||||||
| Due from brokers and counterparties | — | 49 | |||||||||
| Other | 1 | 1 | |||||||||
| CLO and CLO warehouse assets: | |||||||||||
| Cash | 38 | 156 | |||||||||
| CLO investments: | |||||||||||
| Loans in CLOs, FVO | 4,202 | 3,913 | |||||||||
| Loans in CLO warehouses, FVO | 368 | 331 | |||||||||
| Short-term investments, at fair value | 135 | 145 | |||||||||
| Due from brokers and counterparties | 32 | 99 | |||||||||
| Total assets (1) | $ | 5,493 | $ | 5,271 | |||||||
| Liabilities: | |||||||||||
CLO obligations, FVO (2) | $ | 4,090 | $ | 3,665 | |||||||
| Warehouse financing debt, FVO (3) | 313 | 126 | |||||||||
| Securities sold short, at fair value | — | 41 | |||||||||
| Due to brokers and counterparties | 112 | 570 | |||||||||
| Other liabilities | 110 | 34 | |||||||||
| Total liabilities | $ | 4,625 | $ | 4,436 | |||||||
____________________
(1) Includes investments in AssuredIM Funds and other affiliated entities of $392 million and $223 million as of December 31, 2022 and December 31, 2021, respectively. Includes assets and liabilities of voting interest entities as of December 31, 2022 of $58 million and $1 million, respectively, and assets of $12 million as of December 31, 2021.
(2) The weighted average maturity of CLO obligations was 6.2 years as of December 31, 2022 and 6.6 years as of December 31, 2021. The weighted average interest rate of CLO obligations was 5.3% as of December 31, 2022 and 1.8% for December 31, 2021. CLO obligations will mature at various dates from 2034 to 2035.
(3) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.9 years as of December 31, 2022 and 1.8 years as of December 31, 2021. The weighted average interest rate of warehouse financing debt of CLO warehouses was 4.5% as of December 31, 2022 and 1.1% as of December 31, 2021. Warehouse financing debt will mature at various dates from 2023 to 2031.
The “equity securities and warrants” category in the table above includes $127 million as of December 31, 2022 related to a consolidated feeder’s investment in a municipal master fund that was unwound in January 2023 based on the December 31, 2022 valuation. On January 31, 2023 the fund distributed substantially all of its available cash to AGAS and other investors in the fund. Other liabilities in the table above includes redeemable NCI as described below.
As of December 31, 2022, the CIVs had commitments to invest of $424 million.
As of December 31, 2022 and December 31, 2021, the CIVs included derivative contracts with notional amounts totaling $46 million and $49 million, respectively, and average notional amounts of $47 million and $34 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the consolidated statements of operations. The net change in fair value of derivative contracts were those associatedgains of $3 million in 2022.
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Notes to Consolidated Financial Statements, Continued
Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the Commonwealthproceeds of Puerto Ricothe 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 its related authorities and public corporations. AGC, AGM and MAC paid approximately $3.2 million of premiums in 2018are not available for the term January 1, 2018 throughbenefit of other investment vehicles or other Assured Guaranty subsidiaries. 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 other Assured Guaranty subsidiaries.
As of December 31, 20182022, these credit facilities had varying maturities ranging from 2023 to 2031 with the aggregate principal amount not exceeding $1.6 billion. The available commitments were based on the amount of equity contributed to the warehouse which was $377 million. As of December 31, 2022, $284 million was drawn under credit facilities with interest rates ranging from 3-month SOFR plus 150 basis points (bps) to 3-month Euro InterBank Offered Rate (Euribor) plus 200 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of December 31, 2022.
As of December 31, 2022, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $110 million jointly and approximately $3.2$71 million of premiums in 2019individually for the term January 1, 2019 throughconsolidated healthcare fund. The available commitment was based on the capital committed to the funds. As of December 31, 2019.2022, $58 million was drawn by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime floor of 3%). The fund was in compliance with all financial covenants as of December 31, 2022.
Noncontrolling interest in CIVs represents the proportion of the consolidated funds not owned by the Company, and includes ownership interests of third parties, employees, and former employees. The majority of the noncontrolling interest is non-redeemable and presented on the statement of shareholders’ equity. The table below presents the rollforward of redeemable noncontrolling interest in CIVs.
Redeemable NCI in CIVs
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Beginning balance | $ | 22 | $ | 21 | $ | 7 | |||||||||||
| Net income (loss) attributable to the redeemable NCI | (1) | 1 | (1) | ||||||||||||||
| Reallocation of ownership interests | — | — | (10) | ||||||||||||||
| Reclassification to liabilities as mandatorily redeemable NCI (1) | (21) | — | — | ||||||||||||||
| Contributions | 21 | — | 25 | ||||||||||||||
| Distributions | (21) | — | — | ||||||||||||||
| December 31, | $ | — | $ | 22 | $ | 21 | |||||||||||
____________________
(1) Included in “liabilities of consolidated investment vehicles” on the consolidated balance sheets. On January 31, 2023 this liability has been substantially paid.
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 obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $86 million and liabilities of $12 million as of December 31, 2022 and assets of $96 million and liabilities of $11 million as of December 31, 2021, primarily reported in “investments” and “credit derivative liabilities” on the consolidated balance sheets.
Non-Consolidated VIEs
As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 15 thousand policies monitored as of December 31, 2022, approximately 14 thousand policies are not within the
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Notes to Consolidated Financial Statements, Continued
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. With respect to structured finance and other FG VIEs, as of December 31, 2022 and 2021, the Company identified 85 and 69 policies, respectively, that contain provisions and experienced events that may trigger consolidation. See above for information on VIEs that were consolidated based on management’s assessment of these potential triggers or events.
The Company manages funds and CLOs that have been determined to be VIEs in which the Company concluded that it is not the primary beneficiary because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests in these entities are reported in “other invested assets” on the consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $1 million as of both December 31, 2022 and 2021) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs. See Note 16, Related Party Transactions, for other receivables from and payables to AssuredIM funds.
9. Fair Value Measurement
Accounting Policy
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-partythird 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 2019,2022, no changes were made to the Company’s valuation models that had or are expected to have a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.
The Company’s valuation methods for calculatingproduce fair value produce a fair valuevalues 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 materially 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'sasset’s or liability’s categorization within the hierarchy 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.
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Notes to Consolidated Financial Statements, Continued
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 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
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 investmentssecurities is more subjective when markets are less liquid due to the lack of market basedmarket-based inputs.
As of December 31, 2019,2022, the Company used models to price 129 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $1,114 million. Most188 securities. All Level 3 securities were priced with the assistance of an independent third-party.third parties. The pricing is based on a discounted cash flow approach using the third-party’sthird 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.
Short-Term Investments
Short-term investments that are traded in active markets are classified as Level 1 as their value is based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Other Invested Assets
Other invested assets that are carried at fair value primarily include: (i) equity method investments for which the Company elected the FVO using NAV, as a practical expedient, and, therefore, are excluded from the fair value hierarchy; and (ii) equity securities traded in active markets that are classified as Level 1 in the fair value hierarchy as their value is based on quoted market prices.
Other Assets
Committed Capital Securities
The fair value of CCS, which is recordedreported in other assets“other assets” on the 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 (see Note 15, Long Term12, Long-Term Debt and Credit Facilities). The change in fair value of the AGC CCS and AGM CPS are recordedreported in other income“fair value gains (losses) on committed capital securities” in the consolidated statementstatements of operations. Fair value changes on CCS recorded in other income were losses of $22 million and $2 million in 2019 and 2017, respectively, and gains of $14 million in 2018. The estimated current cost of the Company’s CCS is based on several factors, including AGM and
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Notes to Consolidated Financial Statements, Continued
AGC 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.
3.
Supplemental Executive Retirement Plans
The Company classifiesclassified assets included in the fair value measurement of the assets of the Company'sCompany’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 fundfunds included in the plans (Level 1) or based upon the net asset value (NAV)NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. ChangeThe change in fair value of these assets is recordedreported in other“other operating expensesexpenses” in the consolidated statementstatements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which requiresrequire fair value measurement with changes recorded in the statementfair value reported in the consolidated statements 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 arewere generally terminated for an amount that approximatesapproximated 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'sCompany’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 December 31, 20192022 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 establishmentmeasurement 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 by 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.
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The primary sources of information used to determine gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. It is assumed
•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'sCompany’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 1.69%2.78% to 2.08%5.08% at December 31, 20192022 and 2.47%0.11% to 2.89%1.78% at December 31, 2018.2021.
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. ForDue to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads ondo not significantly affect the Company’s name thefair value of these CDS contracts. 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, approximately 17% based on fair value, of the Company's CDS contracts were fair valued using this minimum premium as of December 31, 2018. As of December 31, 2019,2022 and December 31, 2021, the corresponding number was de minimis.use of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC'sAGC’s credit spreads. In general, when AGC'sAGC’s credit spreads narrow, the cost to hedge AGC'sAGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC'sAGC’s credit spreads widen, the cost to hedge AGC'sAGC’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'sAGC’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'sCompany’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 lesslower 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 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 contractssuch contract and taking the present value ofdiscounting such amounts discounted atusing 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.
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Notes to Consolidated Financial Statements, Continued
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.
FG VIEs include Puerto Rico Trusts, structured finance and other FG VIEs. Assets in the Puerto Rico Trusts, which consist of New Recovery Bonds and CVIs, are classified as Level 2. The Company elected the FVO for the Puerto Rico Trusts’ liabilities and they are classified as Level 3. See “ - Fixed Maturity Securities” above for a description of the fair value optionmethodology for all the New Recovery Bonds and CVIs in the Puerto Rico Trusts, which represent the majority of the assets in the Puerto Rico Trusts. For structured finance and other FG VIEs’ assets and liabilities the Company elected the FVO and classifies themthey are classified as Level 3 in the fair value hierarchy.3. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. The net change inCompany records the fair value of consolidatedstructured finance and other FG VIEs’ assets and liabilities is recorded in "fair value gains (losses)based on FG VIEs" inmodeled prices. The Company records the consolidated statements of operations, except for change in fair value of FG VIEs’Puerto Rico Trusts’ liabilities with recourse caused by changes in instrument-specific credit risk (ISCR) which is separately presented in OCI. Interest income and interest expense are derived from the trustee reports and also included in "fair value gains (losses)based on FG VIEs." The FG VIEs issued securities collateralized by first lien and second lien RMBS as well as loans and receivables.quoted prices.
The fair value of the Company’sresidential mortgage loan 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, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the marketfair 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-partythird 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,third party, on comparable bonds.
The models used to price the FG VIEs’ liabilities (other than the liabilities of the Puerto Rico Trusts) 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'sCompany’s insurance policy guaranteeing the timely payment of principal and interestdebt service is also taken into account. The liabilities of the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries’ financial guaranty policies.
Significant changes to any of the inputs described above could have materially changedchange the timing of expected losses within thean 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,
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 VehiclesCIVs
Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE. The Company has elected the FVO to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO.
Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of consolidated investment vehiclesdetermination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which havehas no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third partythird-party data generally at the average between the offer and bid prices. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; (vi) and/or evaluating information provided by management of these investments. 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. Investments in private equity funds are generally valued utilizing NAV.
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 20192022
| Fair Value Hierarchy | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale: | |||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | — | $ | 3,347 | $ | 47 | $ | 3,394 | |||||||||||||||
| U.S. government and agencies | — | 111 | — | 111 | |||||||||||||||||||
| Corporate securities | — | 2,084 | — | 2,084 | |||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | — | 161 | 179 | 340 | |||||||||||||||||||
| CMBS | — | 271 | — | 271 | |||||||||||||||||||
| Asset-backed securities | — | 27 | 794 | 821 | |||||||||||||||||||
| Non-U.S. government securities | — | 98 | — | 98 | |||||||||||||||||||
| Total fixed-maturity securities, available-for-sale | — | 6,099 | 1,020 | 7,119 | |||||||||||||||||||
| Fixed-maturity securities, trading | — | 303 | — | 303 | |||||||||||||||||||
| Short-term investments | 771 | 39 | — | 810 | |||||||||||||||||||
| Other invested assets (1) | 2 | — | 5 | 7 | |||||||||||||||||||
| FG VIEs’ assets | — | 209 | 204 | 413 | |||||||||||||||||||
| Assets of CIVs (2): | |||||||||||||||||||||||
| Fund investments: | |||||||||||||||||||||||
| Equity securities and warrants | — | 5 | 297 | 302 | |||||||||||||||||||
| Corporate securities | — | — | 96 | 96 | |||||||||||||||||||
| Structured products | — | 82 | 46 | 128 | |||||||||||||||||||
| CLOs and CLO warehouse assets: | |||||||||||||||||||||||
| Loans | — | 4,570 | — | 4,570 | |||||||||||||||||||
| Short-term investments | 135 | — | — | 135 | |||||||||||||||||||
| Total assets of CIVs | 135 | 4,657 | 439 | 5,231 | |||||||||||||||||||
| Other assets | 54 | 46 | 48 | 148 | |||||||||||||||||||
| Total assets carried at fair value | $ | 962 | $ | 11,353 | $ | 1,716 | $ | 14,031 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Credit derivative liabilities | $ | — | $ | — | $ | 163 | $ | 163 | |||||||||||||||
| FG VIEs’ liabilities (3) | — | — | 715 | 715 | |||||||||||||||||||
| Liabilities of CIVs: | |||||||||||||||||||||||
| CLO obligations of CFEs | — | — | 4,090 | 4,090 | |||||||||||||||||||
| Warehouse financing debt | — | 277 | 36 | 313 | |||||||||||||||||||
| Securitized borrowing | — | — | 28 | 28 | |||||||||||||||||||
| Total liabilities of CIVs | — | 277 | 4,154 | 4,431 | |||||||||||||||||||
| Other liabilities | — | 7 | — | 7 | |||||||||||||||||||
| Total liabilities carried at fair value | $ | — | $ | 284 | $ | 5,032 | $ | 5,316 | |||||||||||||||
209
| 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 | |||||||||||
| Commercial mortgage-backed securities (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 | 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 | 481 | — | — | 481 | |||||||||||
| Total liabilities carried at fair value | $ | 1,141 | $ | — | $ | — | $ | 1,141 | |||||||
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 20182021
| Fair Value Hierarchy | Fair Value Hierarchy | |||||||||||||||||||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
| Assets: | Assets: | |||||||||||||||||||||||||||||||||||||
| Investment portfolio, available-for-sale: | ||||||||||||||||||||||||||||||||||||||
| Fixed-maturity securities | ||||||||||||||||||||||||||||||||||||||
| Investments: | Investments: | |||||||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale: | Fixed-maturity securities, available-for-sale: | |||||||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 4,911 | $ | — | $ | 4,812 | $ | 99 | Obligations of state and political subdivisions | $ | — | $ | 3,588 | $ | 72 | $ | 3,660 | |||||||||||||||||||||
| U.S. government and agencies | 175 | — | 175 | — | U.S. government and agencies | — | 128 | — | 128 | |||||||||||||||||||||||||||||
| Corporate securities | 2,136 | — | 2,080 | 56 | Corporate securities | — | 2,605 | — | 2,605 | |||||||||||||||||||||||||||||
| Mortgage-backed securities: | Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||||
| RMBS | 982 | — | 673 | 309 | RMBS | — | 221 | 216 | 437 | |||||||||||||||||||||||||||||
| CMBS | 539 | — | 539 | — | CMBS | — | 346 | — | 346 | |||||||||||||||||||||||||||||
| Asset-backed securities | 1,068 | — | 121 | 947 | Asset-backed securities | — | 27 | 863 | 890 | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 278 | — | 278 | — | Non-U.S. government securities | — | 136 | — | 136 | |||||||||||||||||||||||||||||
| Total fixed-maturity securities | 10,089 | — | 8,678 | 1,411 | ||||||||||||||||||||||||||||||||||
| Total fixed-maturity securities, available-for-sale | Total fixed-maturity securities, available-for-sale | — | 7,051 | 1,151 | 8,202 | |||||||||||||||||||||||||||||||||
| Short-term investments | 729 | 429 | 300 | — | Short-term investments | 1,225 | — | — | 1,225 | |||||||||||||||||||||||||||||
| Other invested assets (1) | 7 | — | — | 7 | Other invested assets (1) | 6 | — | 6 | 12 | |||||||||||||||||||||||||||||
| FG VIEs’ assets, at fair value | 569 | — | — | 569 | ||||||||||||||||||||||||||||||||||
| FG VIEs’ assets | FG VIEs’ assets | — | — | 260 | 260 | |||||||||||||||||||||||||||||||||
| Assets of CIVs (2): | Assets of CIVs (2): | |||||||||||||||||||||||||||||||||||||
| Fund investments: | Fund investments: | |||||||||||||||||||||||||||||||||||||
| Equity securities and warrants | Equity securities and warrants | — | 7 | 239 | 246 | |||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | — | 101 | — | 101 | |||||||||||||||||||||||||||||||||
| Corporate securities | Corporate securities | — | 7 | 91 | 98 | |||||||||||||||||||||||||||||||||
| Structured products | Structured products | — | 62 | — | 62 | |||||||||||||||||||||||||||||||||
| CLOs and CLO warehouse assets: | CLOs and CLO warehouse assets: | |||||||||||||||||||||||||||||||||||||
| Loans | Loans | — | 4,244 | — | 4,244 | |||||||||||||||||||||||||||||||||
| Short-term investments | Short-term investments | 145 | — | — | 145 | |||||||||||||||||||||||||||||||||
| Total assets of CIVs | Total assets of CIVs | 145 | 4,421 | 330 | 4,896 | |||||||||||||||||||||||||||||||||
| Other assets | 139 | 25 | 38 | 76 | Other assets | 53 | 54 | 25 | 132 | |||||||||||||||||||||||||||||
| Total assets carried at fair value | $ | 11,533 | $ | 454 | $ | 9,016 | $ | 2,063 | Total assets carried at fair value | $ | 1,429 | $ | 11,526 | $ | 1,772 | $ | 14,727 | |||||||||||||||||||||
| Liabilities: | Liabilities: | |||||||||||||||||||||||||||||||||||||
| Credit derivative liabilities | $ | 209 | $ | — | $ | — | $ | 209 | Credit derivative liabilities | $ | — | $ | — | $ | 156 | $ | 156 | |||||||||||||||||||||
| FG VIEs’ liabilities with recourse, at fair value | 517 | — | — | 517 | ||||||||||||||||||||||||||||||||||
| FG VIEs’ liabilities without recourse, at fair value | 102 | — | — | 102 | ||||||||||||||||||||||||||||||||||
| FG VIEs’ liabilities (3) | FG VIEs’ liabilities (3) | — | — | 289 | 289 | |||||||||||||||||||||||||||||||||
| Liabilities of CIVs: | Liabilities of CIVs: | |||||||||||||||||||||||||||||||||||||
| CLO obligations of CFEs | CLO obligations of CFEs | — | — | 3,665 | 3,665 | |||||||||||||||||||||||||||||||||
| Warehouse financing debt | Warehouse financing debt | — | 103 | 23 | 126 | |||||||||||||||||||||||||||||||||
| Securities sold short | Securities sold short | — | 41 | — | 41 | |||||||||||||||||||||||||||||||||
| Securitized borrowing | Securitized borrowing | — | — | 17 | 17 | |||||||||||||||||||||||||||||||||
| Total liabilities of CIVs | Total liabilities of CIVs | — | 144 | 3,705 | 3,849 | |||||||||||||||||||||||||||||||||
| Other liabilities | Other liabilities | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||
| Total liabilities carried at fair value | $ | 828 | $ | — | $ | — | $ | 828 | Total liabilities carried at fair value | $ | — | $ | 145 | $ | 4,150 | $ | 4,295 | |||||||||||||||||||||
____________________
(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $23 million and $19 million of equity method investments measured at fair value under the FVO using the NAV as a practical expedient as of December 31, 2022 and December 31, 2021, respectively.
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Assured Guaranty Ltd.
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 the years ended December 31, 20192022 and 2018.2021.
Year Ended December 31, 20192022
| Fixed-Maturity Securities, Available-for-Sale | Assets of CIVs | |||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | RMBS | Asset- Backed Securities | FG VIEs’ Assets | Equity Securities and Warrants | Corporate Securities | Structured Products | Other (7) | |||||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | 72 | $ | 216 | $ | 863 | $ | 260 | $ | 239 | $ | 91 | $ | — | $ | 27 | ||||||||||||||||||||||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 1 | (1) | 16 | (1) | 5 | (1) | (3) | (2) | 1 | (4) | 2 | (4) | (5) | (4) | 24 | (3) | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (12) | (36) | (47) | — | — | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | 22 | 43 | — | 73 | 16 | 52 | — | ||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (13) | — | (16) | (13) | (21) | — | ||||||||||||||||||||||||||||||||||||||||||
| Settlements | (14) | (39) | (57) | (60) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Consolidations | — | — | — | 22 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation | — | — | — | (15) | — | — | 20 | — | ||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2022 | $ | 47 | $ | 179 | $ | 794 | $ | 204 | $ | 297 | $ | 96 | $ | 46 | $ | 50 | ||||||||||||||||||||||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2022 included in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | (3) | (2) | $ | (8) | (4) | $ | 1 | (4) | $ | (4) | (4) | $ | 24 | (3) | |||||||||||||||||||||||||||||||||||
| OCI | $ | (12) | $ | (32) | $ | (45) | $ | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Fixed-Maturity Securities | |||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | Corporate Securities | RMBS | Asset- Backed Securities | FG VIEs’ Assets at Fair Value | Assets of Consolidated Investment Vehicles | Other (7) | |||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2018 | $ | 99 | $ | 56 | $ | 309 | $ | 947 | $ | 569 | $ | — | $ | 77 | |||||||||||||||||||||
| Total pretax realized and unrealized gains/(losses) recorded in: | |||||||||||||||||||||||||||||||||||
| Net income (loss) | 6 | (1 | ) | (8 | ) | (1 | ) | 17 | (1 | ) | 58 | (1 | ) | 68 | (2 | ) | — | (4 | ) | (22 | ) | (3 | ) | ||||||||||||
| Other comprehensive income (loss) | (1 | ) | (7 | ) | 25 | (91 | ) | — | — | — | |||||||||||||||||||||||||
| Purchases | 6 | — | 11 | 20 | — | 64 | — | ||||||||||||||||||||||||||||
| Sales | — | — | — | (29 | ) | (51 | ) | — | — | ||||||||||||||||||||||||||
| Settlements | (3 | ) | — | (54 | ) | (248 | ) | (139 | ) | — | — | ||||||||||||||||||||||||
| VIE consolidations | — | — | — | — | 6 | — | — | ||||||||||||||||||||||||||||
| VIE deconsolidations | — | — | — | — | (11 | ) | — | — | |||||||||||||||||||||||||||
| Transfers into Level 3 | — | — | — | 1 | — | — | — | ||||||||||||||||||||||||||||
| Fair value as of December 31, 2019 | $ | 107 | $ | 41 | $ | 308 | $ | 658 | $ | 442 | $ | 64 | $ | 55 | |||||||||||||||||||||
| Change in unrealized gains/(losses) included in earnings related to financial instruments held as of December 31, 2019 | $ | 77 | (2 | ) | $ | — | (4 | ) | $ | (22 | ) | (3 | ) | ||||||||||||||||||||||
| Change in unrealized gains/(losses) included in OCI related to financial instruments held as of December 31, 2019 | $ | — | $ | (7 | ) | $ | 25 | $ | 15 | ||||||||||||||||||||||||||
Year Ended December 31, 20192022
| Credit Derivative Asset (Liability), net (5) | FG VIEs’ (Liabilities) (8) | (Liabilities) of CIVs | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | (154) | $ | (289) | $ | (3,705) | ||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (11) | (6) | 34 | (2) | 178 | (4) | ||||||||||||||
| Other comprehensive income (loss) | — | (3) | 42 | |||||||||||||||||
| Issuances | — | — | (1,421) | |||||||||||||||||
| Sales | — | — | 2 | |||||||||||||||||
| Settlements | 3 | 99 | 402 | |||||||||||||||||
| Consolidations | — | (571) | (26) | |||||||||||||||||
| Deconsolidations | — | 15 | 374 | |||||||||||||||||
| Fair value as of December 31, 2022 | $ | (162) | $ | (715) | $ | (4,154) | ||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2022 included in: | ||||||||||||||||||||
| Earnings | $ | (11) | (6) | $ | 59 | (2) | $ | 217 | (4) | |||||||||||
| OCI | $ | (3) | $ | 42 | ||||||||||||||||
211
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
| 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, 2018 | $ | (207 | ) | $ | (517 | ) | $ | (102 | ) | $ | — | |||||||||
| Total pretax realized and unrealized gains/(losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (6 | ) | (6 | ) | (32 | ) | (2 | ) | (9 | ) | (2 | ) | (9 | ) | (4 | ) | ||||
| Other comprehensive income (loss) | — | 5 | — | — | ||||||||||||||||
| Issuances | — | — | — | (472 | ) | |||||||||||||||
| Settlements | 28 | 173 | 8 | — | ||||||||||||||||
| VIE consolidations | — | (5 | ) | (1 | ) | — | ||||||||||||||
| VIE deconsolidations | — | 9 | 2 | — | ||||||||||||||||
| Fair value as of December 31, 2019 | $ | (185 | ) | $ | (367 | ) | $ | (102 | ) | $ | (481 | ) | ||||||||
| Change in unrealized gains/(losses) included in earnings related to financial instruments held as of December 31, 2019 | $ | 3 | (6 | ) | $ | (31 | ) | (2 | ) | $ | (17 | ) | (2 | ) | $ | (9 | ) | (4 | ) | |
| Change in unrealized gains/(losses) included in OCI related to financial instruments held as of December 31, 2019 | $ | 5 | ||||||||||||||||||
Year Ended December 31, 20182021
| Fixed-Maturity Securities | Assets of CIVs | |||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | Corporate Securities | RMBS | Asset- Backed Securities | FG VIEs’ Assets | Equity Securities and Warrants | Corporate Securities | Other (7) | |||||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2020 | $ | 101 | $ | 30 | $ | 255 | $ | 940 | $ | 296 | $ | 2 | $ | — | $ | 54 | ||||||||||||||||||||||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 23 | (1) | 2 | (1) | 16 | (1) | 18 | (1) | 26 | (2) | 35 | (4) | — | (27) | (3) | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (5) | 16 | (1) | (5) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | — | — | 344 | — | 56 | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Sales | (44) | (48) | — | (142) | — | (28) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Settlements | (3) | — | (54) | (292) | (62) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Consolidation | — | — | — | — | — | 174 | 91 | — | ||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | 72 | $ | — | $ | 216 | $ | 863 | $ | 260 | $ | 239 | $ | 91 | $ | 27 | ||||||||||||||||||||||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | 27 | (2) | $ | (2) | (4) | $ | — | $ | (28) | (3) | |||||||||||||||||||||||||||||||||||||||
| OCI | $ | 1 | $ | — | $ | (1) | $ | (6) | ||||||||||||||||||||||||||||||||||||||||||
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| Credit Derivative Asset (Liability), net (5) | FG VIEs’ (Liabilities) (8) | (Liabilities) of CIVs | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Fair value as of December 31, 2020 | $ | (100) | $ | (333) | $ | (1,227) | ||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (58) | (6) | (8) | (2) | 15 | (4) | ||||||||||||||
| Other comprehensive income (loss) | — | (1) | — | |||||||||||||||||
| Issuances | — | — | (3,367) | |||||||||||||||||
| Settlements | 4 | 53 | 891 | |||||||||||||||||
| Consolidations | — | — | (17) | |||||||||||||||||
| Fair value as of December 31, 2021 | $ | (154) | $ | (289) | $ | (3,705) | ||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | ||||||||||||||||||||
| Earnings | $ | (74) | (6) | $ | (6) | (2) | $ | (2) | (4) | |||||||||||
| OCI | $ | (1) | ||||||||||||||||||
(1)Included in “net realized investment gains (losses)” and “net investment income”.
(2)Included in “fair value gains (losses) on FG VIEs”.
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss)”.
(4)Reported in “fair value gains (losses) on CIVs”.
(5)Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the consolidated balance sheets based on net exposure by transaction.
(6)Reported in “fair value gains (losses) on credit derivatives”.
(7)Includes CCS and other invested assets.
(8)Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse.
212
| 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, 2017 | $ | 76 | $ | 67 | $ | 334 | $ | 787 | $ | 700 | $ | 64 | $ | (269 | ) | $ | (627 | ) | $ | (130 | ) | ||||||||||||||||||||||||
| Total pretax realized and unrealized gains/(losses) recorded in: | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 3 | (1 | ) | (14 | ) | (1 | ) | 21 | (1 | ) | 57 | (1 | ) | 2 | (2 | ) | 14 | (3 | ) | 112 | (6 | ) | (1 | ) | (2 | ) | 4 | (2 | ) | ||||||||||||||||
| Other comprehensive income (loss) | 18 | 3 | (17 | ) | (40 | ) | — | — | — | 2 | — | ||||||||||||||||||||||||||||||||||
| Purchases | 4 | — | 35 | 189 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (68 | ) | (8 | ) | — | — | |||||||||||||||||||||||||||||||||
| Settlements | (2 | ) | — | (64 | ) | (46 | ) | (116 | ) | (1 | ) | 18 | 108 | 8 | |||||||||||||||||||||||||||||||
| FG VIE deconsolidations | — | — | — | — | (17 | ) | — | — | 1 | 16 | |||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2018 | $ | 99 | $ | 56 | $ | 309 | $ | 947 | $ | 569 | $ | 77 | $ | (207 | ) | $ | (517 | ) | $ | (102 | ) | ||||||||||||||||||||||||
| Change in unrealized gains/(losses) included in earnings related to financial instruments held as of December 31, 2018 | $ | 13 | (2 | ) | $ | 14 | (3 | ) | $ | 122 | (6 | ) | $ | 1 | (2 | ) | $ | 3 | (2 | ) | |||||||||||||||||||||||||
| Change in unrealized gains/(losses) included in OCI related to financial instruments held as of December 31, 2018 | $ | 18 | $ | 3 | $ | (14 | ) | $ | (38 | ) | $ | — | $ | 2 | |||||||||||||||||||||||||||||||
Assured Guaranty Ltd.
Level 3 Fair Value Disclosures
Quantitative Information aboutAbout Level 3 Fair Value Inputs
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Investments (2): | ||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale (1): | ||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 47 | Yield | 7.4 | % | - | 13.5% | 9.4% | ||||||||||||||||||||||||
| RMBS | 179 | CPR | 3.8 | % | - | 16.1% | 8.2% | |||||||||||||||||||||||||
| CDR | 1.5 | % | - | 12.0% | 5.9% | |||||||||||||||||||||||||||
| Loss severity | 50.0 | % | - | 125.0% | 82.5% | |||||||||||||||||||||||||||
| Yield | 7.5 | % | - | 11.3% | 9.0% | |||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||
| Life insurance transactions | 342 | Yield | 11.3% | |||||||||||||||||||||||||||||
| CLOs | 428 | Discount Margin | 1.8 | % | - | 4.1% | 3.0% | |||||||||||||||||||||||||
| Others | 24 | Yield | 7.4 | % | - | 12.9% | 12.8% | |||||||||||||||||||||||||
| FG VIEs’ assets (1) | 204 | CPR | 0.9 | % | - | 21.9% | 12.9% | |||||||||||||||||||||||||
| CDR | 1.3 | % | - | 41.0% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.0% | |||||||||||||||||||||||||||
| Yield | 6.6 | % | - | 10.9% | 7.5% | |||||||||||||||||||||||||||
| Assets of CIVs (3): | ||||||||||||||||||||||||||||||||
| Equity securities and warrants | 297 | Yield | 10.0% | |||||||||||||||||||||||||||||
| Discount rate | 19.8 | % | - | 25.1% | 22.7% | |||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 1.05x | - | 1.10x | 1.08x | ||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA (6) | 2.50x | - | 11.00x | 10.25x | ||||||||||||||||||||||||||||
| Market multiple-price to book | 1.15x | |||||||||||||||||||||||||||||||
| Market multiple-price to earnings | 4.50x | |||||||||||||||||||||||||||||||
| Terminal growth rate | 3.0% | - | 4.0% | 3.5% | ||||||||||||||||||||||||||||
| Exit multiple -EBITDA | 8.00x | - | 12.00x | 10.53x | ||||||||||||||||||||||||||||
| Exit multiple-price to book | 1.30x | |||||||||||||||||||||||||||||||
| Exit multiple-price to earnings | 5.50x | |||||||||||||||||||||||||||||||
| Cost | 1.00x | |||||||||||||||||||||||||||||||
| Corporate securities | 96 | Discount rate | 20.8 | % | - | 23.8% | 21.7% | |||||||||||||||||||||||||
| Yield | 16.3% | |||||||||||||||||||||||||||||||
| Exit multiple-EBITDA | 8.00x | |||||||||||||||||||||||||||||||
| Cost | 1.00x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 2.50x | - | 2.75x | 2.63x | ||||||||||||||||||||||||||||
| Structured products | 46 | Yield | 12.8 | % | - | 37.1% | 18.9% | |||||||||||||||||||||||||
| Other assets (1) | 47 | Implied Yield | 7.7 | % | - | 8.4% | 8.1% | |||||||||||||||||||||||||
| Term (years) | 10 years | |||||||||||||||||||||||||||||||
213
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
| 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/Trust preferred securities (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) | 64 | Discount rate | 16.0 | % | - | 28.0% | 21% | ||||||
| Market multiple - enterprise/revenue value | 0.5x | - | 6.7x | ||||||||||
| Yield | 12.5% | ||||||||||||
| Other assets (1) | 52 | Implied Yield | 5.1 | % | - | 5.8% | 5.5% | ||||||
| Term (years) | 10 years | ||||||||||||
| 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 basis points (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 | (481 | ) | Yield | 10.0% | |||||||||
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Credit derivative liabilities, net (1) | (162) | Hedge cost (in bps) | 11.5 | % | - | 25.2% | 15.7% | |||||||||||||||||||||||||
| Bank profit (in bps) | 51.0 | - | 270.5 | 109.4 | ||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA | ||||||||||||||||||||||||||||
| FG VIEs’ liabilities (1) | (715) | CPR | 0.9 | % | - | 21.9% | 6.3% | |||||||||||||||||||||||||
| CDR | 1.3 | % | - | 41.0% | 3.7% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 39.9% | |||||||||||||||||||||||||||
| Yield | 4.8 | % | - | 10.9% | 5.9% | |||||||||||||||||||||||||||
| Liabilities of CIVs (1): | ||||||||||||||||||||||||||||||||
| CLO obligations of CFEs (5) | (4,090) | Yield | 3.0 | % | - | 27.4% | 5.5% | |||||||||||||||||||||||||
| Warehouse financing debt | (36) | Yield | 11.7 | % | - | 16.9% | 12.9% | |||||||||||||||||||||||||
| Securitized borrowing | (28) | Discount rate | 20.9% | |||||||||||||||||||||||||||||
| Terminal growth rate | 3.0% | |||||||||||||||||||||||||||||||
| Exit multiple-EBITDA | 11.00x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 10.00x | - | 11.00x | 10.50x | ||||||||||||||||||||||||||||
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $5 million.
(3) The primary valuation technique uses the income and/or market approach; the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
(6) Earnings before interest, taxes, depreciation, and amortization (EBITDA).
214
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Quantitative Information aboutAbout Level 3 Fair Value Inputs
| Financial Instrument Description(1) | Fair Value at December 31, 2018 (in millions) | Significant Unobservable Inputs | Range | Weighted Average as a Percentage of Current Par Outstanding | |||||||||||||||||||||||||||||||||||||||||
| Assets (liabilities) (2): | |||||||||||||||||||||||||||||||||||||||||||||
| Fixed-maturity securities : | |||||||||||||||||||||||||||||||||||||||||||||
| Financial Instrument Description | Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||||||||||||||
| Investments (2): | Investments (2): | ||||||||||||||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale (1): | Fixed-maturity securities, available-for-sale (1): | ||||||||||||||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 99 | Yield | 4.5 | % | - | 32.7% | 12.0% | Obligations of state and political subdivisions | $ | 72 | Yield | 4.4 | % | - | 24.5% | 6.2% | ||||||||||||||||||||||||||||
| Corporate securities | 56 | Yield | 29.5% | ||||||||||||||||||||||||||||||||||||||||||
| RMBS | 309 | CPR | 3.4 | % | - | 19.4% | 6.2% | RMBS | 216 | CPR | 0.0 | % | 22.7% | 10.4% | |||||||||||||||||||||||||||||||
| CDR | 1.5 | % | - | 6.9% | 5.2% | CDR | 1.4 | % | - | 12.0% | 5.9% | ||||||||||||||||||||||||||||||||||
| Loss severity | 40.0 | % | - | 125.0% | 82.7% | Loss severity | 50.0 | % | - | 125.0% | 84.9% | ||||||||||||||||||||||||||||||||||
| Yield | 5.3 | % | - | 8.1% | 6.3% | Yield | 3.8 | % | - | 5.6% | 4.5% | ||||||||||||||||||||||||||||||||||
| Asset-backed securities: | Asset-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||
| Life insurance transactions | 620 | Yield | 6.5 | % | - | 7.1% | 6.8% | Life insurance transactions | 367 | Yield | 5.0% | ||||||||||||||||||||||||||||||||||
| CLOs | CLOs | 458 | Discount margin | 0.0 | % | - | 2.9% | 1.8% | |||||||||||||||||||||||||||||||||||||
| Others | Others | 38 | Yield | 3.2 | % | - | 7.9% | 7.9% | |||||||||||||||||||||||||||||||||||||
| FG VIEs’ assets (1) | FG VIEs’ assets (1) | 260 | CPR | 0.9 | % | - | 24.5% | 13.3% | |||||||||||||||||||||||||||||||||||||
| CDR | 1.4 | % | - | 26.9% | 7.6% | ||||||||||||||||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.6% | ||||||||||||||||||||||||||||||||||||||||
| Yield | 1.4 | % | - | 8.0% | 4.6% | ||||||||||||||||||||||||||||||||||||||||
| Assets of CIVs (3): | Assets of CIVs (3): | ||||||||||||||||||||||||||||||||||||||||||||
| Equity securities and warrants | Equity securities and warrants | 239 | Yield | 7.7% | |||||||||||||||||||||||||||||||||||||||||
| Discount rate | 14.7% | - | 23.9% | 21.6% | |||||||||||||||||||||||||||||||||||||||||
| CLOs/TruPS | 274 | Yield | 3.8 | % | - | 4.7% | 4.3% | ||||||||||||||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 1.10x | ||||||||||||||||||||||||||||||||||||||||||||
| Others | 53 | Yield | 11.5% | ||||||||||||||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 3.00x | - | 10.50x | 8.95x | |||||||||||||||||||||||||||||||||||||||||
| FG VIEs’ assets, at fair value | 569 | CPR | 0.9 | % | - | 18.1% | 9.3% | ||||||||||||||||||||||||||||||||||||||
| CDR | 1.3 | % | - | 23.7% | 5.1% | ||||||||||||||||||||||||||||||||||||||||
| Loss severity | 60.0 | % | - | 100.0% | 79.8% | ||||||||||||||||||||||||||||||||||||||||
| Yield | 5.0 | % | - | 10.2% | 7.1% | ||||||||||||||||||||||||||||||||||||||||
| Market multiple-price to book | 1.85x | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate securities | Corporate securities | 91 | Discount rate | 14.7 | % | - | 21.4% | 17.8% | |||||||||||||||||||||||||||||||||||||
| Yield | 16.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 74 | Implied Yield | 6.6 | % | - | 7.2% | 6.9% | 23 | Implied Yield | 2.7 | % | - | 3.3% | 3.0% | |||||||||||||||||||||||||||||||
| Term (years) | 10 years | Term (years) | 10 years | ||||||||||||||||||||||||||||||||||||||||||
| Credit derivative liabilities, net (1) | Credit derivative liabilities, net (1) | (154) | Year 1 loss estimates | 0.0 | % | - | 85.8% | 0.1% | |||||||||||||||||||||||||||||||||||||
| Hedge cost (in bps) | 8.0 | - | 37.1 | 12.6 | |||||||||||||||||||||||||||||||||||||||||
| Bank profit (in bps) | 0.0 | - | 187.8 | 67.9 | |||||||||||||||||||||||||||||||||||||||||
| Internal floor (in bps) | 8.8 | ||||||||||||||||||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA | |||||||||||||||||||||||||||||||||||||||||
| FG VIEs’ liabilities (1) | FG VIEs’ liabilities (1) | (289) | CPR | 0.9 | % | - | 24.5% | 13.3% | |||||||||||||||||||||||||||||||||||||
| CDR | 1.4 | % | - | 26.9% | 7.6% | ||||||||||||||||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.6% | ||||||||||||||||||||||||||||||||||||||||
| Yield | 1.4 | % | - | 8.0% | 3.7% | ||||||||||||||||||||||||||||||||||||||||
| Liabilities of CIVs (1): | Liabilities of CIVs (1): | ||||||||||||||||||||||||||||||||||||||||||||
| CLO obligations of CFEs (5) | CLO obligations of CFEs (5) | (3,665) | Yield | 1.6 | % | - | 13.7% | 2.1% | |||||||||||||||||||||||||||||||||||||
| Warehouse financing debt | Warehouse financing debt | (23) | Yield | 12.6 | % | - | 16.0% | 13.8% | |||||||||||||||||||||||||||||||||||||
| Securitized borrowing | Securitized borrowing | (17) | Discount rate | 23.9% | |||||||||||||||||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 10.50x | ||||||||||||||||||||||||||||||||||||||||||||
| Credit derivative liabilities, net | (207 | ) | Year 1 loss estimates | 0.0 | % | - | 66.0% | 2.2% | |||||||||||||||||||||||||||||||||||||
| Hedge cost (in bps) | 5.5 | - | 82.5 | 23.3 | |||||||||||||||||||||||||||||||||||||||||
| Bank profit (in bps) | 7.2 | - | 509.9 | 77.3 | |||||||||||||||||||||||||||||||||||||||||
| Internal floor (in bps) | 8.8 | - | 30.0 | 19.0 | |||||||||||||||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA- | |||||||||||||||||||||||||||||||||||||||||
| FG VIEs’ liabilities, at fair value | (619 | ) | CPR | 0.9 | % | - | 18.1% | 9.3% | |||||||||||||||||||||||||||||||||||||
| CDR | 1.3 | % | - | 23.7% | 5.1% | ||||||||||||||||||||||||||||||||||||||||
| Loss severity | 60.0 | % | - | 100.0% | 79.8% | ||||||||||||||||||||||||||||||||||||||||
| Yield | 5.0 | % | - | 10.2% | 5.6% | ||||||||||||||||||||||||||||||||||||||||
____________________
(3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
215
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 AGMHthe U.S. Holding Companies 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.
Assets and Liabilities of CIVs
Cash equivalents are recorded at cost which approximates fair value. 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 represents balances on a net-by counterparty basis on the consolidated balance sheets 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 securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of notes payable was determined by calculating the present value of the expected cash flows,these items and was classified asare considered Level 31 in the fair value hierarchy.
Other Liabilities
Other liabilities in the table below include $35 million and $37 million as of December 31, 2022 and December 31, 2021, respectively, of AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain BlueMountain European CLOs, which was required to comply with its European risk retention obligations. The maturity dates are in 2034 and 2035. AssuredIM’s obligation under the master repurchase agreement is not guaranteed by any Assured Guaranty insurance or holding companies.
The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.
216
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value of Financial Instruments Not Carried at Fair Value
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
| Assets (liabilities): | Assets (liabilities): | |||||||||||||||||||||||||||||||||||||
| Other invested assets | $ | 1 | $ | 2 | $ | 1 | $ | 2 | ||||||||||||||||||||||||||||||
| Other assets (1) | 97 | 97 | 130 | 130 | ||||||||||||||||||||||||||||||||||
| Financial guaranty insurance contracts (2) | (2,714 | ) | (4,013 | ) | (3,240 | ) | (5,932 | ) | ||||||||||||||||||||||||||||||
| Assets of CIVs (1) | Assets of CIVs (1) | $ | 46 | $ | 46 | $ | 171 | $ | 171 | |||||||||||||||||||||||||||||
| Other assets (including other invested assets) (2) | Other assets (including other invested assets) (2) | 92 | 93 | 134 | 135 | |||||||||||||||||||||||||||||||||
| Financial guaranty insurance contracts (3) | Financial guaranty insurance contracts (3) | (2,335) | (986) | (2,394) | (2,315) | |||||||||||||||||||||||||||||||||
| Long-term debt | (1,235 | ) | (1,573 | ) | (1,233 | ) | (1,496 | ) | Long-term debt | (1,675) | (1,477) | (1,673) | (1,832) | |||||||||||||||||||||||||
| Liabilities of CIVs (4) | Liabilities of CIVs (4) | (170) | (170) | (586) | (586) | |||||||||||||||||||||||||||||||||
| Other liabilities | (14 | ) | (14 | ) | (12 | ) | (12 | ) | (43) | (43) | (45) | (45) | ||||||||||||||||||||||||||
____________________
(2) Primarily includes accrued interest, receivable for an unsettled sale of a portion of the consolidated investment vehicles described in Note 14, Variable interest Entities.
(3) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and non-credit changes insalvage and subrogation and other recoverables net of reinsurance.
(4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value. The credit loss on other-than-temporarily-impaired
(5) Primarily includes accrued interest, repurchase agreement liability and payables for securities is recorded in the statement of operations and the non-credit component of the change in fair value of securities is recorded in OCI. For securities in an unrealized loss position where the Company has the intent to sell or it is more-likely-than-not that it will be required to sell the security before recovery, the entire impairment loss (i.e., the difference between the security's fair value and its amortized cost) is recorded in the consolidated statements of operations. Credit losses reduce the amortized cost of impaired securities. The amortized cost basis is adjusted for accretion and amortization (using the effective interest method) with a corresponding entry recorded in net investment income.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Income from securities managed by third parties | $ | 273 | $ | 297 | $ | 298 | |||||
| Income from internally managed securities (1) | 114 | 107 | 128 | ||||||||
| Gross investment income | 387 | 404 | 426 | ||||||||
| Investment expenses | (9 | ) | (9 | ) | (9 | ) | |||||
| Net investment income | $ | 378 | $ | 395 | $ | 417 | |||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Gross realized gains on available-for-sale securities (1) | $ | 63 | $ | 20 | $ | 95 | |||||
| Gross realized losses on available-for-sale securities | (5 | ) | (12 | ) | (12 | ) | |||||
| Net realized gains (losses) on other invested assets | (1 | ) | (1 | ) | — | ||||||
| OTTI: | |||||||||||
| Total OTTI | (29 | ) | (35 | ) | (33 | ) | |||||
| Less: portion of OTTI recognized in OCI | 6 | 4 | 10 | ||||||||
| Net OTTI recognized in net income (loss) (2) | (35 | ) | (39 | ) | (43 | ) | |||||
| Net realized investment gains (losses) (3) | $ | 22 | $ | (32 | ) | $ | 40 | ||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Balance, beginning of period | $ | 185 | $ | 162 | $ | 134 | |||||
| Additions for credit losses on securities for which an OTTI was not previously recognized | — | — | 13 | ||||||||
| Reductions for securities sold and other settlements | (15 | ) | — | (4 | ) | ||||||
| Additions for credit losses on securities for which an OTTI was previously recognized | 16 | 23 | 19 | ||||||||
| Balance, end of period | $ | 186 | $ | 185 | $ | 162 | |||||
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
| Fixed-maturity securities (1): | |||||||
| Externally managed | $ | 7,978 | $ | 8,909 | |||
| Internally managed | 876 | 1,180 | |||||
| Short-term investments | 1,268 | 729 | |||||
| Other invested assets-internally managed | |||||||
| Equity method investments | 111 | 47 | |||||
| Other | 7 | 8 | |||||
| Total | $ | 10,240 | $ | 10,873 | |||
| Security Type | Percent of Total(1) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | AOCI (2) 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 investment portfolio | 100 | % | $ | 9,639 | $ | 517 | $ | (34 | ) | $ | 10,122 | $ | 59 | AA- | |||||||||||
| 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 | 45 | % | $ | 4,761 | $ | 168 | $ | (18 | ) | $ | 4,911 | $ | 40 | AA- | |||||||||||
| U.S. government and agencies | 2 | 167 | 9 | (1 | ) | 175 | — | AA+ | |||||||||||||||||
| Corporate securities | 20 | 2,175 | 13 | (52 | ) | 2,136 | (4 | ) | A | ||||||||||||||||
| Mortgage-backed securities(4): | |||||||||||||||||||||||||
| RMBS | 9 | 999 | 17 | (34 | ) | 982 | (15 | ) | A- | ||||||||||||||||
| CMBS | 5 | 542 | 4 | (7 | ) | 539 | — | AAA | |||||||||||||||||
| Asset-backed securities | 9 | 942 | 131 | (5 | ) | 1,068 | 97 | BB | |||||||||||||||||
| Non-U.S. government securities | 3 | 298 | 2 | (22 | ) | 278 | — | AA | |||||||||||||||||
| Total fixed-maturity securities | 93 | 9,884 | 344 | (139 | ) | 10,089 | 118 | A+ | |||||||||||||||||
| Short-term investments | 7 | 729 | — | — | 729 | — | AAA | ||||||||||||||||||
| Total investment portfolio | 100 | % | $ | 10,613 | $ | 344 | $ | (139 | ) | $ | 10,818 | $ | 118 | A+ | |||||||||||
| State | State General Obligation | Local General Obligation | Revenue Bonds | Total Fair Value | Amortized Cost | Average Credit Rating | ||||||||||||||||
| (in millions) | ||||||||||||||||||||||
| California | 68 | 70 | 380 | $ | 518 | 457 | A | |||||||||||||||
| New York | $ | 6 | $ | 46 | $ | 408 | $ | 460 | $ | 431 | AA | |||||||||||
| Texas | 23 | 122 | 287 | 432 | 404 | AA | ||||||||||||||||
| Washington | 52 | 69 | 181 | 302 | 284 | AA | ||||||||||||||||
| Florida | 8 | 3 | 233 | 244 | 229 | A+ | ||||||||||||||||
| Illinois | 18 | 53 | 125 | 196 | 182 | A | ||||||||||||||||
| Massachusetts | 71 | — | 115 | 186 | 171 | AA | ||||||||||||||||
| Pennsylvania | 38 | 4 | 95 | 137 | 128 | A+ | ||||||||||||||||
| Georgia | 11 | 10 | 92 | 113 | 104 | AA- | ||||||||||||||||
| District of Columbia | 30 | — | 69 | 99 | 94 | AA | ||||||||||||||||
| All others | 71 | 172 | 915 | 1,158 | 1,080 | AA- | ||||||||||||||||
| Total | $ | 396 | $ | 549 | $ | 2,900 | $ | 3,845 | $ | 3,564 | AA- | |||||||||||
| State | State General Obligation | Local General Obligation | Revenue Bonds | Total Fair Value | Amortized Cost | Average Credit Rating | ||||||||||||||||
| (in millions) | ||||||||||||||||||||||
| New York | $ | 5 | $ | 49 | $ | 492 | $ | 546 | $ | 536 | AA | |||||||||||
| Texas | 19 | 170 | 344 | 533 | 520 | AA | ||||||||||||||||
| California | 63 | 77 | 378 | 518 | 482 | A | ||||||||||||||||
| Washington | 80 | 81 | 193 | 354 | 349 | AA | ||||||||||||||||
| Florida | 8 | 13 | 220 | 241 | 236 | A+ | ||||||||||||||||
| Massachusetts | 75 | — | 144 | 219 | 211 | AA | ||||||||||||||||
| Illinois | 16 | 55 | 127 | 198 | 192 | A | ||||||||||||||||
| Pennsylvania | 35 | 5 | 98 | 138 | 136 | A+ | ||||||||||||||||
| District of Columbia | 41 | — | 92 | 133 | 131 | AA | ||||||||||||||||
| Georgia | 10 | 10 | 94 | 114 | 110 | AA- | ||||||||||||||||
| All others | 96 | 210 | 1,103 | 1,409 | 1,369 | AA- | ||||||||||||||||
| Total | $ | 448 | $ | 670 | $ | 3,285 | $ | 4,403 | $ | 4,272 | AA- | |||||||||||
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||
| Type | Fair Value | Amortized Cost | Fair Value | Amortized Cost | ||||||||||||
| (in millions) | ||||||||||||||||
| Transportation | $ | 916 | $ | 835 | $ | 967 | $ | 925 | ||||||||
| Higher education | 488 | 456 | 557 | 543 | ||||||||||||
| Water and sewer | 453 | 422 | 580 | 566 | ||||||||||||
| Tax backed | 426 | 397 | 471 | 458 | ||||||||||||
| Healthcare | 236 | 220 | 278 | 270 | ||||||||||||
| Municipal utilities | 234 | 212 | 287 | 267 | ||||||||||||
| All others | 147 | 137 | 145 | 143 | ||||||||||||
| Total | $ | 2,900 | $ | 2,679 | $ | 3,285 | $ | 3,172 | ||||||||
| 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 | ||||||||||||||||||||
| 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 | $ | 195 | $ | (4 | ) | $ | 658 | $ | (14 | ) | $ | 853 | $ | (18 | ) | ||||||||
| U.S. government and agencies | 11 | — | 24 | (1 | ) | 35 | (1 | ) | |||||||||||||||
| Corporate securities | 836 | (19 | ) | 522 | (33 | ) | 1,358 | (52 | ) | ||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | 85 | (2 | ) | 447 | (32 | ) | 532 | (34 | ) | ||||||||||||||
| CMBS | 111 | (1 | ) | 164 | (6 | ) | 275 | (7 | ) | ||||||||||||||
| Asset-backed securities | 322 | (4 | ) | 38 | (1 | ) | 360 | (5 | ) | ||||||||||||||
| Non-U.S. government securities | 83 | (4 | ) | 99 | (18 | ) | 182 | (22 | ) | ||||||||||||||
| Total | $ | 1,643 | $ | (34 | ) | $ | 1,952 | $ | (105 | ) | $ | 3,595 | $ | (139 | ) | ||||||||
| Number of securities (1) | 417 | 608 | 997 | ||||||||||||||||||||
| Number of securities with OTTI (1) | 22 | 22 | 42 | ||||||||||||||||||||
Amortized Cost | Estimated Fair Value | ||||||
| (in millions) | |||||||
| Due within one year | $ | 326 | $ | 334 | |||
| Due after one year through five years | 1,538 | 1,591 | |||||
| Due after five years through 10 years | 2,022 | 2,128 | |||||
| Due after 10 years | 3,338 | 3,607 | |||||
| Mortgage-backed securities: | |||||||
| RMBS | 745 | 775 | |||||
| CMBS | 402 | 419 | |||||
| Total | $ | 8,371 | $ | 8,854 | |||
The Company hasreceives a portfoliomanagement fee, as well as performance fee, incentive allocation or carried interest (collectively referred to as performance fees) in exchange for providing investment advisory services to manage investment funds and CLOs. The annual management fees are typically based on a percentage of financial guaranty contractsthe value of the client’s net assets under management, and are generally as follows:
•Depending on the investment strategy, the management fee charged is a range of up to 2.00% per annum calculated on either the beginning of the month or quarter, or month-end NAV or other relevant basis (e.g., committed capital) of the respective funds.
•For the Company’s management and/or servicing of the AssuredIM CLOs, the Company receives, generally 0.25% to 0.50% (combined senior investment management fee and subordinated investment management fee) per annum based on total adjusted par outstanding. The portion of these fees that meetpertains to the definition of a derivative ininvestment by AssuredIM wind-down funds is typically rebated to such AssuredIM Funds.
In accordance with GAAP (primarily CDS). The credit derivative portfoliothe investment management agreements, and by serving as the general partner, managing member or managing general partner, the Company also includes interest rate swaps.receives performance fees. Performance fee revenues are generated on certain management contracts when certain minimum rates of return,( i.e., performance hurdles), are exceeded. Performance fee revenue may fluctuate from period to period and may not correlate with general market changes. Annual performance fee rates generally range from 10% to 20% of the net profits in excess of the high-water mark for the respective fund.
The general partner has the right, in its sole discretion, to require certain AssuredIM Funds to distribute to the general partner an amount equal to its presumed tax liability attributable to the allocation of estimated taxable income relating to performance fees with respect to a reference obligation under asuch fiscal year and are contractually not subject to clawback. The general partner received tax distributions in 2022 related to its presumed tax liability in 2022 and 2021, and there were no tax distributions for 2020.
217
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company may credit, derivative may be more limited than whenreduce or waive the management fee and/or the performance fee with respect to any investor and/or affiliate. Certain current and former employees of 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 specifiedwho have investments 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 CompanyAssuredIM Funds may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.be charged any management fees or performance fee.
Accounting Policy
| As of December 31, 2019 | As of December 31, 2018 (2) | |||||||||||||||
Net Par Outstanding | Net Fair Value Asset (Liability) | Net Par Outstanding | Net Fair Value Asset (Liability) | |||||||||||||
| (in millions) | ||||||||||||||||
| U.S public finance | $ | 1,942 | $ | (83 | ) | $ | 1,783 | $ | (65 | ) | ||||||
| Non-U.S public finance | 2,676 | (39 | ) | 2,807 | (51 | ) | ||||||||||
| U.S structured finance | 1,206 | (58 | ) | 1,465 | (85 | ) | ||||||||||
| Non-U.S structured finance | 132 | (5 | ) | 127 | (6 | ) | ||||||||||
| Total | $ | 5,956 | $ | (185 | ) | $ | 6,182 | $ | (207 | ) | ||||||
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||
| Ratings | Net Par Outstanding | % of Total | Net Par Outstanding | % of Total | ||||||||||
| (dollars in millions) | ||||||||||||||
| AAA | $ | 1,730 | 29.0 | % | $ | 1,813 | 29.4 | % | ||||||
| AA | 1,695 | 28.5 | 1,690 | 27.3 | ||||||||||
| A | 1,110 | 18.6 | 1,171 | 18.9 | ||||||||||
| BBB | 1,292 | 21.7 | 1,351 | 21.9 | ||||||||||
| BIG (1) | 129 | 2.2 | 157 | 2.5 | ||||||||||
| Credit derivative net par outstanding | $ | 5,956 | 100.0 | % | $ | 6,182 | 100.0 | % | ||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Realized gains on credit derivatives | $ | 8 | $ | 9 | $ | 17 | |||||
| Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (35 | ) | (25 | ) | (27 | ) | |||||
| Realized gains (losses) and other settlements | (27 | ) | (16 | ) | (10 | ) | |||||
| Net unrealized gains (losses) | 21 | 128 | 121 | ||||||||
| Net change in fair value of credit derivatives | $ | (6 | ) | $ | 112 | $ | 111 | ||||
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2017 | ||||||
| Five-year CDS spread | 41 | 110 | 163 | |||||
| One-year CDS spread | 9 | 22 | 70 | |||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Fair value of credit derivatives before effect of AGC credit spread | $ | (261 | ) | $ | (407 | ) | |
| Plus: Effect of AGC credit spread | 76 | 200 | |||||
| Net fair value of credit derivatives | $ | (185 | ) | $ | (207 | ) | |
Components of Asset Management Fees
The following table presents the sources of asset management fees since the BlueMountain Acquisition Date:on a consolidated basis.
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 obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $86 million and liabilities of $12 million as of December 31, 2022 and assets of $96 million and liabilities of $11 million as of December 31, 2021, primarily reported in “investments” and “credit derivative liabilities” on the consolidated balance sheets.
Non-Consolidated VIEs
As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 15 thousand policies monitored as of December 31, 2022, approximately 14 thousand policies are not within the
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Notes to Consolidated Financial Statements, Continued
| Year Ended December 31, 2019 | |||
| (in millions) | |||
| Management fees: | |||
| CLOs (1) | $ | 3 | |
| Opportunity funds | 2 | ||
| Wind-down funds | 13 | ||
| Total management fees | 18 | ||
| Performance fees | 4 | ||
| Total asset management fees | $ | 22 | |
The Company hadmanages funds and CLOs that have been determined to be VIEs in which the Company concluded that it is not the primary beneficiary because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests in these entities are reported in “other invested assets” on the consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $1 million as of both December 31, 2022 and 2021) as well as foregone future management and performance fees receivable,fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs. See Note 16, Related Party Transactions, for other receivables from and payables to AssuredIM funds.
9. Fair Value Measurement
Accounting Policy
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 2022, no changes were made to the Company’s valuation models that had or are expected to have a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.
The Company’s valuation methods produce fair values that may not be indicative of net realizable value or future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially 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, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization within the hierarchy 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 includedmore 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.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
There were no transfers from or into Level 3 during the periods presented.
Carried at Fair Value
Fixed-Maturity Securities
The fair value of fixed-maturity securities 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 securities is more subjective when markets are less liquid due to the lack of market-based inputs.
As of December 31, 2022, the Company used models to price 188 securities. All Level 3 securities were priced with the assistance of independent third parties. 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.
Short-Term Investments
Short-term investments that are traded in active markets are classified as Level 1 as their value is based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Other Invested Assets
Other invested assets that are carried at fair value primarily include: (i) equity method investments for which the Company elected the FVO using NAV, as a practical expedient, and, therefore, are excluded from the fair value hierarchy; and (ii) equity securities traded in active markets that are classified as Level 1 in the fair value hierarchy as their value is based on quoted market prices.
Other Assets
Committed Capital Securities
The fair value of CCS, which is reported in “other assets” on the consolidated balance sheets, of $9 million as of December 31, 2019. The Company had 0 unearned revenues as of December 31, 2019.
| Weighted Average Amortization Period as of | As of December 31 | ||||||||
| December 31, 2019 | 2019 | 2018 | |||||||
| (in millions) | |||||||||
| Goodwill (1) | $ | 117 | $ | — | |||||
| Finite-lived intangible assets: | |||||||||
| CLO contracts | 8.8 years | 42 | — | ||||||
| Investment management contracts | 4.5 years | 24 | — | ||||||
| CLO distribution network | 4.8 years | 9 | — | ||||||
| Trade name | 9.8 years | 3 | — | ||||||
| Favorable sublease | 4.2 years | 1 | — | ||||||
| Lease-related intangibles | 7.0 years | 3 | 3 | ||||||
| Finite-lived intangible assets, gross | 7.0 years | 82 | 3 | ||||||
| Accumulated amortization | (5 | ) | (1 | ) | |||||
| Finite-lived intangible assets, net | 77 | 2 | |||||||
| Licenses (indefinite-lived) | 22 | 22 | |||||||
| Total goodwill and other intangible assets | $ | 216 | $ | 24 | |||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
AGC 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.
Supplemental Executive Retirement Plans
The Company classified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the consolidated statements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with finite-lived intangible assets was $3 millionchanges in the fair value reported in the consolidated statements 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 were generally terminated for an amount that approximated 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 year endedCompany’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 December 31, 2019,2022 were such that market prices of the Company’s CDS contracts were not available.
Assumptions and $1 millionInputs
The various inputs and assumptions that are key to the measurement 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 by 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.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The primary sources of information used to determine gross spread include:
•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 2.78% to 5.08% at December 31, 2022 and 0.11% to 1.78% at December 31, 2021.
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 2017. For 2018, amortization expense was de minimis.the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. 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 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.
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. As of December 31, 2019, future annual amortization2022 and December 31, 2021, the use of finite-lived intangible assetsthe minimum premium did not have a significant effect on fair value. 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 lower 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 of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the years 2020 through 2024remaining duration of each contract to the notional value of such contract and thereafter is estimateddiscounting such amounts using the LIBOR corresponding to be:the weighted average remaining life of the contract.
| As of December 31, 2019 | ||||
| Year | (in millions) | |||
| 2020 | $ | 13 | ||
| 2021 | 12 | |||
| 2022 | 11 | |||
| 2023 | 11 | |||
| 2024 | 10 | |||
| Thereafter | 20 | |||
| Total | $ | 77 | ||
The typesCompany’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The primary strengths of entities the Company assesses for consolidation principally include (1) entities whose debt obligationsCompany’s CDS modeling techniques are:
•The model takes into account the insurance subsidiaries insurestransaction 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 its financial guaranty business, and (2) investment vehicles such as collateralized financing entities and investment funds managedwhich to validate the reasonableness of the fair values developed by the asset management subsidiaries, inCompany’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 has a variable interest. For eachenters into derivative contracts, the fair value of these typesits credit derivatives may not reflect the same prices observed in an actively traded market of entities, the Company assesses whether it is the primary beneficiary. If the Company concludescredit derivatives that it is the primary beneficiary, it consolidates the VIE in the Company's financial statements and eliminates the effects of intercompany transactions with the insurance subsidiaries and intercompany transactions between consolidated VIEs.
FG VIEs is included in Note 6, Expected Loss to be Paid.VIEs’ Assets and Liabilities
The fair value of the residential mortgage loan FG VIEs’ assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused bygenerally sensitive to changes in ISCR which is now separately presented in OCI, effective January 1, 2018. The inceptionestimated 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 date change inthe evaluation of collateral credit quality); yields implied by market prices for similar securities; and, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the 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. Interest income and interest expense are derived from the trustee reports and also included in "fair value gains (losses) on FG VIEs." 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.
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Beginning of year | 31 | 32 | 32 | |||||
| Consolidated | 1 | — | 2 | |||||
| Deconsolidated | (3 | ) | (1 | ) | (2 | ) | ||
| Matured | (2 | ) | — | — | ||||
| December 31 | 27 | 31 | 32 | |||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Excess of unpaid principal over fair value of: | |||||||
| FG VIEs' assets | $ | 279 | $ | 350 | |||
| FG VIEs' liabilities with recourse | 21 | 48 | |||||
| FG VIEs' liabilities without recourse | 19 | 28 | |||||
| Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 52 | 71 | |||||
| Unpaid principal for FG VIEs’ liabilities with recourse (1) | 388 | 565 | |||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||
| (in millions) | |||||||||||||||
| With recourse: | |||||||||||||||
| U.S. RMBS first lien | $ | 270 | $ | 297 | $ | 299 | $ | 326 | |||||||
| U.S. RMBS second lien | 70 | 70 | 115 | 137 | |||||||||||
| Manufactured housing | — | — | 53 | 54 | |||||||||||
| Total with recourse | 340 | 367 | 467 | 517 | |||||||||||
| Without recourse | 102 | 102 | 102 | 102 | |||||||||||
| Total | $ | 442 | $ | 469 | $ | 569 | $ | 619 | |||||||
| As of December 31, 2019 | |||
| (in millions) | |||
| Assets: | |||
| Cash and restricted cash (1) | $ | 14 | |
| Corporate loans of CFE, at fair value | 494 | ||
| Corporate loans, at fair value | 47 | ||
| Other assets (2) | 17 | ||
| Total assets | $ | 572 | |
| Liabilities: | |||
| CLO obligations of CFE, at fair value (3) | $ | 481 | |
| Other liabilities | 1 | ||
| Total liabilities | $ | 482 | |
| Year Ended December 31, 2019 | |||
| (in millions) | |||
| Beginning balance | $ | — | |
| Contributions to investment vehicles | 12 | ||
| Distributions from investment vehicles | (4 | ) | |
| Net loss | (1 | ) | |
| December 31, | $ | 7 | |
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Assets | |||||||
| Investment portfolio: | |||||||
| Fixed maturity securities and short-term investments | $ | (39 | ) | $ | (38 | ) | |
| Equity method investments (1) | (77 | ) | — | ||||
| Total investments | (116 | ) | (38 | ) | |||
| Premiums receivable, net of commissions payable | (7 | ) | (9 | ) | |||
| Salvage and subrogation recoverable | (8 | ) | (1 | ) | |||
| FG VIEs’ assets, at fair value | 442 | 569 | |||||
| Assets of consolidated investment vehicles (1) | 572 | — | |||||
| Total assets | $ | 883 | $ | 521 | |||
| Liabilities and shareholders’ equity | |||||||
| Unearned premium reserve | $ | (39 | ) | $ | (51 | ) | |
| Loss and LAE reserve | (41 | ) | (48 | ) | |||
| FG VIEs’ liabilities with recourse, at fair value | 367 | 517 | |||||
| FG VIEs’ liabilities without recourse, at fair value | 102 | 102 | |||||
| Liabilities of consolidated investment vehicles (1) | 482 | — | |||||
| Total liabilities | 871 | 520 | |||||
| Redeemable noncontrolling interests in consolidated investment vehicles (1) | 7 | — | |||||
| Retained earnings | 34 | 34 | |||||
| Accumulated other comprehensive income | (35 | ) | (33 | ) | |||
| Total shareholders’ equity attributable to Assured Guaranty Ltd. | (1 | ) | 1 | ||||
| Nonredeemable noncontrolling interests (1) | 6 | — | |||||
| Total shareholders’ equity | 5 | 1 | |||||
| Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 883 | $ | 521 | |||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Net earned premiums | $ | (18 | ) | $ | (12 | ) | $ | (15 | ) | ||
| Net investment income | (4 | ) | (4 | ) | (5 | ) | |||||
| Fair value gains (losses) on FG VIEs (1) | 42 | 14 | 30 | ||||||||
| Other income (loss) (2) | (3 | ) | — | — | |||||||
| Loss and LAE | (20 | ) | (3 | ) | 7 | ||||||
| Equity in net earnings of investees | 2 | — | — | ||||||||
| Effect on income before tax | (1 | ) | (5 | ) | 17 | ||||||
| Less: Tax provision (benefit) | — | (1 | ) | 6 | |||||||
| Effect on net income (loss) | (1 | ) | (4 | ) | 11 | ||||||
| Effect on redeemable noncontrolling interests | (1 | ) | — | — | |||||||
| Effect on net income (loss) attributable to AGL | $ | — | $ | (4 | ) | $ | 11 | ||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Effect on cash flows from operating activities | $ | (254 | ) | $ | 11 | $ | 19 | ||||
| Effect on cash flows from investing activities | 259 | 105 | 138 | ||||||||
| Effect on cash flows from financing activities | 9 | (116 | ) | (157 | ) | ||||||
| Total effect on cash flows | $ | 14 | $ | — | $ | — | |||||
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 was(other than the liabilities of the Puerto Rico Trusts) 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 debt service is also taken into account. The liabilities of the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries’ financial guaranty policies.
Significant changes to any of the inputs described above could materially change the timing of expected losses within an 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,
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 FG VIEs’ assets resulting from improvementCompany’s insurance and an increase in the underlying collateral. The change in fair value of the Company’s FG VIEs’ liabilities with recourse.
Assets and Liabilities of CIVs
The consolidated CLOs are CFEs, and therefore the debt issued by, and loans held by, the consolidated CLOs are measured under the FVO using the CFE practical expedient. Loans in CLOs are priced using a loan pricing service which aggregates quotes from loan market participants. The loans are all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt is measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) 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 underlying financial liabilities to the beneficial interests retained by the Company).
Prior to securitization, when loans are warehoused in an investment vehicles wasvehicle, such vehicle is not considered a CFE. The Company has elected the FVO to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO.
Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has 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. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; (vi) and/or evaluating information provided by management of these investments. 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. Investments in private equity funds are generally valued utilizing NAV.
Level 2 assets in the CIVs include assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the FVO), securities sold short and derivative liabilities. Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of $3the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2022
| Fair Value Hierarchy | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale: | |||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | — | $ | 3,347 | $ | 47 | $ | 3,394 | |||||||||||||||
| U.S. government and agencies | — | 111 | — | 111 | |||||||||||||||||||
| Corporate securities | — | 2,084 | — | 2,084 | |||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | — | 161 | 179 | 340 | |||||||||||||||||||
| CMBS | — | 271 | — | 271 | |||||||||||||||||||
| Asset-backed securities | — | 27 | 794 | 821 | |||||||||||||||||||
| Non-U.S. government securities | — | 98 | — | 98 | |||||||||||||||||||
| Total fixed-maturity securities, available-for-sale | — | 6,099 | 1,020 | 7,119 | |||||||||||||||||||
| Fixed-maturity securities, trading | — | 303 | — | 303 | |||||||||||||||||||
| Short-term investments | 771 | 39 | — | 810 | |||||||||||||||||||
| Other invested assets (1) | 2 | — | 5 | 7 | |||||||||||||||||||
| FG VIEs’ assets | — | 209 | 204 | 413 | |||||||||||||||||||
| Assets of CIVs (2): | |||||||||||||||||||||||
| Fund investments: | |||||||||||||||||||||||
| Equity securities and warrants | — | 5 | 297 | 302 | |||||||||||||||||||
| Corporate securities | — | — | 96 | 96 | |||||||||||||||||||
| Structured products | — | 82 | 46 | 128 | |||||||||||||||||||
| CLOs and CLO warehouse assets: | |||||||||||||||||||||||
| Loans | — | 4,570 | — | 4,570 | |||||||||||||||||||
| Short-term investments | 135 | — | — | 135 | |||||||||||||||||||
| Total assets of CIVs | 135 | 4,657 | 439 | 5,231 | |||||||||||||||||||
| Other assets | 54 | 46 | 48 | 148 | |||||||||||||||||||
| Total assets carried at fair value | $ | 962 | $ | 11,353 | $ | 1,716 | $ | 14,031 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Credit derivative liabilities | $ | — | $ | — | $ | 163 | $ | 163 | |||||||||||||||
| FG VIEs’ liabilities (3) | — | — | 715 | 715 | |||||||||||||||||||
| Liabilities of CIVs: | |||||||||||||||||||||||
| CLO obligations of CFEs | — | — | 4,090 | 4,090 | |||||||||||||||||||
| Warehouse financing debt | — | 277 | 36 | 313 | |||||||||||||||||||
| Securitized borrowing | — | — | 28 | 28 | |||||||||||||||||||
| Total liabilities of CIVs | — | 277 | 4,154 | 4,431 | |||||||||||||||||||
| Other liabilities | — | 7 | — | 7 | |||||||||||||||||||
| Total liabilities carried at fair value | $ | — | $ | 284 | $ | 5,032 | $ | 5,316 | |||||||||||||||
209
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2021
| Fair Value Hierarchy | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale: | |||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | — | $ | 3,588 | $ | 72 | $ | 3,660 | |||||||||||||||
| U.S. government and agencies | — | 128 | — | 128 | |||||||||||||||||||
| Corporate securities | — | 2,605 | — | 2,605 | |||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | — | 221 | 216 | 437 | |||||||||||||||||||
| CMBS | — | 346 | — | 346 | |||||||||||||||||||
| Asset-backed securities | — | 27 | 863 | 890 | |||||||||||||||||||
| Non-U.S. government securities | — | 136 | — | 136 | |||||||||||||||||||
| Total fixed-maturity securities, available-for-sale | — | 7,051 | 1,151 | 8,202 | |||||||||||||||||||
| Short-term investments | 1,225 | — | — | 1,225 | |||||||||||||||||||
| Other invested assets (1) | 6 | — | 6 | 12 | |||||||||||||||||||
| FG VIEs’ assets | — | — | 260 | 260 | |||||||||||||||||||
| Assets of CIVs (2): | |||||||||||||||||||||||
| Fund investments: | |||||||||||||||||||||||
| Equity securities and warrants | — | 7 | 239 | 246 | |||||||||||||||||||
| Obligations of state and political subdivisions | — | 101 | — | 101 | |||||||||||||||||||
| Corporate securities | — | 7 | 91 | 98 | |||||||||||||||||||
| Structured products | — | 62 | — | 62 | |||||||||||||||||||
| CLOs and CLO warehouse assets: | |||||||||||||||||||||||
| Loans | — | 4,244 | — | 4,244 | |||||||||||||||||||
| Short-term investments | 145 | — | — | 145 | |||||||||||||||||||
| Total assets of CIVs | 145 | 4,421 | 330 | 4,896 | |||||||||||||||||||
| Other assets | 53 | 54 | 25 | 132 | |||||||||||||||||||
| Total assets carried at fair value | $ | 1,429 | $ | 11,526 | $ | 1,772 | $ | 14,727 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Credit derivative liabilities | $ | — | $ | — | $ | 156 | $ | 156 | |||||||||||||||
| FG VIEs’ liabilities (3) | — | — | 289 | 289 | |||||||||||||||||||
| Liabilities of CIVs: | |||||||||||||||||||||||
| CLO obligations of CFEs | — | — | 3,665 | 3,665 | |||||||||||||||||||
| Warehouse financing debt | — | 103 | 23 | 126 | |||||||||||||||||||
| Securities sold short | — | 41 | — | 41 | |||||||||||||||||||
| Securitized borrowing | — | — | 17 | 17 | |||||||||||||||||||
| Total liabilities of CIVs | — | 144 | 3,705 | 3,849 | |||||||||||||||||||
| Other liabilities | — | 1 | — | 1 | |||||||||||||||||||
| Total liabilities carried at fair value | $ | — | $ | 145 | $ | 4,150 | $ | 4,295 | |||||||||||||||
____________________
(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $23 million and $19 million of equity method investments measured at fair value under the FVO using the NAV as a practical expedient as of December 31, 2022 and December 31, 2021, respectively.
(2) Excludes $5 million and $6 millionas of December 31, 2022 and December 31, 2021, respectively, in investments in AssuredIM Funds for which the yearCompany records a 100% NCI. The consolidation of these funds results in a gross up of assets and NCI on the consolidated financial statements; however, it results in no economic equity or net income attributable to AGL. As of December 31,
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
2022, excludes a $127 million investment in the AssuredIM municipal relative value master fund, which is measured using NAV as a practical expedient.
(3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
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 the years ended December 31, 2019.2022 and 2021.
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2022
| Fixed-Maturity Securities, Available-for-Sale | Assets of CIVs | |||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | RMBS | Asset- Backed Securities | FG VIEs’ Assets | Equity Securities and Warrants | Corporate Securities | Structured Products | Other (7) | |||||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | 72 | $ | 216 | $ | 863 | $ | 260 | $ | 239 | $ | 91 | $ | — | $ | 27 | ||||||||||||||||||||||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 1 | (1) | 16 | (1) | 5 | (1) | (3) | (2) | 1 | (4) | 2 | (4) | (5) | (4) | 24 | (3) | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (12) | (36) | (47) | — | — | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | 22 | 43 | — | 73 | 16 | 52 | — | ||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (13) | — | (16) | (13) | (21) | — | ||||||||||||||||||||||||||||||||||||||||||
| Settlements | (14) | (39) | (57) | (60) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Consolidations | — | — | — | 22 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation | — | — | — | (15) | — | — | 20 | — | ||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2022 | $ | 47 | $ | 179 | $ | 794 | $ | 204 | $ | 297 | $ | 96 | $ | 46 | $ | 50 | ||||||||||||||||||||||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2022 included in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | (3) | (2) | $ | (8) | (4) | $ | 1 | (4) | $ | (4) | (4) | $ | 24 | (3) | |||||||||||||||||||||||||||||||||||
| OCI | $ | (12) | $ | (32) | $ | (45) | $ | (1) | ||||||||||||||||||||||||||||||||||||||||||
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2022
| Credit Derivative Asset (Liability), net (5) | FG VIEs’ (Liabilities) (8) | (Liabilities) of CIVs | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | (154) | $ | (289) | $ | (3,705) | ||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (11) | (6) | 34 | (2) | 178 | (4) | ||||||||||||||
| Other comprehensive income (loss) | — | (3) | 42 | |||||||||||||||||
| Issuances | — | — | (1,421) | |||||||||||||||||
| Sales | — | — | 2 | |||||||||||||||||
| Settlements | 3 | 99 | 402 | |||||||||||||||||
| Consolidations | — | (571) | (26) | |||||||||||||||||
| Deconsolidations | — | 15 | 374 | |||||||||||||||||
| Fair value as of December 31, 2022 | $ | (162) | $ | (715) | $ | (4,154) | ||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2022 included in: | ||||||||||||||||||||
| Earnings | $ | (11) | (6) | $ | 59 | (2) | $ | 217 | (4) | |||||||||||
| OCI | $ | (3) | $ | 42 | ||||||||||||||||
211
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| Fixed-Maturity Securities | Assets of CIVs | |||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | Corporate Securities | RMBS | Asset- Backed Securities | FG VIEs’ Assets | Equity Securities and Warrants | Corporate Securities | Other (7) | |||||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2020 | $ | 101 | $ | 30 | $ | 255 | $ | 940 | $ | 296 | $ | 2 | $ | — | $ | 54 | ||||||||||||||||||||||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 23 | (1) | 2 | (1) | 16 | (1) | 18 | (1) | 26 | (2) | 35 | (4) | — | (27) | (3) | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (5) | 16 | (1) | (5) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | — | — | 344 | — | 56 | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Sales | (44) | (48) | — | (142) | — | (28) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Settlements | (3) | — | (54) | (292) | (62) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Consolidation | — | — | — | — | — | 174 | 91 | — | ||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | 72 | $ | — | $ | 216 | $ | 863 | $ | 260 | $ | 239 | $ | 91 | $ | 27 | ||||||||||||||||||||||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | 27 | (2) | $ | (2) | (4) | $ | — | $ | (28) | (3) | |||||||||||||||||||||||||||||||||||||||
| OCI | $ | 1 | $ | — | $ | (1) | $ | (6) | ||||||||||||||||||||||||||||||||||||||||||
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| Credit Derivative Asset (Liability), net (5) | FG VIEs’ (Liabilities) (8) | (Liabilities) of CIVs | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Fair value as of December 31, 2020 | $ | (100) | $ | (333) | $ | (1,227) | ||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (58) | (6) | (8) | (2) | 15 | (4) | ||||||||||||||
| Other comprehensive income (loss) | — | (1) | — | |||||||||||||||||
| Issuances | — | — | (3,367) | |||||||||||||||||
| Settlements | 4 | 53 | 891 | |||||||||||||||||
| Consolidations | — | — | (17) | |||||||||||||||||
| Fair value as of December 31, 2021 | $ | (154) | $ | (289) | $ | (3,705) | ||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | ||||||||||||||||||||
| Earnings | $ | (74) | (6) | $ | (6) | (2) | $ | (2) | (4) | |||||||||||
| OCI | $ | (1) | ||||||||||||||||||
(1)Included in “net realized investment gains (losses)” and “net investment income”.
(2)Included in “fair value gains (losses) on FG VIEs”.
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss)”.
(4)Reported in “fair value gains (losses) on CIVs”.
(5)Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the consolidated balance sheets based on net exposure by transaction.
(6)Reported in “fair value gains (losses) on credit derivatives”.
(7)Includes CCS and other invested assets.
(8)Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse.
212
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2022
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Investments (2): | ||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale (1): | ||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 47 | Yield | 7.4 | % | - | 13.5% | 9.4% | ||||||||||||||||||||||||
| RMBS | 179 | CPR | 3.8 | % | - | 16.1% | 8.2% | |||||||||||||||||||||||||
| CDR | 1.5 | % | - | 12.0% | 5.9% | |||||||||||||||||||||||||||
| Loss severity | 50.0 | % | - | 125.0% | 82.5% | |||||||||||||||||||||||||||
| Yield | 7.5 | % | - | 11.3% | 9.0% | |||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||
| Life insurance transactions | 342 | Yield | 11.3% | |||||||||||||||||||||||||||||
| CLOs | 428 | Discount Margin | 1.8 | % | - | 4.1% | 3.0% | |||||||||||||||||||||||||
| Others | 24 | Yield | 7.4 | % | - | 12.9% | 12.8% | |||||||||||||||||||||||||
| FG VIEs’ assets (1) | 204 | CPR | 0.9 | % | - | 21.9% | 12.9% | |||||||||||||||||||||||||
| CDR | 1.3 | % | - | 41.0% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.0% | |||||||||||||||||||||||||||
| Yield | 6.6 | % | - | 10.9% | 7.5% | |||||||||||||||||||||||||||
| Assets of CIVs (3): | ||||||||||||||||||||||||||||||||
| Equity securities and warrants | 297 | Yield | 10.0% | |||||||||||||||||||||||||||||
| Discount rate | 19.8 | % | - | 25.1% | 22.7% | |||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 1.05x | - | 1.10x | 1.08x | ||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA (6) | 2.50x | - | 11.00x | 10.25x | ||||||||||||||||||||||||||||
| Market multiple-price to book | 1.15x | |||||||||||||||||||||||||||||||
| Market multiple-price to earnings | 4.50x | |||||||||||||||||||||||||||||||
| Terminal growth rate | 3.0% | - | 4.0% | 3.5% | ||||||||||||||||||||||||||||
| Exit multiple -EBITDA | 8.00x | - | 12.00x | 10.53x | ||||||||||||||||||||||||||||
| Exit multiple-price to book | 1.30x | |||||||||||||||||||||||||||||||
| Exit multiple-price to earnings | 5.50x | |||||||||||||||||||||||||||||||
| Cost | 1.00x | |||||||||||||||||||||||||||||||
| Corporate securities | 96 | Discount rate | 20.8 | % | - | 23.8% | 21.7% | |||||||||||||||||||||||||
| Yield | 16.3% | |||||||||||||||||||||||||||||||
| Exit multiple-EBITDA | 8.00x | |||||||||||||||||||||||||||||||
| Cost | 1.00x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 2.50x | - | 2.75x | 2.63x | ||||||||||||||||||||||||||||
| Structured products | 46 | Yield | 12.8 | % | - | 37.1% | 18.9% | |||||||||||||||||||||||||
| Other assets (1) | 47 | Implied Yield | 7.7 | % | - | 8.4% | 8.1% | |||||||||||||||||||||||||
| Term (years) | 10 years | |||||||||||||||||||||||||||||||
213
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Credit derivative liabilities, net (1) | (162) | Hedge cost (in bps) | 11.5 | % | - | 25.2% | 15.7% | |||||||||||||||||||||||||
| Bank profit (in bps) | 51.0 | - | 270.5 | 109.4 | ||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA | ||||||||||||||||||||||||||||
| FG VIEs’ liabilities (1) | (715) | CPR | 0.9 | % | - | 21.9% | 6.3% | |||||||||||||||||||||||||
| CDR | 1.3 | % | - | 41.0% | 3.7% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 39.9% | |||||||||||||||||||||||||||
| Yield | 4.8 | % | - | 10.9% | 5.9% | |||||||||||||||||||||||||||
| Liabilities of CIVs (1): | ||||||||||||||||||||||||||||||||
| CLO obligations of CFEs (5) | (4,090) | Yield | 3.0 | % | - | 27.4% | 5.5% | |||||||||||||||||||||||||
| Warehouse financing debt | (36) | Yield | 11.7 | % | - | 16.9% | 12.9% | |||||||||||||||||||||||||
| Securitized borrowing | (28) | Discount rate | 20.9% | |||||||||||||||||||||||||||||
| Terminal growth rate | 3.0% | |||||||||||||||||||||||||||||||
| Exit multiple-EBITDA | 11.00x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 10.00x | - | 11.00x | 10.50x | ||||||||||||||||||||||||||||
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $5 million.
(3) The primary valuation technique uses the income and/or market approach; the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
(6) Earnings before interest, taxes, depreciation, and amortization (EBITDA).
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Notes to Consolidated Financial Statements, Continued
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2021
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Investments (2): | ||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale (1): | ||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 72 | Yield | 4.4 | % | - | 24.5% | 6.2% | ||||||||||||||||||||||||
| RMBS | 216 | CPR | 0.0 | % | 22.7% | 10.4% | ||||||||||||||||||||||||||
| CDR | 1.4 | % | - | 12.0% | 5.9% | |||||||||||||||||||||||||||
| Loss severity | 50.0 | % | - | 125.0% | 84.9% | |||||||||||||||||||||||||||
| Yield | 3.8 | % | - | 5.6% | 4.5% | |||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||
| Life insurance transactions | 367 | Yield | 5.0% | |||||||||||||||||||||||||||||
| CLOs | 458 | Discount margin | 0.0 | % | - | 2.9% | 1.8% | |||||||||||||||||||||||||
| Others | 38 | Yield | 3.2 | % | - | 7.9% | 7.9% | |||||||||||||||||||||||||
| FG VIEs’ assets (1) | 260 | CPR | 0.9 | % | - | 24.5% | 13.3% | |||||||||||||||||||||||||
| CDR | 1.4 | % | - | 26.9% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.6% | |||||||||||||||||||||||||||
| Yield | 1.4 | % | - | 8.0% | 4.6% | |||||||||||||||||||||||||||
| Assets of CIVs (3): | ||||||||||||||||||||||||||||||||
| Equity securities and warrants | 239 | Yield | 7.7% | |||||||||||||||||||||||||||||
| Discount rate | 14.7% | - | 23.9% | 21.6% | ||||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 1.10x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 3.00x | - | 10.50x | 8.95x | ||||||||||||||||||||||||||||
| Market multiple-price to book | 1.85x | |||||||||||||||||||||||||||||||
| Corporate securities | 91 | Discount rate | 14.7 | % | - | 21.4% | 17.8% | |||||||||||||||||||||||||
| Yield | 16.4% | |||||||||||||||||||||||||||||||
| Other assets (1) | 23 | Implied Yield | 2.7 | % | - | 3.3% | 3.0% | |||||||||||||||||||||||||
| Term (years) | 10 years | |||||||||||||||||||||||||||||||
| Credit derivative liabilities, net (1) | (154) | Year 1 loss estimates | 0.0 | % | - | 85.8% | 0.1% | |||||||||||||||||||||||||
| Hedge cost (in bps) | 8.0 | - | 37.1 | 12.6 | ||||||||||||||||||||||||||||
| Bank profit (in bps) | 0.0 | - | 187.8 | 67.9 | ||||||||||||||||||||||||||||
| Internal floor (in bps) | 8.8 | |||||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA | ||||||||||||||||||||||||||||
| FG VIEs’ liabilities (1) | (289) | CPR | 0.9 | % | - | 24.5% | 13.3% | |||||||||||||||||||||||||
| CDR | 1.4 | % | - | 26.9% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.6% | |||||||||||||||||||||||||||
| Yield | 1.4 | % | - | 8.0% | 3.7% | |||||||||||||||||||||||||||
| Liabilities of CIVs (1): | ||||||||||||||||||||||||||||||||
| CLO obligations of CFEs (5) | (3,665) | Yield | 1.6 | % | - | 13.7% | 2.1% | |||||||||||||||||||||||||
| Warehouse financing debt | (23) | Yield | 12.6 | % | - | 16.0% | 13.8% | |||||||||||||||||||||||||
| Securitized borrowing | (17) | Discount rate | 23.9% | |||||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 10.50x | |||||||||||||||||||||||||||||||
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $6 million.
(3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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, 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 the U.S. Holding Companies 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.
Assets and Liabilities of CIVs
Cash equivalents are recorded at cost which approximates fair value. 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 represents balances on a net-by counterparty basis on the consolidated balance sheets 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 securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy.
Other Liabilities
Other liabilities in the table below include $35 million and $37 million as of December 31, 2022 and December 31, 2021, respectively, of AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain BlueMountain European CLOs, which was required to comply with its European risk retention obligations. The maturity dates are in 2034 and 2035. AssuredIM’s obligation under the master repurchase agreement is not guaranteed by any Assured Guaranty insurance or holding companies.
The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value of Financial Instruments Not Carried at Fair Value
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets (liabilities): | |||||||||||||||||||||||
| Assets of CIVs (1) | $ | 46 | $ | 46 | $ | 171 | $ | 171 | |||||||||||||||
| Other assets (including other invested assets) (2) | 92 | 93 | 134 | 135 | |||||||||||||||||||
| Financial guaranty insurance contracts (3) | (2,335) | (986) | (2,394) | (2,315) | |||||||||||||||||||
| Long-term debt | (1,675) | (1,477) | (1,673) | (1,832) | |||||||||||||||||||
| Liabilities of CIVs (4) | (170) | (170) | (586) | (586) | |||||||||||||||||||
| Other liabilities (5) | (43) | (43) | (45) | (45) | |||||||||||||||||||
____________________
(1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2) Primarily includes accrued interest, receivable for an unsettled sale of a portion of the Puerto Rico salvage and subrogation recoverable, management fees receivables and receivables for securities sold, for which carrying value approximates fair value.
(3) 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.
(4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value.
(5) Primarily includes accrued interest, repurchase agreement liability and payables for securities purchased, for which carrying value approximates fair value.
10. Asset Management Fees
The Company receives a management fee, as well as performance fee, incentive allocation or carried interest (collectively referred to as performance fees) in exchange for providing investment advisory services to manage investment funds and CLOs. The annual management fees are typically based on a percentage of the value of the client’s net assets under management, and are generally as follows:
•Depending on the investment strategy, the management fee charged is a range of up to 2.00% per annum calculated on either the beginning of the month or quarter, or month-end NAV or other relevant basis (e.g., committed capital) of the respective funds.
•For the Company’s management and/or servicing of the AssuredIM CLOs, the Company receives, generally 0.25% to 0.50% (combined senior investment management fee and subordinated investment management fee) per annum based on total adjusted par outstanding. The portion of these fees that pertains to the investment by AssuredIM wind-down funds is typically rebated to such AssuredIM Funds.
In accordance with the investment management agreements, and by serving as the general partner, managing member or managing general partner, the Company also receives performance fees. Performance fee revenues are generated on certain management contracts when certain minimum rates of return,( i.e., performance hurdles), are exceeded. Performance fee revenue may fluctuate from period to period and may not correlate with general market changes. Annual performance fee rates generally range from 10% to 20% of the net profits in excess of the high-water mark for the respective fund.
For the Company’s management or servicing of the AssuredIM CLOs, the Company generally receives a performance fee of 20% per annum of the remaining interest proceeds and principal proceeds after a performance hurdle is exceeded. The portion of these fees that pertains to the investment by AssuredIM wind-down funds is typically rebated to such AssuredIM Funds.
The general partner has the right, in its sole discretion, to require certain AssuredIM Funds to distribute to the general partner an amount equal to its presumed tax liability attributable to the allocation of estimated taxable income relating to performance fees with respect to such fiscal year and are contractually not subject to clawback. The general partner received tax distributions in 2022 related to its presumed tax liability in 2022 and 2021, and there were no tax distributions for 2020.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company may credit, reduce or waive the management fee and/or the performance fee with respect to any investor and/or affiliate. Certain current and former employees of the Company who have investments in the AssuredIM Funds may not be charged any management fees or performance fee.
Accounting Policy
Management, CLO and performance fees earned by AssuredIM are accounted for as contracts with customers. An entity may recognize revenue when the contractual performance criteria have been met and only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. Given the uniqueness of each fee arrangement, performance fee contractual provisions are evaluated on an individual basis to determine the timing of revenue recognition.
Components of Asset Management Fees
The following table presents the sources of asset management fees on a consolidated basis.
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 obligations under the original insured financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of those VIEsthat VIE in the line items that most accurately reflect the nature of the items,such assets and liabilities, as opposed to within the FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $91$86 million and liabilities of $12 million as of December 31, 20192022 and assets of $87$96 million and liabilities of $21$11 million as of December 31, 2018,2021, primarily recordedreported in the investment portfolio“investments” and credit“credit derivative liabilitiesliabilities” on the consolidated balance sheets.
Non-Consolidated VIEs
As described in Note 5,3, Outstanding Insurance Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 1815 thousand policies monitored as of December 31, 2019,2022, approximately 1614 thousand policies are not within the
202
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
scope of ASCFASB 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. AsWith respect to structured finance and other FG VIEs, as of December 31, 20192022 and 2018,2021, the Company identified 9085 and 11069 policies, respectively, that contain provisions and experienced events that may trigger consolidation. BasedSee above for information on VIEs that were consolidated based on management’s assessment of these potential triggers or events, the Company consolidated 27 and 31 FG VIEs as of December 31, 2019 and December 31, 2018, respectively. 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 5, Outstanding Insurance Exposure.
The Company manages funds and CLOs that have been determined to be a VIE or voting interest entity,VIEs in which the Company concluded that it held no variable interests, through either equity interests held, debt interests held or decision-making fees received byis not the Assured Investment Management subsidiaries.primary beneficiary because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests in these entities are reported in “other invested assets” on the consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $1 million as of both December 31, 2022 and 2021) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs. See Note 16, Related Party Transactions, for other receivables from and payables to AssuredIM funds.
9. Fair Value Measurement
Accounting Policy
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 2022, no changes were made to the Company’s valuation models that had or are expected to have a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.
The Company’s valuation methods produce fair values that may not be indicative of net realizable value or future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially 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, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization within the hierarchy 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.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
There were no transfers from or into Level 3 during the periods presented.
Carried at Fair Value
Fixed-Maturity Securities
The fair value of fixed-maturity securities 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 securities is more subjective when markets are less liquid due to the lack of market-based inputs.
As of December 31, 2022, the Company used models to price 188 securities. All Level 3 securities were priced with the assistance of independent third parties. 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.
Short-Term Investments
Short-term investments that are traded in active markets are classified as Level 1 as their value is based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Other Invested Assets
Other invested assets that are carried at fair value primarily include: (i) equity method investments for which the Company elected the FVO using NAV, as a practical expedient, and, therefore, are excluded from the fair value hierarchy; and (ii) equity securities traded in active markets that are classified as Level 1 in the fair value hierarchy as their value is based on quoted market prices.
Other Assets
Committed Capital Securities
The fair value of CCS, which is reported in “other assets” on the 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 (see Note 12, Long-Term Debt and Credit Facilities). The change in fair value of the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and
204
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
AGC 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.
Supplemental Executive Retirement Plans
The Company classified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the consolidated statements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment 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 in the fair value reported in the consolidated statements 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 were generally terminated for an amount that approximated 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 December 31, 2022 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 measurement 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 by 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.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The primary sources of information used to determine gross spread include:
•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 2.78% to 5.08% at December 31, 2022 and 0.11% to 1.78% at December 31, 2021.
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. 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 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.
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. As of December 31, 2022 and December 31, 2021, the use of the minimum premium did not have a significant effect on fair value. 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 lower 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 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 such contract and discounting such amounts using 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.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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.
FG VIEs’ Assets and Liabilities
FG VIEs include Puerto Rico Trusts, structured finance and other FG VIEs. Assets in the Puerto Rico Trusts, which consist of New Recovery Bonds and CVIs, are classified as Level 2. The Company elected the FVO for the Puerto Rico Trusts’ liabilities and they are classified as Level 3. See “ - Fixed Maturity Securities” above for a description of the fair value methodology for the New Recovery Bonds and CVIs in the Puerto Rico Trusts, which represent the majority of the assets in the Puerto Rico Trusts. For structured finance and other FG VIEs’ assets and liabilities the Company elected the FVO and they are classified as Level 3. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. The Company records the fair value of structured finance and other FG VIEs’ assets and liabilities based on modeled prices. The Company records the fair value of Puerto Rico Trusts’ liabilities based on quoted prices.
The fair value of the residential mortgage loan 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, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the fair 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 (other than the liabilities of the Puerto Rico Trusts) 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 debt service is also taken into account. The liabilities of the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries’ financial guaranty policies.
Significant changes to any of the inputs described above could materially change the timing of expected losses within an 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,
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 CIVs
The consolidated CLOs are CFEs, and therefore the debt issued by, and loans held by, the consolidated CLOs are measured under the FVO using the CFE practical expedient. Loans in CLOs are priced using a loan pricing service which aggregates quotes from loan market participants. The loans are all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt is measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) 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 underlying financial liabilities to the beneficial interests retained by the Company).
Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE. The Company has elected the FVO to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO.
Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has 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. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; (vi) and/or evaluating information provided by management of these investments. 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. Investments in private equity funds are generally valued utilizing NAV.
Level 2 assets in the CIVs include assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the FVO), securities sold short and derivative liabilities. Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.
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Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2022
| Fair Value Hierarchy | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale: | |||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | — | $ | 3,347 | $ | 47 | $ | 3,394 | |||||||||||||||
| U.S. government and agencies | — | 111 | — | 111 | |||||||||||||||||||
| Corporate securities | — | 2,084 | — | 2,084 | |||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | — | 161 | 179 | 340 | |||||||||||||||||||
| CMBS | — | 271 | — | 271 | |||||||||||||||||||
| Asset-backed securities | — | 27 | 794 | 821 | |||||||||||||||||||
| Non-U.S. government securities | — | 98 | — | 98 | |||||||||||||||||||
| Total fixed-maturity securities, available-for-sale | — | 6,099 | 1,020 | 7,119 | |||||||||||||||||||
| Fixed-maturity securities, trading | — | 303 | — | 303 | |||||||||||||||||||
| Short-term investments | 771 | 39 | — | 810 | |||||||||||||||||||
| Other invested assets (1) | 2 | — | 5 | 7 | |||||||||||||||||||
| FG VIEs’ assets | — | 209 | 204 | 413 | |||||||||||||||||||
| Assets of CIVs (2): | |||||||||||||||||||||||
| Fund investments: | |||||||||||||||||||||||
| Equity securities and warrants | — | 5 | 297 | 302 | |||||||||||||||||||
| Corporate securities | — | — | 96 | 96 | |||||||||||||||||||
| Structured products | — | 82 | 46 | 128 | |||||||||||||||||||
| CLOs and CLO warehouse assets: | |||||||||||||||||||||||
| Loans | — | 4,570 | — | 4,570 | |||||||||||||||||||
| Short-term investments | 135 | — | — | 135 | |||||||||||||||||||
| Total assets of CIVs | 135 | 4,657 | 439 | 5,231 | |||||||||||||||||||
| Other assets | 54 | 46 | 48 | 148 | |||||||||||||||||||
| Total assets carried at fair value | $ | 962 | $ | 11,353 | $ | 1,716 | $ | 14,031 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Credit derivative liabilities | $ | — | $ | — | $ | 163 | $ | 163 | |||||||||||||||
| FG VIEs’ liabilities (3) | — | — | 715 | 715 | |||||||||||||||||||
| Liabilities of CIVs: | |||||||||||||||||||||||
| CLO obligations of CFEs | — | — | 4,090 | 4,090 | |||||||||||||||||||
| Warehouse financing debt | — | 277 | 36 | 313 | |||||||||||||||||||
| Securitized borrowing | — | — | 28 | 28 | |||||||||||||||||||
| Total liabilities of CIVs | — | 277 | 4,154 | 4,431 | |||||||||||||||||||
| Other liabilities | — | 7 | — | 7 | |||||||||||||||||||
| Total liabilities carried at fair value | $ | — | $ | 284 | $ | 5,032 | $ | 5,316 | |||||||||||||||
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Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2021
| Fair Value Hierarchy | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale: | |||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | — | $ | 3,588 | $ | 72 | $ | 3,660 | |||||||||||||||
| U.S. government and agencies | — | 128 | — | 128 | |||||||||||||||||||
| Corporate securities | — | 2,605 | — | 2,605 | |||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| RMBS | — | 221 | 216 | 437 | |||||||||||||||||||
| CMBS | — | 346 | — | 346 | |||||||||||||||||||
| Asset-backed securities | — | 27 | 863 | 890 | |||||||||||||||||||
| Non-U.S. government securities | — | 136 | — | 136 | |||||||||||||||||||
| Total fixed-maturity securities, available-for-sale | — | 7,051 | 1,151 | 8,202 | |||||||||||||||||||
| Short-term investments | 1,225 | — | — | 1,225 | |||||||||||||||||||
| Other invested assets (1) | 6 | — | 6 | 12 | |||||||||||||||||||
| FG VIEs’ assets | — | — | 260 | 260 | |||||||||||||||||||
| Assets of CIVs (2): | |||||||||||||||||||||||
| Fund investments: | |||||||||||||||||||||||
| Equity securities and warrants | — | 7 | 239 | 246 | |||||||||||||||||||
| Obligations of state and political subdivisions | — | 101 | — | 101 | |||||||||||||||||||
| Corporate securities | — | 7 | 91 | 98 | |||||||||||||||||||
| Structured products | — | 62 | — | 62 | |||||||||||||||||||
| CLOs and CLO warehouse assets: | |||||||||||||||||||||||
| Loans | — | 4,244 | — | 4,244 | |||||||||||||||||||
| Short-term investments | 145 | — | — | 145 | |||||||||||||||||||
| Total assets of CIVs | 145 | 4,421 | 330 | 4,896 | |||||||||||||||||||
| Other assets | 53 | 54 | 25 | 132 | |||||||||||||||||||
| Total assets carried at fair value | $ | 1,429 | $ | 11,526 | $ | 1,772 | $ | 14,727 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Credit derivative liabilities | $ | — | $ | — | $ | 156 | $ | 156 | |||||||||||||||
| FG VIEs’ liabilities (3) | — | — | 289 | 289 | |||||||||||||||||||
| Liabilities of CIVs: | |||||||||||||||||||||||
| CLO obligations of CFEs | — | — | 3,665 | 3,665 | |||||||||||||||||||
| Warehouse financing debt | — | 103 | 23 | 126 | |||||||||||||||||||
| Securities sold short | — | 41 | — | 41 | |||||||||||||||||||
| Securitized borrowing | — | — | 17 | 17 | |||||||||||||||||||
| Total liabilities of CIVs | — | 144 | 3,705 | 3,849 | |||||||||||||||||||
| Other liabilities | — | 1 | — | 1 | |||||||||||||||||||
| Total liabilities carried at fair value | $ | — | $ | 145 | $ | 4,150 | $ | 4,295 | |||||||||||||||
____________________
(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $23 million and $19 million of equity method investments measured at fair value under the FVO using the NAV as a practical expedient as of December 31, 2022 and December 31, 2021, respectively.
(2) Excludes $5 million and $6 millionas of December 31, 2022 and December 31, 2021, respectively, in investments in AssuredIM Funds for which the Company records a 100% NCI. The consolidation of these funds results in a gross up of assets and NCI on the consolidated financial statements; however, it results in no economic equity or net income attributable to AGL. As of December 31,
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Notes to Consolidated Financial Statements, Continued
2022, excludes a $127 million investment in the AssuredIM municipal relative value master fund, which is measured using NAV as a practical expedient.
(3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
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 the years ended December 31, 2022 and 2021.
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2022
| Fixed-Maturity Securities, Available-for-Sale | Assets of CIVs | |||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | RMBS | Asset- Backed Securities | FG VIEs’ Assets | Equity Securities and Warrants | Corporate Securities | Structured Products | Other (7) | |||||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | 72 | $ | 216 | $ | 863 | $ | 260 | $ | 239 | $ | 91 | $ | — | $ | 27 | ||||||||||||||||||||||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 1 | (1) | 16 | (1) | 5 | (1) | (3) | (2) | 1 | (4) | 2 | (4) | (5) | (4) | 24 | (3) | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (12) | (36) | (47) | — | — | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | 22 | 43 | — | 73 | 16 | 52 | — | ||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (13) | — | (16) | (13) | (21) | — | ||||||||||||||||||||||||||||||||||||||||||
| Settlements | (14) | (39) | (57) | (60) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Consolidations | — | — | — | 22 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation | — | — | — | (15) | — | — | 20 | — | ||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2022 | $ | 47 | $ | 179 | $ | 794 | $ | 204 | $ | 297 | $ | 96 | $ | 46 | $ | 50 | ||||||||||||||||||||||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2022 included in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | (3) | (2) | $ | (8) | (4) | $ | 1 | (4) | $ | (4) | (4) | $ | 24 | (3) | |||||||||||||||||||||||||||||||||||
| OCI | $ | (12) | $ | (32) | $ | (45) | $ | (1) | ||||||||||||||||||||||||||||||||||||||||||
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2022
| Credit Derivative Asset (Liability), net (5) | FG VIEs’ (Liabilities) (8) | (Liabilities) of CIVs | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | (154) | $ | (289) | $ | (3,705) | ||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (11) | (6) | 34 | (2) | 178 | (4) | ||||||||||||||
| Other comprehensive income (loss) | — | (3) | 42 | |||||||||||||||||
| Issuances | — | — | (1,421) | |||||||||||||||||
| Sales | — | — | 2 | |||||||||||||||||
| Settlements | 3 | 99 | 402 | |||||||||||||||||
| Consolidations | — | (571) | (26) | |||||||||||||||||
| Deconsolidations | — | 15 | 374 | |||||||||||||||||
| Fair value as of December 31, 2022 | $ | (162) | $ | (715) | $ | (4,154) | ||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2022 included in: | ||||||||||||||||||||
| Earnings | $ | (11) | (6) | $ | 59 | (2) | $ | 217 | (4) | |||||||||||
| OCI | $ | (3) | $ | 42 | ||||||||||||||||
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| Fixed-Maturity Securities | Assets of CIVs | |||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of State and Political Subdivisions | Corporate Securities | RMBS | Asset- Backed Securities | FG VIEs’ Assets | Equity Securities and Warrants | Corporate Securities | Other (7) | |||||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2020 | $ | 101 | $ | 30 | $ | 255 | $ | 940 | $ | 296 | $ | 2 | $ | — | $ | 54 | ||||||||||||||||||||||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 23 | (1) | 2 | (1) | 16 | (1) | 18 | (1) | 26 | (2) | 35 | (4) | — | (27) | (3) | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (5) | 16 | (1) | (5) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | — | — | 344 | — | 56 | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Sales | (44) | (48) | — | (142) | — | (28) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Settlements | (3) | — | (54) | (292) | (62) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Consolidation | — | — | — | — | — | 174 | 91 | — | ||||||||||||||||||||||||||||||||||||||||||
| Fair value as of December 31, 2021 | $ | 72 | $ | — | $ | 216 | $ | 863 | $ | 260 | $ | 239 | $ | 91 | $ | 27 | ||||||||||||||||||||||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings | $ | 27 | (2) | $ | (2) | (4) | $ | — | $ | (28) | (3) | |||||||||||||||||||||||||||||||||||||||
| OCI | $ | 1 | $ | — | $ | (1) | $ | (6) | ||||||||||||||||||||||||||||||||||||||||||
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| Credit Derivative Asset (Liability), net (5) | FG VIEs’ (Liabilities) (8) | (Liabilities) of CIVs | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Fair value as of December 31, 2020 | $ | (100) | $ | (333) | $ | (1,227) | ||||||||||||||
| Total pre-tax realized and unrealized gains (losses) recorded in: | ||||||||||||||||||||
| Net income (loss) | (58) | (6) | (8) | (2) | 15 | (4) | ||||||||||||||
| Other comprehensive income (loss) | — | (1) | — | |||||||||||||||||
| Issuances | — | — | (3,367) | |||||||||||||||||
| Settlements | 4 | 53 | 891 | |||||||||||||||||
| Consolidations | — | — | (17) | |||||||||||||||||
| Fair value as of December 31, 2021 | $ | (154) | $ | (289) | $ | (3,705) | ||||||||||||||
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | ||||||||||||||||||||
| Earnings | $ | (74) | (6) | $ | (6) | (2) | $ | (2) | (4) | |||||||||||
| OCI | $ | (1) | ||||||||||||||||||
(1)Included in “net realized investment gains (losses)” and “net investment income”.
(2)Included in “fair value gains (losses) on FG VIEs”.
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss)”.
(4)Reported in “fair value gains (losses) on CIVs”.
(5)Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the consolidated balance sheets based on net exposure by transaction.
(6)Reported in “fair value gains (losses) on credit derivatives”.
(7)Includes CCS and other invested assets.
(8)Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2022
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Investments (2): | ||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale (1): | ||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 47 | Yield | 7.4 | % | - | 13.5% | 9.4% | ||||||||||||||||||||||||
| RMBS | 179 | CPR | 3.8 | % | - | 16.1% | 8.2% | |||||||||||||||||||||||||
| CDR | 1.5 | % | - | 12.0% | 5.9% | |||||||||||||||||||||||||||
| Loss severity | 50.0 | % | - | 125.0% | 82.5% | |||||||||||||||||||||||||||
| Yield | 7.5 | % | - | 11.3% | 9.0% | |||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||
| Life insurance transactions | 342 | Yield | 11.3% | |||||||||||||||||||||||||||||
| CLOs | 428 | Discount Margin | 1.8 | % | - | 4.1% | 3.0% | |||||||||||||||||||||||||
| Others | 24 | Yield | 7.4 | % | - | 12.9% | 12.8% | |||||||||||||||||||||||||
| FG VIEs’ assets (1) | 204 | CPR | 0.9 | % | - | 21.9% | 12.9% | |||||||||||||||||||||||||
| CDR | 1.3 | % | - | 41.0% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.0% | |||||||||||||||||||||||||||
| Yield | 6.6 | % | - | 10.9% | 7.5% | |||||||||||||||||||||||||||
| Assets of CIVs (3): | ||||||||||||||||||||||||||||||||
| Equity securities and warrants | 297 | Yield | 10.0% | |||||||||||||||||||||||||||||
| Discount rate | 19.8 | % | - | 25.1% | 22.7% | |||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 1.05x | - | 1.10x | 1.08x | ||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA (6) | 2.50x | - | 11.00x | 10.25x | ||||||||||||||||||||||||||||
| Market multiple-price to book | 1.15x | |||||||||||||||||||||||||||||||
| Market multiple-price to earnings | 4.50x | |||||||||||||||||||||||||||||||
| Terminal growth rate | 3.0% | - | 4.0% | 3.5% | ||||||||||||||||||||||||||||
| Exit multiple -EBITDA | 8.00x | - | 12.00x | 10.53x | ||||||||||||||||||||||||||||
| Exit multiple-price to book | 1.30x | |||||||||||||||||||||||||||||||
| Exit multiple-price to earnings | 5.50x | |||||||||||||||||||||||||||||||
| Cost | 1.00x | |||||||||||||||||||||||||||||||
| Corporate securities | 96 | Discount rate | 20.8 | % | - | 23.8% | 21.7% | |||||||||||||||||||||||||
| Yield | 16.3% | |||||||||||||||||||||||||||||||
| Exit multiple-EBITDA | 8.00x | |||||||||||||||||||||||||||||||
| Cost | 1.00x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 2.50x | - | 2.75x | 2.63x | ||||||||||||||||||||||||||||
| Structured products | 46 | Yield | 12.8 | % | - | 37.1% | 18.9% | |||||||||||||||||||||||||
| Other assets (1) | 47 | Implied Yield | 7.7 | % | - | 8.4% | 8.1% | |||||||||||||||||||||||||
| Term (years) | 10 years | |||||||||||||||||||||||||||||||
213
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Credit derivative liabilities, net (1) | (162) | Hedge cost (in bps) | 11.5 | % | - | 25.2% | 15.7% | |||||||||||||||||||||||||
| Bank profit (in bps) | 51.0 | - | 270.5 | 109.4 | ||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA | ||||||||||||||||||||||||||||
| FG VIEs’ liabilities (1) | (715) | CPR | 0.9 | % | - | 21.9% | 6.3% | |||||||||||||||||||||||||
| CDR | 1.3 | % | - | 41.0% | 3.7% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 39.9% | |||||||||||||||||||||||||||
| Yield | 4.8 | % | - | 10.9% | 5.9% | |||||||||||||||||||||||||||
| Liabilities of CIVs (1): | ||||||||||||||||||||||||||||||||
| CLO obligations of CFEs (5) | (4,090) | Yield | 3.0 | % | - | 27.4% | 5.5% | |||||||||||||||||||||||||
| Warehouse financing debt | (36) | Yield | 11.7 | % | - | 16.9% | 12.9% | |||||||||||||||||||||||||
| Securitized borrowing | (28) | Discount rate | 20.9% | |||||||||||||||||||||||||||||
| Terminal growth rate | 3.0% | |||||||||||||||||||||||||||||||
| Exit multiple-EBITDA | 11.00x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 10.00x | - | 11.00x | 10.50x | ||||||||||||||||||||||||||||
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $5 million.
(3) The primary valuation technique uses the income and/or market approach; the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
(6) Earnings before interest, taxes, depreciation, and amortization (EBITDA).
214
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2021
| Financial Instrument Description | Fair Value Assets (Liabilities) (in millions) | Significant Unobservable Inputs | Range | Weighted Average (4) | ||||||||||||||||||||||||||||
| Investments (2): | ||||||||||||||||||||||||||||||||
| Fixed-maturity securities, available-for-sale (1): | ||||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 72 | Yield | 4.4 | % | - | 24.5% | 6.2% | ||||||||||||||||||||||||
| RMBS | 216 | CPR | 0.0 | % | 22.7% | 10.4% | ||||||||||||||||||||||||||
| CDR | 1.4 | % | - | 12.0% | 5.9% | |||||||||||||||||||||||||||
| Loss severity | 50.0 | % | - | 125.0% | 84.9% | |||||||||||||||||||||||||||
| Yield | 3.8 | % | - | 5.6% | 4.5% | |||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||
| Life insurance transactions | 367 | Yield | 5.0% | |||||||||||||||||||||||||||||
| CLOs | 458 | Discount margin | 0.0 | % | - | 2.9% | 1.8% | |||||||||||||||||||||||||
| Others | 38 | Yield | 3.2 | % | - | 7.9% | 7.9% | |||||||||||||||||||||||||
| FG VIEs’ assets (1) | 260 | CPR | 0.9 | % | - | 24.5% | 13.3% | |||||||||||||||||||||||||
| CDR | 1.4 | % | - | 26.9% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.6% | |||||||||||||||||||||||||||
| Yield | 1.4 | % | - | 8.0% | 4.6% | |||||||||||||||||||||||||||
| Assets of CIVs (3): | ||||||||||||||||||||||||||||||||
| Equity securities and warrants | 239 | Yield | 7.7% | |||||||||||||||||||||||||||||
| Discount rate | 14.7% | - | 23.9% | 21.6% | ||||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 1.10x | |||||||||||||||||||||||||||||||
| Market multiple-enterprise value/EBITDA | 3.00x | - | 10.50x | 8.95x | ||||||||||||||||||||||||||||
| Market multiple-price to book | 1.85x | |||||||||||||||||||||||||||||||
| Corporate securities | 91 | Discount rate | 14.7 | % | - | 21.4% | 17.8% | |||||||||||||||||||||||||
| Yield | 16.4% | |||||||||||||||||||||||||||||||
| Other assets (1) | 23 | Implied Yield | 2.7 | % | - | 3.3% | 3.0% | |||||||||||||||||||||||||
| Term (years) | 10 years | |||||||||||||||||||||||||||||||
| Credit derivative liabilities, net (1) | (154) | Year 1 loss estimates | 0.0 | % | - | 85.8% | 0.1% | |||||||||||||||||||||||||
| Hedge cost (in bps) | 8.0 | - | 37.1 | 12.6 | ||||||||||||||||||||||||||||
| Bank profit (in bps) | 0.0 | - | 187.8 | 67.9 | ||||||||||||||||||||||||||||
| Internal floor (in bps) | 8.8 | |||||||||||||||||||||||||||||||
| Internal credit rating | AAA | - | CCC | AA | ||||||||||||||||||||||||||||
| FG VIEs’ liabilities (1) | (289) | CPR | 0.9 | % | - | 24.5% | 13.3% | |||||||||||||||||||||||||
| CDR | 1.4 | % | - | 26.9% | 7.6% | |||||||||||||||||||||||||||
| Loss severity | 45.0 | % | - | 100.0% | 81.6% | |||||||||||||||||||||||||||
| Yield | 1.4 | % | - | 8.0% | 3.7% | |||||||||||||||||||||||||||
| Liabilities of CIVs (1): | ||||||||||||||||||||||||||||||||
| CLO obligations of CFEs (5) | (3,665) | Yield | 1.6 | % | - | 13.7% | 2.1% | |||||||||||||||||||||||||
| Warehouse financing debt | (23) | Yield | 12.6 | % | - | 16.0% | 13.8% | |||||||||||||||||||||||||
| Securitized borrowing | (17) | Discount rate | 23.9% | |||||||||||||||||||||||||||||
| Market multiple-enterprise value/revenue | 10.50x | |||||||||||||||||||||||||||||||
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $6 million.
(3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
215
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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, 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 the U.S. Holding Companies 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.
Assets and Liabilities of CIVs
Cash equivalents are recorded at cost which approximates fair value. 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 represents balances on a net-by counterparty basis on the consolidated balance sheets 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 securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy.
Other Liabilities
Other liabilities in the table below include $35 million and $37 million as of December 31, 2022 and December 31, 2021, respectively, of AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain BlueMountain European CLOs, which was required to comply with its European risk retention obligations. The maturity dates are in 2034 and 2035. AssuredIM’s obligation under the master repurchase agreement is not guaranteed by any Assured Guaranty insurance or holding companies.
The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.
216
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value of Financial Instruments Not Carried at Fair Value
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets (liabilities): | |||||||||||||||||||||||
| Assets of CIVs (1) | $ | 46 | $ | 46 | $ | 171 | $ | 171 | |||||||||||||||
| Other assets (including other invested assets) (2) | 92 | 93 | 134 | 135 | |||||||||||||||||||
| Financial guaranty insurance contracts (3) | (2,335) | (986) | (2,394) | (2,315) | |||||||||||||||||||
| Long-term debt | (1,675) | (1,477) | (1,673) | (1,832) | |||||||||||||||||||
| Liabilities of CIVs (4) | (170) | (170) | (586) | (586) | |||||||||||||||||||
| Other liabilities (5) | (43) | (43) | (45) | (45) | |||||||||||||||||||
____________________
(1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2) Primarily includes accrued interest, receivable for an unsettled sale of a portion of the Puerto Rico salvage and subrogation recoverable, management fees receivables and receivables for securities sold, for which carrying value approximates fair value.
(3) 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.
(4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value.
(5) Primarily includes accrued interest, repurchase agreement liability and payables for securities purchased, for which carrying value approximates fair value.
10. Asset Management Fees
The Company receives a management fee, as well as performance fee, incentive allocation or carried interest (collectively referred to as performance fees) in exchange for providing investment advisory services to manage investment funds and CLOs. The annual management fees are typically based on a percentage of the value of the client’s net assets under management, and are generally as follows:
•Depending on the investment strategy, the management fee charged is a range of up to 2.00% per annum calculated on either the beginning of the month or quarter, or month-end NAV or other relevant basis (e.g., committed capital) of the respective funds.
•For the Company’s management and/or servicing of the AssuredIM CLOs, the Company receives, generally 0.25% to 0.50% (combined senior investment management fee and subordinated investment management fee) per annum based on total adjusted par outstanding. The portion of these fees that pertains to the investment by AssuredIM wind-down funds is typically rebated to such AssuredIM Funds.
In accordance with the investment management agreements, and by serving as the general partner, managing member or managing general partner, the Company also receives performance fees. Performance fee revenues are generated on certain management contracts when certain minimum rates of return,( i.e., performance hurdles), are exceeded. Performance fee revenue may fluctuate from period to period and may not correlate with general market changes. Annual performance fee rates generally range from 10% to 20% of the net profits in excess of the high-water mark for the respective fund.
For the Company’s management or servicing of the AssuredIM CLOs, the Company generally receives a performance fee of 20% per annum of the remaining interest proceeds and principal proceeds after a performance hurdle is exceeded. The portion of these fees that pertains to the investment by AssuredIM wind-down funds is typically rebated to such AssuredIM Funds.
The general partner has the right, in its sole discretion, to require certain AssuredIM Funds to distribute to the general partner an amount equal to its presumed tax liability attributable to the allocation of estimated taxable income relating to performance fees with respect to such fiscal year and are contractually not subject to clawback. The general partner received tax distributions in 2022 related to its presumed tax liability in 2022 and 2021, and there were no tax distributions for 2020.
217
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company may credit, reduce or waive the management fee and/or the performance fee with respect to any investor and/or affiliate. Certain current and former employees of the Company who have investments in the AssuredIM Funds may not be charged any management fees or performance fee.
Accounting Policy
Management, CLO and performance fees earned by AssuredIM are accounted for as contracts with customers. An entity may recognize revenue when the contractual performance criteria have been met and only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. Given the uniqueness of each fee arrangement, performance fee contractual provisions are evaluated on an individual basis to determine the timing of revenue recognition.
Components of Asset Management Fees
The following table presents the sources of asset management fees on a consolidated basis.
Asset Management Fees
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Management fees: | |||||||||||||||||
| CLOs (1) | $ | 34 | $ | 41 | $ | 21 | |||||||||||
| Opportunity funds and liquid strategies | 17 | 17 | 8 | ||||||||||||||
| Wind-down funds | 2 | 7 | 25 | ||||||||||||||
| Total management fees | 53 | 65 | 54 | ||||||||||||||
| Performance fees | 19 | 1 | — | ||||||||||||||
| Reimbursable fund expenses | 21 | 22 | 35 | ||||||||||||||
| Total asset management fees | $ | 93 | $ | 88 | $ | 89 | |||||||||||
_____________________
(1) To the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs. Gross management fees from CLOs, before rebates, were $34 million in 2022, $47 million in 2021 and $40 million in 2020.
The Company had management and performance fees receivable, which are included in “other assets” on the consolidated balance sheets, of $10 million as of December 31, 2022 and $8 million as of December 31, 2021. Performance fees earned in 2022 were attributable to the healthcare and asset-based funds.
11. Goodwill and Other Intangible Assets
All of the Company’s goodwill relates to the AssuredIM entities that were acquired in 2019 as part of the acquisition of BlueMountain Capital Management, LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities (the BlueMountain Acquisition). All of the goodwill is assigned to the Asset Management reporting unit and segment. Once goodwill is assigned to a reporting unit, generally all of the activities within the reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Accounting Policy
Goodwill represents the excess of cost over the net fair value of assets and liabilities at the date of acquisition. The Company tests goodwill for impairment annually, as of December 31, or more frequently if circumstances indicate an impairment may have occurred. The goodwill impairment analysis is performed at the reporting unit level, which is the same as the Company’s operating segment level excluding the effects of the subleases on AssuredIM’s prior office space. If, after assessing qualitative factors, the Company believes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company will evaluate impairment quantitatively to determine the amount of goodwill impairment, which is the excess of the carrying amount of the reporting unit over its fair value.
218
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Finite-lived intangible assets are recorded at fair value on the date of acquisition and are amortized over their estimated useful lives. The Company assesses finite-lived intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable. The carrying amount is deemed unrecoverable if it is greater than the sum of undiscounted cash flows expected to result from use and eventual disposition of the finite-lived intangible asset. If deemed unrecoverable, the Company records an impairment loss for the excess of the carrying amount over fair value.
Goodwill and Intangible Assets
Inherent in the fair value determinations are certain judgments and estimates relating to future cash flows, including the Company’s interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations. 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. If the Company performs worse than its competitors, it could impede its ability to raise funds, seek investors and hire and retain professionals, and may lead to an impairment of goodwill. The Company’s goodwill impairment assessment is sensitive to the Company’s assumptions of discount rates, market multiples, projections of AUM growth and other factors, which may vary. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.
The Company’s finite-lived intangible assets consist primarily of contractual rights to earn future asset management fees from the acquired management and CLO contracts as well as a CLO distribution network.
The following table summarizes the carrying value for the Company’s goodwill and other intangible assets:
Goodwill and Other Intangible Assets
| Weighted Average Amortization Period as of December 31, 2022 | As of December 31, | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (in millions) | |||||||||||||||||
| Goodwill (1) | $ | 117 | $ | 117 | |||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||
| CLO contracts | 5.8 years | 42 | 42 | ||||||||||||||
| Investment management contracts | 1.5 years | 24 | 24 | ||||||||||||||
| CLO distribution network | 1.8 years | 9 | 9 | ||||||||||||||
| Trade name | 6.8 years | 3 | 3 | ||||||||||||||
| Favorable sublease | 1.2 years | 1 | 1 | ||||||||||||||
| Lease-related intangibles | 4.3 years | 3 | 3 | ||||||||||||||
| Finite-lived intangible assets, gross | 4.6 years | 82 | 82 | ||||||||||||||
| Accumulated amortization | (42) | (30) | |||||||||||||||
| Finite-lived intangible assets, net | 40 | 52 | |||||||||||||||
| Indefinite-lived intangible assets (insurance licenses) | 6 | 6 | |||||||||||||||
| Total goodwill and other intangible assets | $ | 163 | $ | 175 | |||||||||||||
_____________________
(1) Includes goodwill allocated to the European subsidiaries of BlueMountain. The balance changes due to foreign currency translation. The amount of goodwill deductible for tax purposes was approximately $92 million as of December 31, 2022 and $99 million as of December 31, 2021.
Goodwill and substantially all finite-lived intangible assets relate to AssuredIM. In 2022, the results of a qualitative assessment indicated that it was more likely-than-not that the fair value of the reporting unit was greater than its carrying value and therefore no goodwill impairment was recorded. To date, there have been no impairments of goodwill or finite-lived intangible assets. Amortization expense associated with the finite-lived intangible assets was $11 million, $12 million and $13 million for the years ended December 31, 2022, 2021 and 2020, respectively, and is reported in “other operating expenses” in the consolidated statements of operations.
219
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
On February 24, 2021, the Company received the last regulatory approval required to merge MAC with and into AGM, with AGM as the surviving company. The merger was effective on April 1, 2021. Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM. As a result, the Company wrote off the $16 million carrying value of the indefinite-lived intangible asset related to the MAC insurance licenses in the first quarter of 2021. This was reported in “other operating expenses” in the Insurance segment.
As of December 31, 2022, future annual amortization of finite-lived intangible assets is estimated to be:
Estimated Future Amortization Expense for Finite-Lived Intangible Assets
| As of December 31, 2022 | ||||||||
| Year | (in millions) | |||||||
| 2023 | $ | 11 | ||||||
| 2024 | 10 | |||||||
| 2025 | 6 | |||||||
| 2026 | 5 | |||||||
| 2027 | 5 | |||||||
| Thereafter | 3 | |||||||
| Total | $ | 40 | ||||||
12. Long-Term Debt and Credit Facilities
Accounting Policy
Long-term debt is recorded at principal amounts net of anyany: (1) unamortized original issue discount or premium andpremium; (2) unamortized acquisition date fair value adjustmentadjustments for AGM and AGMH debt. Discountsdebt; and (3) debt issuance costs. Original issue discount and premium, acquisition date fair value adjustments for AGM and AGMH debt, and debt issuance costs are accreted into interest expense over the lifecontractual term of the applicable debt. When long-term debt is redeemed, the difference between the cash paid to redeem the debt and the carrying value of the debt is reported as a “loss on extinguishment of debt” in the consolidated statements of operations. When one consolidated subsidiary (AGUS) purchases outstanding debt of another consolidated subsidiary (AGMH), the difference between the cash paid to redeem the debt and the carrying value of the debt is reported as “other income” in the consolidated statements of operations.
Long-Term Debt
The Company has outstandingCompany’s long-term debt outstanding primarily consistingconsists of debt issued by AGUS and AGMH.the U.S. Holding Companies. All of the AGUS and AGMHU.S. Holding Companies’ long-term debt is fully and unconditionally guaranteed by AGL; AGL'sAGL’s guarantee of the junior subordinated debentures is on a junior subordinated basis.
220
Assured Guaranty Ltd.
The principal and the related capital contributions. Interest will be payable annually in arrears on each anniversarycarrying values of the note, commencing on October 1, 2020. Interest will accrue dailyCompany’s debt are presented in the table below.
Principal and be computed on a basisCarrying Amounts of a 360 day year from October 1, 2019 untilLong-Term Debt
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| Principal | Carrying Value | Principal | Carrying Value | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| AGUS 7% Senior Notes | $ | 200 | $ | 198 | $ | 200 | $ | 197 | |||||||||||||||
| AGUS 5% Senior Notes | 330 | 329 | 330 | 329 | |||||||||||||||||||
| AGUS 3.15% Senior Notes | 500 | 495 | 500 | 495 | |||||||||||||||||||
| AGUS 3.6% Senior Notes | 400 | 395 | 400 | 395 | |||||||||||||||||||
| AGUS Series A Enhanced Junior Subordinated Debentures | 150 | 150 | 150 | 150 | |||||||||||||||||||
| AGMH Junior Subordinated Debentures (1) | 146 | 108 | 146 | 105 | |||||||||||||||||||
| AGM Notes Payable | — | — | 2 | 2 | |||||||||||||||||||
| Total | $ | 1,726 | $ | 1,675 | $ | 1,728 | $ | 1,673 | |||||||||||||||
____________________
(1) Carrying amounts are different than principal amounts primarily due to fair value adjustments at the date on which the principal amount is paid in full. AGUS will pay 20% of the original principal amountAGMH acquisition, which are accreted into interest expense over the remaining terms of each note on the sixth, seventh, eighth, and ninth anniversaries. The remaining 20%these obligations. Net of the original principal amount and all accrued and unpaid interest will be paid on the maturity date. AGUS has the right to prepay the principal amount of the notes in whole or in part at any time, or from time to time, without payment of any premium or penalty.AGMH’s long-term debt purchased by AGUS.
Debt Issued by AGUS
5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 (5% Senior Notes) 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 AGL common shares. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. On September 27, 2021, the Company used a portion of the proceeds from the issuance of AGUS’s 3.6% Senior Notes on August 20, 2021 to redeem $170 million of the outstanding principal of these 5% Senior Notes.
3.15% Senior Notes. On May 26, 2021, AGUS issued $500 million of 3.150% Senior Notes due 2031 (3.15% Senior Notes) for net proceeds of $494 million The net proceeds from the issuance were used for the redemption of AGMH’s debt, as described below, with the balance being used for general corporate purposes, including share repurchases. AGUS may redeem all or part of the 3.15% Senior Notes at any time or from time to time prior to March 15, 2031 (the date that is three months prior to the maturity of the 3.15% Senior Notes), at its option, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 3.15% Senior Notes being redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (excluding interest accrued to the redemption date) from the redemption date to March 15, 2031 discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Rate plus 25 bps; plus, in each case, accrued and unpaid interest on the 3.15% Senior Notes to be redeemed to, but excluding, the redemption date. AGUS may redeem all or part of the 3.15% Senior Notes at any time or from time to time on and after March 15, 2031, at its option, at a redemption price equal to 100% of the principal amount of the 3.15% Senior Notes being redeemed, plus accrued and unpaid interest on the 3.15% Senior Notes to be redeemed to, but excluding, the redemption date. The 3.15% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by AGL. The 3.15% Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding. The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
3.6% Senior Notes. On August 20, 2021, AGUS issued $400 million of 3.600% Senior Notes due 2051 (3.6% Senior Notes) for net proceeds of $395 million. The net proceeds from the issuance were used for the redemption on September 27, 2021, of AGMH’s debt and a portion of AGUS’s debt maturing in 2024, as described below. AGUS may redeem all or part of the 3.6% Senior Notes at any time or from time to time prior to March 15, 2051 (the date that is six months prior to the maturity of the 3.6% Senior Notes), at its option, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 3.6% Senior Notes being redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (excluding interest accrued to the redemption date) from the redemption date to March 15, 2051 discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Rate plus 30 bps; plus, in each case, accrued and unpaid interest on the 3.6% Senior Notes to be redeemed to, but excluding, the redemption date. AGUS may redeem all or part of the 3.6% Senior Notes at any time or from time to time on and after March 15, 2051, at its option, at a redemption price equal to 100% of the principal amount of the 3.6% Senior Notes being redeemed, plus accrued and unpaid interest on the 3.6% Senior Notes to be redeemed to, but excluding, the redemption date. The 3.6% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by AGL. The 3.6% Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding. The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.
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%. AGUS may select at 1one or more times to defer payment of interest for 1one 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.
Debt Issued by AGMH
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 4four 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. AGMH may elect at 1one or more times to defer payment of interest on the debentures for 1one 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 20 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. Over the past several years AGUS purchased, and as of December 31, 2022 and 2021, AGUS holds approximately $154 million in principal of the AGMH Subordinated Debentures.
Loss on Extinguishment of Debt
On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt as follows:
•all $100 million of AGMH’s 6 7/8% Notes (6 7/8% Quarterly Interest Bonds) due in 2101, and
•$100 million of the $230 million of AGMH’s 6.25% Notes due in 2102.
On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows:
•all $100 million of AGMH’s 5.6%% Notes due in 2103,
•the remaining $130 million of AGMH 6.25% Notes due in 2102, and
•$170 million of the $500 million of AGUS’s 5% Senior Notes due in 2024.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
As a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) in the year ended December 31, 2021, which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The loss on extinguishment of debt primarily consists of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the acquisition of AGMH in 2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS’s 5% Senior Notes.
Debt Maturity and Interest Expense
Scheduled principal and carrying valuespayments of the Company’s debt are presented in the table below.
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||
| Principal | Carrying Value | Principal | Carrying Value | ||||||||||||
| (in millions) | |||||||||||||||
| AGUS: | |||||||||||||||
| 7% Senior Notes (1) | $ | 200 | $ | 197 | $ | 200 | $ | 197 | |||||||
| 5% Senior Notes (1) | 500 | 497 | 500 | 497 | |||||||||||
| Series A Enhanced Junior Subordinated Debentures (2) | 150 | 150 | 150 | 150 | |||||||||||
| AGUS long-term debt | 850 | 844 | 850 | 844 | |||||||||||
| Intercompany loans payable | 290 | 290 | 50 | 50 | |||||||||||
| Total AGUS | 1,140 | 1,134 | 900 | 894 | |||||||||||
| AGMH (3): | |||||||||||||||
67/8% QUIBS (1) | 100 | 70 | 100 | 70 | |||||||||||
| 6.25% Notes (1) | 230 | 144 | 230 | 143 | |||||||||||
| 5.6% Notes (1) | 100 | 58 | 100 | 57 | |||||||||||
| Junior Subordinated Debentures (2) | 300 | 204 | 300 | 198 | |||||||||||
| Total AGMH | 730 | 476 | 730 | 468 | |||||||||||
| AGM (3): | |||||||||||||||
| AGM Notes Payable | 4 | 4 | 5 | 5 | |||||||||||
| Total AGM | 4 | 4 | 5 | 5 | |||||||||||
| AGMH's debt purchased by AGUS | (131 | ) | (89 | ) | (128 | ) | (84 | ) | |||||||
| Elimination of intercompany loans payable | (290 | ) | (290 | ) | (50 | ) | (50 | ) | |||||||
| Total | $ | 1,453 | $ | 1,235 | $ | 1,457 | $ | 1,233 | |||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Principal amount repurchased | $ | 3 | $ | 100 | $ | 28 | |||||
| Loss on extinguishment of debt (1) | 1 | 34 | 9 | ||||||||
As of December 31, 20192022
| Year | Principal | |||||||
| (in millions) | ||||||||
| 2023 | $ | — | ||||||
| 2024 | 330 | |||||||
| 2025 | — | |||||||
| 2026 | — | |||||||
| 2027 | — | |||||||
| 2028-2047 | 700 | |||||||
| 2048-2066 | 696 | |||||||
| Total | $ | 1,726 | ||||||
____________________
| AGUS | AGMH (1) | AGM | Eliminations (2) | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| 2020 | $ | — | $ | — | $ | 2 | $ | — | $ | 2 | ||||||||||
| 2021 | — | — | — | — | — | |||||||||||||||
| 2022 | — | — | — | — | — | |||||||||||||||
| 2023 | 40 | — | — | (40 | ) | — | ||||||||||||||
| 2024 | 500 | — | — | — | 500 | |||||||||||||||
| 2025-2044 | 450 | — | 2 | (250 | ) | 202 | ||||||||||||||
| 2045-2064 | — | — | — | — | — | |||||||||||||||
| 2065-2084 | 150 | 300 | — | (131 | ) | 319 | ||||||||||||||
| Thereafter | — | 430 | — | — | 430 | |||||||||||||||
| Total | $ | 1,140 | $ | 730 | $ | 4 | $ | (421 | ) | $ | 1,453 | |||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| AGUS: | |||||||||||
| 7% Senior Notes | $ | 13 | $ | 13 | $ | 13 | |||||
| 5% Senior Notes | 26 | 26 | 26 | ||||||||
| Series A Enhanced Junior Subordinated Debentures | 7 | 7 | 5 | ||||||||
| AGUS long-term debt | 46 | 46 | 44 | ||||||||
| Intercompany loans payable | 5 | 3 | 3 | ||||||||
| Total AGUS | 51 | 49 | 47 | ||||||||
| AGMH: | |||||||||||
67/8% QUIBS | 7 | 7 | 7 | ||||||||
| 6.25% Notes | 16 | 15 | 16 | ||||||||
| 5.6% Notes | 6 | 6 | 6 | ||||||||
| Junior Subordinated Debentures | 25 | 25 | 25 | ||||||||
| Total AGMH | 54 | 53 | 54 | ||||||||
| AGMH's debt purchased by AGUS | (11 | ) | (5 | ) | (1 | ) | |||||
| Elimination of intercompany loans payable | (5 | ) | (3 | ) | (3 | ) | |||||
| Total | $ | 89 | $ | 94 | $ | 97 | |||||
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with 4four separate custodial trusts allowing 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 doesis not consider itself to be the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty'sGuaranty’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'sAGC’s or AGM'sAGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase the 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 CPS is one-month LIBOR plus 200 bps.
223
Notes to Consolidated Financial Statements, Continued
Short-Term Loan Facility
On February 3, 2022, the Company entered into a secured short-term loan facility with a major financial institution to partially fund gross payments in connection with the resolution of a portion of its Puerto Rico exposures. See Note 3, Outstanding Exposure. The short-term loan facility permitted the Company to borrow up to $550 million for up to thirty days and up to $150 million for up to six months. The Company borrowed $400 million on March 14, 2022 and repaid it in full, with interest at the beginning1.10%, on March 16, 2022. The ability of the offering period usingCompany to borrow under the Black-Scholes option valuation model.facility has expired.
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
Under the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended (the Incentive Plan), the number of AGL common shares that may be delivered under the Incentive Plan may not exceed 18,670,000. As of December 31, 2022, 8,059,991 common shares were available for grant under the Incentive Plan. In the event of certain transactions affecting AGL'sAGL’s common shares, the number or type of shares subject to the Incentive Plan, the number and type of shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may be adjusted.
The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and full value awards that are based on AGL'sAGL’s common shares. The grant of full value awards may be in return for a participant's previously performed services, or in return for the participant surrendering other compensation that may be due, or may be contingent on the achievement of performance or other objectives during a specified period, or may beperiod. The grant of full value awards are subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become vested upon a change in control of AGL.
The Incentive Plan is administered by the Compensation Committee of AGL's Board of Directors (the Board), except as otherwise determined by the Board. The Board may amend or terminate the Incentive Plan.
Accounting Policy
Share-based compensation expense is based on the grant date fair value using the grant date closing price or the Monte Carlo or Black-Scholes-Merton (Black-Scholes) pricing models. The Company amortizes the fair value of share-based awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the exception of retirement‑eligible employees. For retirement-eligible employees, the portion of the unvested time-based awards that become fully vested upon retirement eligibility are expensed immediately.
The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan is estimated at the beginning of the offering period using the Black-Scholes option valuation model and are expensed over the period which the employee participates in the plan and pays for the shares.
Long-Term Incentive Plan
Restricted Stock Units
Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. The Company awards restricted stock units to employees that generally vest after a three-year or over a four-year period. Occasionally the Company may award restricted stock units to employees that vest after a four-year period. The shares are delivered on the vesting date.
224
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Restricted Stock Unit Activity
| Nonvested Stock Units | Number of Stock Units | Weighted Average Grant Date Fair Value Per Share | ||||||||||||
| Nonvested at December 31, 2021 | 906,302 | $ | 43.25 | |||||||||||
| Granted | 441,436 | 56.46 | ||||||||||||
| Vested | (279,089) | 41.26 | ||||||||||||
| Forfeited | (1,583) | 47.39 | ||||||||||||
| Nonvested at December 31, 2022 | 1,067,066 | $ | 49.18 | |||||||||||
As of December 31, 2019, 9,311,090 common shares were available for grant under2022, the Incentive Plan.
Options for Common Shares | Weighted Average Exercise Price | Number of Exercisable Options | |||||||
| Balance as of December 31, 2018 | 373,628 | $ | 18.77 | 373,628 | |||||
| Options granted | — | — | |||||||
| Options exercised | (283,277 | ) | 18.16 | ||||||
| Options forfeited/expired | — | — | |||||||
| Balance as of December 31, 2019 | 90,351 | $ | 20.68 | 90,351 | |||||
1.8 years. The total intrinsicfair value of restricted stock options exercisedunits vested during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $8.2$12 million, $9.9$12 million and $6.6$11 million, respectively. During the years ended December 31, 2019, 2018 and 2017, $2.3 million, $2.4 million and $4.7 million, respectively, was received from the exercise of stock options. In order to satisfy stock option exercises, the Company issues new shares.
The Company grants performance stock options under the Incentive Plan. These awards are non-qualified stock options with exercise prices equal to the closing price of an AGL common share on the applicable date of grant. These awards vest 35%, 50% or 100%, if the price of AGL's common shares using the highest 40-day average share price reaches certain hurdles. If the share price is between the specified levels, the vesting level will be interpolated accordingly. These awards expire seven years from the date of grant.
Options for Common Shares | Weighted Average Exercise Price | Number of Exercisable Options | |||||||
| Balance as of December 31, 2018 | 27,552 | $ | 19.24 | 27,552 | |||||
| Options granted | — | — | |||||||
| Options exercised | (27,552 | ) | 19.24 | ||||||
| Options forfeited/expired | — | — | |||||||
| Balance as of December 31, 2019 | — | $ | — | — | |||||
Performance Restricted Stock Units
Each performance restricted stock unit represents a contingent right to receive up to a certain number of the Company’s common shares. Awards tied to core adjusted book value per share represent the right to receive up to two shares at the end of a three-year performance period, depending on the growth in core adjusted book value per share over the three-year performance period. Performance restricted stock units tied to total shareholder return (TSR) relative to the TSR of the 55th percentile of the Russell Midcap Financial Services Index represent the right to receive up to 2.5 shares at the end of a three-year performance period. The shares related to awards tied to core adjusted book value per share are delivered on the vesting date and the shares related to awards tied to relative TSR are generally delivered on the fourth anniversary of the grant date.
Performance Restricted Stock Unit Activity
| Performance Restricted Stock Units | Number of Performance Share Units | Weighted Average Grant Date Fair Value Per Share | ||||||||||||
| Nonvested at December 31, 2021 | 614,912 | $ | 46.25 | |||||||||||
| Granted (1) | 217,551 | 62.89 | ||||||||||||
| Vested (1) | (197,078) | 41.34 | ||||||||||||
| Forfeited | — | — | ||||||||||||
| Nonvested at December 31, 2022 (2) | 635,385 | $ | 54.26 | |||||||||||
____________________
(1) Includes 94,209 performance restricted stock units that were granted prior to 2022 at a weighted average grant date fair value of $41.34, but met performance hurdles and vested during 2022. The weighted average grant date fair value per share excludes these shares.
(2) Excludes 167,942 performance restricted stock units that have met performance hurdles and will be eligible for vesting after December 31, 2022.
As of December 31, 2022, the total unrecognized compensation cost related to outstanding non-vested performance share units was $15 million, $3.8 million and $0.7 million, respectively. Duringwhich the Company expects to recognize over the weighted-average remaining service period of 1.7 years. The total value of performance restricted stock units vested during the years ended December 31, 2019, 20182022, 2021 and 2017, $0.52020 was based on grant date fair value and was $8 million, $2.7$9 million and $0.2$8 million, respectively,respectively.
For the 2022, 2021 and 2020 awards, the grant-date fair value of the performance restricted stock units tied to relative TSR was received from the exercise of performance stock options. Incalculated using a Monte Carlo simulation in order to satisfydetermine the total return of the Company’s shares relative to the total return of financial companies in the Russell Midcap Financial Services Index. The inputs to the simulation include the beginning prices of shares, historical volatilities, and dividend yields of all relevant companies as well as all possible pairwise correlation coefficients among the relevant companies. In addition, the risk-free return and discount for illiquidity are also included.
225
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The following are significant assumptions used in determining the fair value of the performance restricted stock option exercises,units tied to relative TSR.
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| Expected term | 2.85 years | 2.85 years | 2.84 years | |||||||||||||||||||||||||||||||||||
| Expected volatility | 27.19 | % | – | 78.96% | 26.55 | % | – | 65.84% | 11.93 | % | – | 48.12% | ||||||||||||||||||||||||||
| Dividend yield | 0.00% | 0.00% | 0.00% | |||||||||||||||||||||||||||||||||||
| Risk-free-rates | 1.74% | 0.22% | 1.14% | |||||||||||||||||||||||||||||||||||
| Grant-date fair value | $83.97 | $60.06 | $38.96 | |||||||||||||||||||||||||||||||||||
For the Company issues new shares. 2022, 2021 and 2020 awards, the grant-date fair value of the performance restricted stock units tied to core adjusted book value was based on the grant date closing price.
The tax benefit from time vestedweighted-average grant-date fair value of the 2022, 2021 and performance stock options exercised during 20192020 awards was $0.9 million.$62.89, $52.04 and $41.03, respectively.
Restricted Stock Awards
Restricted stock awards are valued based on the closing price of the underlying shares at the date of grant. Restricted stockThe Company awards to employees generally vest in equal annual installments over a four-year period and restricted stock awards to outside director'snon-executive directors that vest in full in after one year. Restricted stock awards to employeesyear. The shares are amortizeddelivered on a straight-line basis over the requisite service periods of the awards, and restricted stock awards to outside directors are amortized over one year, which are generally the vesting periods, with the exception of retirement‑eligible employees, discussed above.date.
Restricted Stock Award Activity
| Nonvested Shares | Number of Shares | Weighted Average Grant Date Fair Value Per Share | ||||||||||||
| Nonvested at December 31, 2021 | 44,797 | $ | 51.34 | |||||||||||
| Granted | 36,403 | 59.47 | ||||||||||||
| Vested | (44,797) | 51.34 | ||||||||||||
| Forfeited | — | — | ||||||||||||
| Nonvested at December 31, 2022 | 36,403 | $ | 59.47 | |||||||||||
| Nonvested Shares | Number of Shares | Weighted Average Grant Date Fair Value Per Share | |||||
| Nonvested at December 31, 2018 | 51,746 | $ | 35.56 | ||||
| Granted | 48,241 | 45.98 | |||||
| Vested | (51,746 | ) | 35.56 | ||||
| Forfeited | — | — | |||||
| Nonvested at December 31, 2019 | 48,241 | $ | 45.98 | ||||
As of December 31, 2019,2022, the total unrecognized compensation cost related to outstanding nonvestednon-vested restricted stock awards was $0.7 million, which the Company expects to recognize over the weighted‑averageweighted-average remaining service period of 0.3 years. The total fair value of shares vested during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $1.8$2.3 million, $1.9 million and $1.5$2.3 million, respectively.
| Nonvested Stock Units | Number of Stock Units | Weighted Average Grant Date Fair Value Per Share | |||||
| Nonvested at December 31, 2018 | 900,276 | $ | 33.83 | ||||
| Granted | 464,500 | 44.40 | |||||
| Vested | (375,981 | ) | 28.03 | ||||
| Forfeited | (1,528 | ) | 40.90 | ||||
| Nonvested at December 31, 2019 | 987,267 | $ | 41.24 | ||||
| Performance Restricted Stock Units | Number of Performance Share Units | Weighted Average Grant Date Fair Value Per Share | |||||
| Nonvested at December 31, 2018 | 596,728 | $ | 39.42 | ||||
| Granted (1) | 436,690 | 44.00 | |||||
| Vested | (489,161 | ) | 12.66 | ||||
| Forfeited | — | — | |||||
| Nonvested at December 31, 2019 (2) | 544,257 | $ | 47.23 | ||||
| 2018 | 2017 | |||||||
| Dividend yield | 1.68 | % | 1.37 | % | ||||
| Expected volatility | 27.65 | % | 25.19 | % | ||||
| Risk free interest rate | 2.43 | % | 1.48 | % | ||||
| Weighted average grant date fair value | $ | 45.64 | $ | 53.74 | ||||
Employee Stock Purchase Plan
The Company established the AGL Employee Stock Purchase Plan (Stock Purchase Plan) in accordance with Internal Revenue Code of 1986 (the Code) Section 423, and participation is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10% of the participant's compensation or, if less, shares having a value of $25,000. Participants may purchase shares at a purchase price equal to 85% of the lesser of the fair market value of the stock on the first day or the last day of the subscription period. The Company has reserved for issuance and purchases under the Stock Purchase Plan 850,000 Assured Guaranty Ltd.AGL common shares. As of December 31, 2022, 65,042 common shares were available for grant under the Stock Purchase Plan.
The fair value of each award under the Stock Purchase Plan is estimated at the beginning of each offering period using the Black‑Scholes option‑pricing model and the following assumptions: a) the expected dividend yield is based on the current expected annual dividend and share price on the grant date; b) the expected volatility is estimated at the date of grant based on the historical share price volatility, calculated on a daily basis; c) the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; and d) the expected life is based on the term of the offering period.
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Stock Purchase Plan
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| Proceeds from purchase of shares by employees | $ | 2.4 | $ | 2.1 | $ | 1.5 | |||||||||||
| Number of shares issued by the Company | 53,453 | 67,615 | 72,797 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (dollars in millions) | |||||||||||
| Proceeds from purchase of shares by employees | $ | 1.5 | $ | 1.2 | $ | 1.0 | |||||
| Number of shares issued by the Company | 40,732 | 39,532 | 33,666 | ||||||||
| Recorded in share-based compensation, net of deferral | $ | 0.4 | $ | 0.3 | $ | 0.3 | |||||
The following table presents stock basedshare-based compensation costs and the amount of such costs that are deferred as policy acquisition costs, pre-tax. Amortization of previously deferred stockshare compensation costs is not shown in the table below.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Share‑based compensation expense | $ | 39 | $ | 27 | $ | 25 | |||||||||||
| Share‑based compensation capitalized as DAC | 3 | 2 | 1 | ||||||||||||||
| Income tax benefit | 6 | 4 | 4 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Share‑based compensation expense | $ | 21 | $ | 19 | $ | 16 | |||||
| Share‑based compensation capitalized as DAC | 1.1 | 0.8 | 0.6 | ||||||||
| Income tax benefit | 3 | 3 | 2 | ||||||||
Defined Contribution Plan
The Company maintains a savings incentive plan, which is qualified under Section 401(a) of the Internal Revenue Code for U.S. employees. The savings incentive plan is available to eligible full-time employees upon hire. Eligible participants couldmay contribute a percentage of their eligible compensation subject to U.S. Internal Revenue Service (IRS) limitations. Contributions were matched by the Company at a rateThe Company’s matching contribution is an amount equal to 100% of 100%each participant’s contributions up to 6% 7% of participant'ssuch participant’s eligible compensation, subject to IRS limitations. Any amountsCertain eligible participants may also contribute a percentage of eligible compensation over the IRS limits are contributedlimitations to and matched by the Company into a nonqualified supplemental executive retirement plan. The Company's matching contribution in the nonqualified plan is an amount equal to 100% of each participant’s contributions up to 6% of participant’s eligible compensation above the IRS limitations for employees eligible to participate in such nonqualifiedthe qualified plan. The Company also made amakes core contributioncontributions of 6%7% of the participant'sparticipant’s eligible compensation to the qualified plan, subject to IRS limitations, and the nonqualified supplemental executive retirement plan for eligible employees, regardless of whether the employee otherwise contributes to the plan(s).plan, and a core contribution of 6% of the participant’s eligible compensation above the IRS limitations for the qualified plan to the nonqualified plan for eligible employees. Employees become fully vested in Company contributions to the qualified and nonqualified plans after one year of service, as defined in the plan.plan (or upon reaching age 65 for the nonqualified plan, if earlier). Plan eligibility is immediate upon hire. The Company also maintains similar non-qualified plans for non-U.S. employees.
The Company recognized defined contribution expenses of $12$20 million, $12$20 million and $11$20 million for the years ended December 31, 2019,2022, 2021 and 2020, respectively.
14. Income Taxes
AGL and its Bermuda subsidiaries, AG Re, AGRO, and Cedar Personnel Ltd. (collectively, the 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., U.K. and French subsidiaries are subject to income taxes imposed by U.S., U.K. and French 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 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. As a U.K. tax resident company, AGL is required to file a corporation tax return with His Majesty’s Revenue & Customs. AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The corporation tax rate was 19%. The Company expects that the dividends AGL receives from its direct subsidiaries will be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, the Company obtained a clearance from His Majesty’s Revenue & Customs confirming any dividends paid by AGL to its shareholders should not be
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Notes to Consolidated Financial Statements, Continued
subject to any withholding tax in the U.K. The Company does not expect any profits of non-U.K. resident members of the group to be taxed under the U.K. “controlled foreign companies” regime.
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 U.S. entities acquired in the BlueMountain Acquisition are included in the AGUS consolidated federal income tax return and the U.K. entities acquired in the BlueMountain Acquisition are included in the U.K tax returns.
The Coronavirus Aid, Relief, and Economic Security Act (the CARES 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 2017, respectively.2019. As a result, the Company received a refund for AMT credits in 2020.
Accounting Policy
The provision for income taxes consists of an amount for taxes currently payable and an amount for deferred taxes. Deferred income taxes are provided for temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized.
Non-interest-bearing tax and loss bonds are purchased in the amount of the tax benefit that results from deducting statutory-basis contingency reserves as provided under Internal Revenuethe Code Section 832(e). The Company records the purchase of tax and loss bonds in deferred taxes.
The Company recognizes tax benefits only if a tax position is “more likely than not” to prevail.
The Company elected to account for tax associated with Global Intangible Low-Taxed Income (GILTI) as a current-period expense when incurred.
Tax Assets (Liabilities)
Deferred and Current Tax Assets (Liabilities) (1)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Net deferred tax assets (liabilities) | $ | 114 | $ | (33) | |||||||
| Net current tax assets (liabilities) | 63 | (43) | |||||||||
228
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| (in millions) | |||||||
| Deferred tax assets (liabilities) | $ | (17 | ) | $ | 68 | ||
| Current tax assets (liabilities) | 47 | 22 | |||||
Assured Guaranty Ltd.
Components of Net Deferred Tax Assets (Liabilities)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Deferred tax assets: | |||||||||||
| Unearned premium reserves, net | $ | 26 | $ | 51 | |||||||
| Net unrealized investment losses | 70 | — | |||||||||
| Rent | 18 | 17 | |||||||||
| Investments | 7 | — | |||||||||
| Foreign tax credit | 5 | 24 | |||||||||
| Net operating loss | 25 | 28 | |||||||||
| Depreciation | 30 | 27 | |||||||||
| Deferred compensation | 30 | 29 | |||||||||
| Deferred balances related to non-U.S. affiliates | 14 | — | |||||||||
| Other | 23 | 19 | |||||||||
| Total deferred tax assets | 248 | 195 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Net unrealized investment gains | — | 74 | |||||||||
| Investments | — | 30 | |||||||||
| DAC | 20 | 20 | |||||||||
| Loss and LAE reserve | 74 | 44 | |||||||||
| Lease | 14 | 16 | |||||||||
| Other | 21 | 20 | |||||||||
| Total deferred tax liabilities | 129 | 204 | |||||||||
| Less: Valuation allowance | 5 | 24 | |||||||||
| Net deferred tax assets (liabilities) | $ | 114 | $ | (33) | |||||||
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
| Deferred tax assets: | |||||||
| Unearned premium reserves, net | $ | 76 | $ | 98 | |||
| Investment basis differences | 48 | 49 | |||||
| Foreign tax credit | 36 | 36 | |||||
| Net operating loss | 32 | 34 | |||||
| Deferred compensation | 26 | 25 | |||||
| Alternative minimum tax credit | 12 | 20 | |||||
| Other | 24 | 35 | |||||
| Total deferred income tax assets | 254 | 297 | |||||
| Deferred tax liabilities: | |||||||
| Unrealized appreciation on investments | 86 | 54 | |||||
| Public debt | 44 | 50 | |||||
| Market discount | 11 | 31 | |||||
| DAC | 33 | 23 | |||||
| Unrealized gains on CCS | 11 | 16 | |||||
| Loss and LAE reserve | 29 | 7 | |||||
| Other | 21 | 12 | |||||
| Total deferred income tax liabilities | 235 | 193 | |||||
| Less: Valuation allowance | 36 | 36 | |||||
| Net deferred income tax asset (liabilities) | $ | (17 | ) | $ | 68 | ||
As part of the acquisition of CIFG Holding Inc. (CIFGH, and together with its subsidiaries, CIFG), the Company acquired $189 million of net operating losses (NOL) which will begin to expire in 2033. The NOL has been limited under Internal Revenuethe Code Section 382 due to a change in control as a result of the acquisition. As of December 31, 2019,2022, the Company had $151$121 million of NOLsNOL available to offset its future U.S. taxable income.
Valuation Allowance
There were no changes in the valuation allowance during 2021. During 2020, the Company reduced its valuation allowance from $36 million as of December 31, 2019 to $24 million as of December 31, 2020 due to the expiration of the FTC from previous acquisitions.
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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Notes to Consolidated Financial Statements, Continued
Changes in market conditions during 2022, including rising interest rates, resulted in the recording of deferred tax assets related to net unrealized tax capital losses. When assessing recoverability of these deferred tax assets, the Company considers the ability and intent to hold the underlying securities to recovery in value, if necessary, as well as other factors as noted above. As of December 31, 2022, based on all available evidence, including capital loss carryback capacity, the Company concluded that the deferred tax assets related to the unrealized tax capital losses on the available-for-sale securities portfolios are, more likely than not, expected to be realized.
Provision for Income Taxes
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% in 20192022, 2021 and 2018 and 35% in 2017,2020; U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%,; French subsidiaries taxed at the French marginal corporate tax rate of 25% in 2022, 27.5% in 2021, and 28% in 2020; and no taxes for the Company’s Bermuda Subsidiaries unless subject to U.S. tax by election. In 2018, due to the Tax Act, controlledControlled foreign corporations (CFCs) apply the local marginal corporate tax rate. In addition, the Tax ActTCJA creates a new requirement that a portion of the GILTI earned by CFCs must be included currently in the gross income of the CFCs'CFCs’ U.S. shareholder. For the periods between April 1, 2015 and March 31, 2017, the U.K. corporation tax rate was 20%. 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
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Expected tax provision (benefit) | $ | 23 | $ | 76 | $ | 83 | |||||||||||
| Tax-exempt interest | (14) | (19) | (20) | ||||||||||||||
| Change in liability for uncertain tax positions | — | — | (17) | ||||||||||||||
| Return to provision adjustment | (20) | (4) | (7) | ||||||||||||||
| Noncontrolling interest | (3) | (8) | (1) | ||||||||||||||
| State taxes | 12 | 7 | 4 | ||||||||||||||
| Taxes on reinsurance | — | (2) | 9 | ||||||||||||||
| Foreign taxes | 6 | 8 | (3) | ||||||||||||||
| Stock based compensation | 5 | 4 | — | ||||||||||||||
| Other | 2 | (4) | (3) | ||||||||||||||
| Total provision (benefit) for income taxes | $ | 11 | $ | 58 | $ | 45 | |||||||||||
| Effective tax rate | 7.2 | % | 12.2 | % | 10.9 | % | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Expected tax provision (benefit) | $ | 91 | $ | 97 | $ | 300 | |||||
| Tax-exempt interest | (19 | ) | (23 | ) | (49 | ) | |||||
| Bargain purchase gain | — | — | (20 | ) | |||||||
| Change in liability for uncertain tax positions | 1 | (15 | ) | (26 | ) | ||||||
| Effect of provision to tax return filing adjustments | (6 | ) | (1 | ) | (8 | ) | |||||
| State tax | 1 | 6 | 9 | ||||||||
| Taxes on reinsurance | (5 | ) | 6 | (4 | ) | ||||||
| Effect of adjustments to the provisional amounts as a result of 2017 Tax Cuts and Jobs Act | — | (4 | ) | 61 | |||||||
| Foreign taxes | 6 | — | 4 | ||||||||
| Other | (6 | ) | (7 | ) | (6 | ) | |||||
| Total provision (benefit) for income taxes | $ | 63 | $ | 59 | $ | 261 | |||||
| Effective tax rate | 13.7 | % | 10.2 | % | 26.3 | % | |||||
The expected tax provision (benefit) is calculated as the sum of pretaxpre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pretaxpre-tax loss in one jurisdiction and pretaxpre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The following tables present pretaxpre-tax income and revenue by jurisdiction.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| U.S. | $ | 189 | $ | 378 | $ | 385 | |||||||||||
| Bermuda | 44 | 115 | 16 | ||||||||||||||
| U.K. | (69) | (8) | 13 | ||||||||||||||
| France | (16) | (8) | (1) | ||||||||||||||
| Total | $ | 148 | $ | 477 | $ | 413 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| U.S. | $ | 440 | $ | 461 | $ | 873 | |||||
| Bermuda | 33 | 121 | 145 | ||||||||
| U.K. and other | (9 | ) | (2 | ) | (27 | ) | |||||
| Total | $ | 464 | $ | 580 | $ | 991 | |||||
Revenue by Tax Jurisdiction
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| U.S. | $ | 779 | $ | 801 | $ | 1,543 | |||||
| Bermuda | 146 | 177 | 216 | ||||||||
| U.K. and other | 38 | 23 | (20 | ) | |||||||
| Total | $ | 963 | $ | 1,001 | $ | 1,739 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| U.S. | $ | 661 | $ | 685 | $ | 894 | |||||||||||
| Bermuda | 84 | 123 | 151 | ||||||||||||||
| U.K. | (15) | 41 | 60 | ||||||||||||||
| France | (8) | (3) | 6 | ||||||||||||||
| Other | 1 | 2 | 4 | ||||||||||||||
| Total | $ | 723 | $ | 848 | $ | 1,115 | |||||||||||
| Year Ended December 31, | |||||||
| 2018 | 2017 | ||||||
| (in millions) | |||||||
| Transition tax | $ | (1 | ) | $ | 93 | ||
| Foreign tax credit realized | — | (31 | ) | ||||
| Write down of unremitted earnings | — | (38 | ) | ||||
| Net impact of repatriation | (1 | ) | 24 | ||||
| Write down of deferred tax asset due to tax rate change | (3 | ) | 37 | ||||
| Net impact of Tax Act | $ | (4 | ) | $ | 61 | ||
Uncertain Tax Positions
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Beginning of year | $ | 14 | $ | 28 | $ | 50 | |||||
| Effect of provision to tax return filing adjustments | 5 | 1 | 8 | ||||||||
| Increase in unrecognized tax positions as a result of position taken during the current period | — | — | 1 | ||||||||
| Decrease in unrecognized tax positions as a result of settlement of positions taken during the prior period | — | — | (31 | ) | |||||||
| Reductions to unrecognized tax benefits as a result of the applicable statute of limitations | (4 | ) | (15 | ) | — | ||||||
| Balance as of December 31, | $ | 15 | $ | 14 | $ | 28 | |||||
The Company'sCompany’s policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued $1 millionzero for full years 2019, 20182022 and 2017.2021 and $0.3 million for 2020. As of both December 31, 20192022 and December 31, 2018,2021, the Company has accrued $2 millionzero of interest.
The total amount of reserves for unrecognized tax positions, including accrued interest, as of December 31, 2019 and December 31, 2018 that would affect the effective tax rate, if recognized, was $17 million and $16 million, respectively.
15. Insurance Company Regulatory Requirements
The following table summarizes the equitypolicyholder’s surplus and net income amounts reported to local regulatory bodies in the U.S. and Bermuda for insurance subsidiaries within the group. The discussion that follows describes the basis of accounting and differences to GAAP.
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Insurance Regulatory Amounts Reported
U.S. and Bermuda
| Policyholders' Surplus | Net Income (Loss) | Policyholders’ Surplus | Net Income (Loss) | |||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, | Year Ended December 31, | As of December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2017 | 2022 | 2021 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. statutory companies: | U.S. statutory companies: | |||||||||||||||||||||||||||||||||||||||||||||||
| AGM (1) (2) | $ | 2,691 | $ | 2,533 | $ | 312 | $ | 172 | $ | 152 | ||||||||||||||||||||||||||||||||||||||
| AGC (1) (2) | 1,775 | 1,793 | 226 | (5 | ) | 219 | ||||||||||||||||||||||||||||||||||||||||||
| MAC (2) | 276 | 321 | 53 | 55 | 32 | |||||||||||||||||||||||||||||||||||||||||||
| AGM (1) | AGM (1) | $ | 2,747 | $ | 3,053 | $ | 163 | $ | 352 | $ | 398 | |||||||||||||||||||||||||||||||||||||
| AGC (2) | AGC (2) | 1,916 | 2,070 | 62 | 282 | 73 | ||||||||||||||||||||||||||||||||||||||||||
| Bermuda statutory companies: | Bermuda statutory companies: | |||||||||||||||||||||||||||||||||||||||||||||||
| AG Re | 1,098 | 1,249 | 45 | 131 | 155 | AG Re | 839 | 944 | 53 | 121 | 24 | |||||||||||||||||||||||||||||||||||||
| AGRO | 410 | 383 | 12 | 10 | 10 | AGRO | 390 | 425 | 9 | 6 | 7 | |||||||||||||||||||||||||||||||||||||
____________________
(1) Policyholders’ surplus is net of contingency reserves of $855 million and $877 million as of December 31, 2022 and December 31, 2021, respectively.
(2) Policyholders’ surplus is net of contingency reserves of $347 million and $348 million as of December 31, 2022 and December 31, 2021, respectively.
Basis of Regulatory Financial Reporting
United States
Each of the Company'sCompany’s U.S. domiciled insurance companies'companies’ ability to pay dividends depends, among other things, upon its financial condition, results of operations, cash requirements, compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of its state of domicile and other states. Financial statements prepared in accordance with accounting practices prescribed or permitted by local insurance regulatory authorities differ in certain respects from GAAP.
The Company'sCompany’s U.S. domiciled insurance companies prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (NAIC) and their respective insurance departments. Prescribed statutory accounting practices (SAP) are set forth in the National Association of Insurance CommissionersNAIC Accounting Practices and Procedures Manual. The Company has no permitted accounting practices on a statutory basis.
GAAP differs in certain significant respects from the U.S. insurance companies'companies’ statutory accounting practices prescribed or permitted by insurance regulatory authorities. The principal differences result from the statutory accounting practices listed below.
•Upfront premiums are earned upon expiration of risk and installment premiums are earned on a pro-rata basis over the installment period, rather than earned overin proportion to the expected periodamount of coverage. Premium earningsinsurance protection provided under GAAP. The timing of premium accelerations may also differ between statutory and GAAP. Under GAAP, premiums are accelerated when transactions areonly upon the legal defeasance of an insured obligation, whereas statutory premiums may be accelerated earlier if an insured obligation is economically defeased rather than legally defeased.prior to legal defeasance.
•Acquisition costs are charged to expense as incurred rather than expensed over the period that the related premiums are earned.earned under GAAP. Ceding commission income is earned immediately except for amounts in excess of acquisition costs, which are deferred, rather than fully deferred under GAAP.
•A contingency reserve is computed based on statutory requirements,established according to applicable insurance laws, whereas no such reserve is required under GAAP.
•Certain assets designated as “non-admitted assets” are charged directly to statutory surplus, rather than reflected as assets under GAAP.
•Investments in subsidiaries are carried on the balance sheet on the equity basis, to the extent admissible, rather than consolidated with the parent.parent under GAAP.
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Notes to Consolidated Financial Statements, Continued
•The amount of admitted deferred tax assets are subject to an adjusted surplus threshold and subject to a limitation calculated in accordance with SAP.statutory accounting principles. Under GAAP there is no non-admitted asset determination, rather a valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized.
•Insured credit derivatives are accounted for as insurance contracts rather than accounted for as derivative contracts that are measured at fair value.value under GAAP.
•Bonds are generallyreported at either amortized cost or the lower of amortized cost or fair value, rather than classified as available-for-sale or trading securities and carried at amortized cost rather than fair value.value under GAAP.
•The impairment model for fixed-maturity debt securities classified as available-for-sale under GAAP differs from the statutory impairment model. Under SAP, debt securities that have been determined to be other-than-temporarily impaired, are written down to fair value or the present value of cash flows. Under GAAP, an allowance for credit losses is established, and can be reversed for subsequent increases in expected cash flows.
•Insured obligations of VIEs, and refinancing vehicles’ debt, where the Company is deemed the primary beneficiary, are accounted for as insurance contracts. Under GAAP, such VIEs and refinancing vehicles are consolidated and any transactions with the Company are eliminated.
•Surplus notes are recognized as surplus and each payment of principal and interest is recorded only upon approval of the insurance regulator rather than as liabilities with periodic accrual of interest.interest under GAAP.
•Acquisitions are accounted for as either statutory purchases or statutory mergers, rather than under the purchase method under GAAP.
•Losses are discounted at tax equivalentpre-tax book yields, and recorded when there is a significant credit deterioration on specific insured obligations and the lossobligations are in default or default is deemed probable and without consideration of the deferred premium revenue.probable. Under GAAP, expected losses are discounted at the risk freerisk-free rate at the end of each reporting period and are recorded only to the extent they exceed deferred premium revenue.
•The present value of contractual or expected installment premiums and commissions are not recorded on the balance sheet as they are under GAAP.
•The put options in CCS are not accounted for as derivatives as they are under GAAP.
•Foreign denominated unearned premiums reserve is remeasured at current exchange rates. rather than carried at historical rates under GAAP.
Bermuda
AG Re, a Bermuda regulated Class 3B insurer, and AGRO, a Bermuda regulated Class 3A and Class C insurer,
prepare their statutory financial statements in conformity with the accounting principles set forth in the Insurance Act 1978, amendments thereto and related regulations. As of December 31, 2016, the Bermuda Monetary Authority (the Authority) requires insurers to prepare statutory financial statements in accordance with the particular accounting principles adopted by the insurer (which, in the case of AG Re and AGRO, are U.S. GAAP), subject to certain adjustments. The principal difference relatesadjustments are mainly related to certain assets designated as “non-admitted assets” which are charged directly to statutory surplus rather than reflected as assets as they are under U.S. GAAP.
United Kingdom
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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
France
AGE prepares its Solvency and £693Financial Condition Report and other required regulatory financial reports based on Autorité de Contrôle Prudentiel et de Résolution (ACPR) regulations and Solvency II. As of December 31, 2022 AGE’s Own Funds were an estimated €52 million respectively.(or $56 million). As of December 31, 2021 AGE’s Own Funds were €58 million (or $66 million).
Dividend Restrictions and Capital Requirements
United States
Under the New York insurance law, AGM and MAC may only pay dividends out of "earned“earned surplus,"” which is the portion of the company'san insurer’s surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to the insurer’s shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM and MAC may each pay dividends without the prior approval of the New York SuperintendentState Department of Financial Services Superintendent (New York Superintendent) in an amount that, together with all dividends declared or distributed by it during the preceding 12 months, dodoes not exceed the lesser of 10% of its policyholders'policyholders’ surplus (as of
its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income during that period.
The maximum amount available during 20202023 for AGM to distribute to AGMH as dividends without regulatory approval is estimated to be approximately $218$209 million. Of such $218$209 million, $72$40 million is estimated to be available for distribution in the first quarter of 2020.2023.
Under Maryland'sMaryland’s insurance law, AGC may, with prior notice to the Maryland Insurance Administration Commissioner, pay an ordinary dividend in an amount that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders'policyholders’ surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. The maximum amount available during 20202023 for AGC to distribute as ordinary dividends is approximately $166$102 million. Of such $166$102 million, approximately $85$20 million is available for distribution in the first quarter of 2020.2023.
Bermuda
For AG Re, any distribution (including repurchase of shares) of any share capital, contributed surplus or other statutory capital that would reduce its total statutory capital by 15% or more of its total statutory capital as set out in its previous year's financial statements requires the prior approval of the Authority. Separately, dividends are paid out of an insurer'sinsurer’s statutory surplus and cannot exceed that surplus. Furthermore, annual dividends cannot exceed 25% of total statutory capital and surplus as set out in its previous year'syear’s financial statements, which is $274$210 million, without AG Re certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 20202023 AG Re has the capacity toto: (i) make capital distributions in an aggregate amount up to $128$129 million without the prior approval of the AuthorityAuthority; and (ii) declare and pay dividends in an aggregate amount up to approximately $274$210 million as of December 31, 2019.2022. Such dividend capacity is further limited byby: (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 $264$138 million as of December 31, 2019,2022; and (ii) the amount of statutory surplus, which as of December 31, 20192022 was $240a deficit of $19 million.
For AGRO, a subsidiary of AG Re, annual dividends cannot exceed $103$98 million, without AGRO certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 20202023 AGRO has the capacity toto: (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the AuthorityAuthority; and (ii) declare and pay dividends in an aggregate amount up to approximately $103$98 million as of December 31, 2019.2022. Such dividend capacity is further limited byby: (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 $383$374 million as of December 31, 2019,2022; and (ii) the amount of statutory surplus, which as of December 31, 20192022 was $273$253 million.
United Kingdom
U.K. company law prohibits AGE UKAGUK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a
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general insurer'sinsurer’s ability to declare a dividend, the Prudential Regulation Authority'sAuthority’s capital requirements may in practice act as a restriction on dividends.dividends for AGUK.
France
French company law prohibits AGE from declaring a dividend to its shareholders unless it has “profits and/or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While French law imposes no statutory restrictions on an insurer’s ability to declare a dividend, the ACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE.
Dividend Restrictions and Capital Requirements
Distributions by
from / Contributions to Insurance Company Subsidiaries
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Dividends paid by AGC to AGUS | $ | 123 | $ | 133 | $ | 107 | |||||
| Dividends paid by AGM to AGMH | 220 | 171 | 196 | ||||||||
| Dividends paid by AG Re to AGL | 275 | 125 | 125 | ||||||||
| Dividends paid by MAC to MAC Holdings (1) | 105 | 27 | 36 | ||||||||
| Repurchase of common stock by AGM from AGMH | — | — | 101 | ||||||||
| Repurchase of common stock by AGC from AGUS | 100 | 200 | — | ||||||||
| Redemption of common stock by MAC from MAC Holdings (1) | — | — | 250 | ||||||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Dividends paid by AGC to AGUS | $ | 207 | $ | 94 | $ | 166 | |||||||||||
| Dividends paid by AGM to AGMH | 266 | 291 | 267 | ||||||||||||||
| Dividends paid by AG Re to AGL (1) | — | 150 | 150 | ||||||||||||||
| Dividends from AGUK to AGM (2) | — | — | 124 | ||||||||||||||
| Contributions from AGM to AGE (2) | — | — | (123) | ||||||||||||||
____________________
(1) The 2021 and 2020 amounts included fixed-maturity securities with a fair value of $46 million and $47 million, respectively.
(2) In 2020, the dividend paid to AGM from AGUK was contributed to AGE.
| 16. Related Party Transactions |
From time to time, certain officers, directors, employees, their family members and related charitable foundations may make investments in various private funds, vehicles or accounts managed by the Company.AssuredIM. These investments are available to those of the Company'sCompany’s employees whom the Company has determined to have a status that reasonably permits the Company to offer them these types of investments in compliance with applicable laws. Generally, these investments are not subject to the management fees and performance allocations or incentive fees charged to other investors. See Note 10, Asset Management Fees, for information on management fees from AssuredIM Funds and CLOs.
As of December 31, 2019, all noncontrolling interests in the consolidated balance sheets represent employees' ownership interests in consolidated Assured Investment Management funds. Andrew Feldstein, the Company’s Chief Investment Officer2022 and HeadDecember 31, 2021, each of Asset Management, is among the Company’s employees who invest in various private funds, vehicles or accounts managed by the Company. See also Note 12, Asset Management Fees, for additional information.
The Company hasowns a minority interest in Wasmer, Schroeder & Company LLC (Wasmer), which isuntil July 1, 2020, was also one of the Company'sCompany’s investment portfolio managers. The Company’s investment management agreement with Wasmer was transferred to the Charles Schwab Corporation (Schwab) on July 1, 2020, in connection with the closing on July 1, 2020 of the purchase by Schwab of the business of Wasmer.
The investment management and reporting software expense from transactions with these related parties wasWellington, BlackRock and Wasmer were approximately $3.8$2.0 million in 2019, $4.02022, $2.4 million in 20182021 and $4.1$3.4 million in 2017.2020. In addition, the Company recognized $1.0 million and $1.2$0.5 million in 2019 and 2018, respectively,2020 in income from its investment in Wasmer, Schroeder & Company LLC, which is included in "equity“equity in net earnings of investees"investees” in the consolidated statements of operations. Accrued expenses
Other related party transactions include receivables from transactionsand payables to AssuredIM Funds and receivables due from employees. Total other assets and liabilities with these related parties were $2$3 million and $1 million, respectively, as of both December 31, 20192022 and $4 million and $3 million, respectively, as of December 31, 2018.2021. In addition, see Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for the investments in AssuredIM Funds and other affiliated entities that are held by CIVs.
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In addition, the Company cancelled 385,777 common shares it received in December 2020 from the Company’s former Chief Investment Officer and Head of Asset Management pursuant to the terms of the separation agreement. The Company recognized $12 million benefit in “other income” in the consolidated statements of operations in connection with this cancellation, with an offset to “retained earnings”.
17. Leases
The Company is party to various non-cancelable lease agreements, theseall of which are operating leases include both operating and finance leases.as of December 31, 2022. The largest lease relatesmajority of the Company's leases relate to approximately 103,500 square feet of office space dedicated to the Company's operations in various locations (primarily New York City, San Francisco, Bermuda, London and expires inParis) consisting of a total of 271 thousand square feet with expiration dates ranging from 2023 to 2032. Subject to certain conditions, the Company has an option to renew this lease for an additional five years at a fair market rent. The Company also leases another 78,400 square feet of office space at a second locationsubleases certain properties that are not used in New York City, and that lease expires in 2024. Additionally, the Company leases additional office space in several other locations, an apartment, and certain equipment. These leases expire at various dates through 2029.its operations.
Accounting Policy
The Company elected the package of practical expedients, which permitted organizations not to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification of expired or existing leases, and (iii) the initial direct costs for existing leases. The Company also elected the practical expedient to account for all lease components and their associated non-lease components (i.e., common area maintenance, real estate taxes, building insurance, etc.) as a single lease component and include all fixed payments in the measurement of ROU assets and lease liabilities.
Operating lease expense is recognized on a straight-line basis over the lease term and finance lease expense is comprised of the straight-line amortization of the lease asset and the accretion of interest expense under the effective interest method.term. Costs related to variable lease and non-lease components for the Company’s leases are expensed in the period incurred. Sublease income is earned on a straight-line basis over the term of the lease.
The Company also subleases office space thatassesses ROU assets for impairment when certain events occur or when there are changes in circumstances including potential alternative uses. If circumstances require an ROU asset to be tested for possible impairment, and the carrying value of the ROU asset is not used forrecoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value and reported in “other operating expenses” in the consolidated statement of operations.
Lease Assets and Liabilities
As of December 31, 2022, the ROU asset and lease liability was $87 million and $116 million, respectively. As of December 31, 2021, the ROU asset and lease liability was $100 million and $136 million, respectively. The weighted average remaining lease term as of December 31, 2022 and December 31, 2021 was 8.2 years and 8.6 years, respectively. The Company used a weighted average discount rate of 2.49% and 2.40% as of December 31, 2022 and December 31, 2021, respectively.
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| As of December 31, 2019 | |||||||||||||
| Assets(1) | Liabilities(2) | Weighted Average Remaining Lease Term (in years) | Weighted Average Discount Rate | ||||||||||
| (in millions) | |||||||||||||
| Operating leases | $ | 100 | $ | 130 | 9.4 | 2.61 | % | ||||||
| Finance leases | 2 | 2 | 1.8 | 1.74 | % | ||||||||
| Total | $ | 102 | $ | 132 | |||||||||
| Year Ended December 31, | ||||
| 2019 | ||||
| (in millions) | ||||
| Operating lease cost | $ | 10 | ||
| Variable lease cost | 2 | |||
| Total lease cost (1) | $ | 12 | ||
| Cash paid for amounts included in the measurement of lease liabilities (2) | ||||
| Operating cash flows from operating leases | $ | 11 | ||
| ROU assets obtained in exchange for new operating lease liabilities (3) | 37 | |||
| ROU assets obtained in exchange for new finance lease liabilities (3) | 2 | |||
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Operating lease cost (1) | $ | 16 | $ | 16 | $ | 30 | ||||||||||||||
| Other lease costs (2) | 3 | 3 | 4 | |||||||||||||||||
| Sublease income | (7) | (5) | (3) | |||||||||||||||||
| Total lease cost (3) | $ | 12 | $ | 14 | $ | 31 | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||||||
| Operating cash outflows for operating leases | $ | 23 | $ | 20 | $ | 19 | ||||||||||||||
| ROU assets obtained in exchange for new operating lease liabilities (4) | 1 | 35 | 4 | |||||||||||||||||
____________________
(3) Includes amortization on finance lease ROU assets and interest on finance lease liabilities reported in “other operating expenses” in the consolidated statements of operations.
(4) The amounts in 2021 relate primarily to additional office space leased in New York City.
During the fourth quarter of 2020, the Company made the decision to actively market for sublease the office space acquired in the BlueMountain Acquisition. Accordingly, the Company recognized an ROU asset impairment of $13 million as of December 31, 2020 within the Asset Management segment, reducing the carrying value of the associated ROU asset to its estimated fair value. This ROU asset fair value was $9 million in 2018 and $9 million in 2017.estimated using an income-approach based on forecasted future cash flows expected to be derived from the property based on current sublease market rent.
Future Minimum Rental Payments
| As of December 31, 2022 | ||||||||
| Year | (in millions) | |||||||
| 2023 | $ | 23 | ||||||
| 2024 | 16 | |||||||
| 2025 | 13 | |||||||
| 2026 | 12 | |||||||
| 2027 | 12 | |||||||
| Thereafter | 53 | |||||||
| Total lease payments | 129 | |||||||
| Less: Imputed interest | 13 | |||||||
| Total lease liabilities | $ | 116 | ||||||
| As of December 31, 2019 | ||||||||
| Year | (in millions) | |||||||
| Operating Leases | Finance Leases | |||||||
| 2020 | $ | 19 | $ | 1 | ||||
| 2021 | 19 | 1 | ||||||
| 2022 | 19 | — | ||||||
| 2023 | 19 | — | ||||||
| 2024 | 11 | — | ||||||
| Thereafter | 62 | — | ||||||
| Total lease payments (1) | 149 | 2 | ||||||
| Less: imputed interest | 19 | — | ||||||
| Total lease liabilities | $ | 130 | $ | 2 | ||||
18. Commitments and Contingencies
Legal Proceedings
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 or liquidity in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of AGL'sAGL’s insurance subsidiaries are involved in litigation with third parties to recover insurance 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
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unrelated to Puerto Rico. Also, in the ordinary course of their respective business, certain of AGL'sAGL’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'sCompany’s results of operations in that particular quarter or year.
The Company also receives subpoenasduces tecum and interrogatories from regulators from time to time.
Accounting Policy
The Company establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated.estimated and discloses such amounts if material to the financial position of the Company. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it iswould be disclosed including matters discussed below. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
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 State of New York (the Court), asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination in December 2008 of 9nine 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'sAGFP’s termination in July 2008 of 28 other credit derivative transactions between LBIE and AGFP and AGFP'sAGFP’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 has calculated that LBIE owes AGFP approximately $4 million for the claims which were dismissed (as described below) and approximately $25$21 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'sLBIE’s complaint, and on March 15, 2013, the courtCourt granted AGFP'sAGFP’s motion to dismiss in respect of the count relating to the 9nine credit derivative transactions and narrowed LBIE'sLBIE’s claim with respect to the 28 other credit derivative transactions. LBIE'sLBIE’s administrators disclosed in an April 10, 2015 report to LBIE’s unsecured creditors that LBIE'sLBIE’s valuation expert has calculated LBIE'sLBIE’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.risk. In addition, LBIE seeks prejudgment interest from the time of termination onwards. AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP'sAGFP’s counterclaims, and on July 2, 2018, the courtCourt granted in part and denied in part AGFP’s motion. The courtCourt 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 courtCourt 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 (the Appellate Division), seeking reversal of the portions of the lower court'scourt’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'sCourt’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. A bench trial was held before Justice Melissa A. Crane of the New York Supreme Court from October 18 through November 19, 2021. Post-trial briefing was submitted on June 21, 2022. In December 2022, both parties provided written submissions at the request of Justice Crane; a decision is anticipated in the first half of 2023.
19. Shareholders’ Equity
Accounting Policy
The Company records share repurchases as a reduction to “common shares” and “additional paid-in capital”. Once additional paid-in capital has been scheduled for March 2020.exhausted, share repurchases are recorded as a reduction to common shares and retained earnings.
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Notes to Consolidated Financial Statements, Continued
Share Issuances
AGL has authorized share capital of $5 million divided into 500,000,000 shares with a par value $0.01 per share. Except as described below, AGL'sAGL’s common shares have no preemptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL'sAGL’s common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL'sAGL’s assets, if any remain after the payment of all itsAGL’s debts and liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a shareholder at fair market value. All of the common shares are fully paid and non-assessable. Holders of AGL'sAGL’s common shares are entitled to receive dividends as lawfully may be declared from time to time by the Board.
In general, and except as provided below, shareholders have 1one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL'sAGL’s shares) of a shareholder are treated as "controlled shares"“controlled shares” (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL'sAGL’s issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL's Bye-laws.AGL’s Bye-Laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a CFC as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL'sAGL’s Bye-Laws as a 9.5% U.S. Shareholder).
Subject to AGL'sAGL’s Bye-Laws and Bermuda law, AGL'sAGL’s Board has the power to issue any of AGL'sAGL’s unissued shares as it determines, including the issuance of any shares or class of shares with preferred, deferred or other special rights.
Under AGL'sAGL’s Bye-Laws and subject to Bermuda law, if AGL'sAGL’s Board determines that any ownership of AGL's shares may result in adverse tax, legal or regulatory consequences to the Company, any of the Company'sCompany’s subsidiaries or any of itsAGL’s shareholders or indirect holders of shares or its Affiliatesaffiliates (other than such as AGL'sAGL’s Board considers de minimis), the Company has the option, but not the obligation, to require such shareholder to sell to AGL, or to a third party to whom AGL assigns the repurchase right, the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board to represent the shares'shares’ fair market value (as defined in AGL'sAGL’s Bye-Laws). In addition, AGL'sAGL’s Board may determine that shares held carry different voting rights when it deems it appropriate to do so toto: (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. "Controlled shares"“Controlled shares” includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL's Bye-lawsAGL’s Bye-Laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.
Share Repurchases
shares. As of February 27, 2020,28, 2023, the Company was authorized to purchase $408$201 million of its common shares; including a $250 million authorization that was approved by the Board on February 26, 2020.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'sCompany’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date.
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Share Repurchases
| Year | Number of Shares Repurchased | Total Payments (in millions) | Average Price Paid Per Share | ||||||||
| 2017 | 12,669,643 | $ | 501 | $ | 39.57 | ||||||
| 2018 | 13,243,107 | $ | 500 | $ | 37.76 | ||||||
| 2019 | 11,163,929 | $ | 500 | $ | 44.79 | ||||||
| 2020 (through February 27, 2020 on a settlement date basis) | 843,729 | $ | 40 | $ | 47.41 | ||||||
| Year | Number of Shares Repurchased | Total Payments (in millions) | Average Price Paid Per Share | |||||||||||||||||
| 2020 | 15,787,804 | $ | 446 | $ | 28.23 | |||||||||||||||
| 2021 | 10,519,040 | 496 | 47.19 | |||||||||||||||||
| 2022 | 8,847,981�� | 503 | 56.79 | |||||||||||||||||
| 2023 (through February 28, 2023 on a settlement date basis) | 36,369 | 2 | 62.23 | |||||||||||||||||
Deferred Compensation
Certain executives of the Company elected to invest a portion of their AG US Group Services Inc. supplemental executive retirement plan (AGS SERP) accounts in the employer stock fund in the AGS SERP. Each unit in the employer stock fund represents the right to receive 1one AGL common share upon a distribution from the AGS SERP. Each unit equals the number of AGL common shares which could have been purchased with the value of the account deemed invested in the employer stock fund as of the date of such election. As of December 31, 20192022 and 2018,2021, there were 74,309 and 74,309 units, respectively, in the AGS SERP. See Note 16, Employee Benefit Plans.
Dividends
Any determination to pay cash dividends is at the discretion of the Company'sCompany’s Board, and depends upon the Company'sCompany’s results of operations, cash flows from operating activities, its financial position, capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual restrictions on the payment of dividends, other potential uses for such funds, and any other factors the Company'sCompany’s Board deems relevant. For more information concerning regulatory constraints that affect the Company'sCompany’s ability to pay dividends, see Note 18,15, Insurance Company Regulatory Requirements.
On February 26, 2020,22, 2023, the Company declared a quarterly dividend of $0.20$0.28 per common share compared with $0.18$0.25 per common share paid in 2019,2022, an increase of 11%12%.
20. Other Comprehensive Income
The following tables present the changes in each component of AOCI and the effect of reclassifications out of AOCI oninto the respective line itemslines in net income.the consolidated statements of operations.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Year Ended December 31, 20192022
| Net Unrealized Gains (Losses) on Investments with: | ISCR on FG VIEs’ Liabilities with Recourse | Cumulative Translation Adjustment | Cash Flow Hedge | Total AOCI | |||||||||||||||||||||||||||||||
| No Credit Impairment | Credit Impairment | ||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 375 | $ | (24) | $ | (21) | $ | (36) | $ | 6 | $ | 300 | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (755) | (103) | (4) | (9) | — | (871) | |||||||||||||||||||||||||||||
| Less: Amounts reclassified from AOCI to: | |||||||||||||||||||||||||||||||||||
| Net realized investment gains (losses) | (44) | (21) | — | — | — | (65) | |||||||||||||||||||||||||||||
| Fair value gains (losses) on FG VIEs | — | — | (3) | — | — | (3) | |||||||||||||||||||||||||||||
| Interest expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total before tax | (44) | (21) | (3) | — | — | (68) | |||||||||||||||||||||||||||||
| Tax (provision) benefit | 7 | 4 | 1 | — | — | 12 | |||||||||||||||||||||||||||||
| Total amount reclassified from AOCI, net of tax | (37) | (17) | (2) | — | — | (56) | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (718) | (86) | (2) | (9) | — | (815) | |||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | (343) | $ | (110) | $ | (23) | $ | (45) | $ | 6 | $ | (515) | |||||||||||||||||||||||
240
Net Unrealized Gains (Losses) on Investments with no OTTI | Net Unrealized Gains (Losses) on Investments with OTTI | 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 | 339 | (62 | ) | (8 | ) | (1 | ) | — | 268 | ||||||||||||||
| Less: Amounts reclassified from AOCI to: | |||||||||||||||||||||||
| Net realized investment gains (losses) | 55 | (32 | ) | — | — | — | 23 | ||||||||||||||||
| Net investment income | 1 | 15 | — | — | — | 16 | |||||||||||||||||
| Fair value gains (losses) on FG VIEs | — | — | (15 | ) | — | — | (15 | ) | |||||||||||||||
| Interest expense | — | — | — | — | 1 | 1 | |||||||||||||||||
| Total before tax | 56 | (17 | ) | (15 | ) | — | 1 | 25 | |||||||||||||||
| Tax (provision) benefit | (10 | ) | 1 | 3 | — | — | (6 | ) | |||||||||||||||
| Total amount reclassified from AOCI, net of tax | 46 | (16 | ) | (12 | ) | — | 1 | 19 | |||||||||||||||
| Net current period other comprehensive income (loss) | 293 | (46 | ) | 4 | (1 | ) | (1 | ) | 249 | ||||||||||||||
| Balance, December 31, 2019 | $ | 352 | $ | 48 | $ | (27 | ) | $ | (38 | ) | $ | 7 | $ | 342 | |||||||||
Assured Guaranty Ltd.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Year Ended December 31, 20182021
| Net Unrealized Gains (Losses) on Investments with: | ISCR on FG VIEs’ Liabilities with Recourse | Cumulative Translation Adjustment | Cash Flow Hedge | Total AOCI | |||||||||||||||||||||||||||||||
| No Credit Impairment | Credit Impairment | ||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 577 | $ | (30) | $ | (20) | $ | (36) | $ | 7 | $ | 498 | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (184) | — | (3) | — | — | (187) | |||||||||||||||||||||||||||||
| Less: Amounts reclassified from AOCI to: | |||||||||||||||||||||||||||||||||||
| Net realized investment gains (losses) | 21 | (7) | — | — | — | 14 | |||||||||||||||||||||||||||||
| Fair value gains (losses) on FG VIEs | — | — | (3) | — | — | (3) | |||||||||||||||||||||||||||||
| Interest expense | — | — | — | — | 1 | 1 | |||||||||||||||||||||||||||||
| Total before tax | 21 | (7) | (3) | — | 1 | 12 | |||||||||||||||||||||||||||||
| Tax (provision) benefit | (3) | 1 | 1 | — | — | (1) | |||||||||||||||||||||||||||||
| Total amount reclassified from AOCI, net of tax | 18 | (6) | (2) | — | 1 | 11 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (202) | 6 | (1) | — | (1) | (198) | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 375 | $ | (24) | $ | (21) | $ | (36) | $ | 6 | $ | 300 | |||||||||||||||||||||||
Net Unrealized Gains (Losses) on Investments with no OTTI | Net Unrealized Gains (Losses) on Investments with OTTI | 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, 2017 | $ | 273 | $ | 120 | — | $ | (29 | ) | $ | 8 | $ | 372 | |||||||||||
| Effect of adoption of ASU 2016-01 (1) | 1 | — | (33 | ) | — | — | (32 | ) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (208 | ) | (58 | ) | (5 | ) | (8 | ) | — | (279 | ) | ||||||||||||
| Less: Amounts reclassified from AOCI to: | |||||||||||||||||||||||
| Net realized investment gains (losses) | 7 | (38 | ) | — | — | — | (31 | ) | |||||||||||||||
| Fair value gains (losses) on FG VIEs | — | — | (9 | ) | — | — | (9 | ) | |||||||||||||||
| Interest expense | — | — | — | — | — | — | |||||||||||||||||
| Total before tax | 7 | (38 | ) | (9 | ) | — | — | (40 | ) | ||||||||||||||
| Tax (provision) benefit | — | 6 | 2 | — | — | 8 | |||||||||||||||||
| Total amount reclassified from AOCI, net of tax | 7 | (32 | ) | (7 | ) | — | — | (32 | ) | ||||||||||||||
| Net current period other comprehensive income (loss) | (215 | ) | (26 | ) | 2 | (8 | ) | — | (247 | ) | |||||||||||||
| Balance, December 31, 2018 | $ | 59 | $ | 94 | $ | (31 | ) | $ | (37 | ) | $ | 8 | $ | 93 | |||||||||
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Year Ended December 31, 20172020
Net Unrealized Gains (Losses) on Investments with no OTTI | Net Unrealized Gains (Losses) on Investments with OTTI | Cumulative Translation Adjustment | Cash Flow Hedge | Total AOCI | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Balance, December 31, 2016 | $ | 171 | $ | 10 | $ | (39 | ) | $ | 7 | $ | 149 | ||||||||
| Reclassification of stranded tax effects | 38 | 21 | (5 | ) | 2 | $ | 56 | ||||||||||||
| Other comprehensive income (loss) before reclassifications | 128 | 69 | 15 | — | 212 | ||||||||||||||
| Less: Amounts reclassified from AOCI to: | |||||||||||||||||||
| Net realized investment gains (losses) | 71 | (31 | ) | — | — | 40 | |||||||||||||
| Net investment income | 27 | 1 | — | — | 28 | ||||||||||||||
| Interest expense | — | — | — | 1 | 1 | ||||||||||||||
| Total before tax | 98 | (30 | ) | — | 1 | 69 | |||||||||||||
| Tax (provision) benefit | (34 | ) | 10 | — | — | (24 | ) | ||||||||||||
| Total amount reclassified from AOCI, net of tax | 64 | (20 | ) | — | 1 | 45 | |||||||||||||
| Net current period other comprehensive income (loss) | 64 | 89 | 15 | (1 | ) | 167 | |||||||||||||
| Balance, December 31, 2017 | $ | 273 | $ | 120 | $ | (29 | ) | $ | 8 | $ | 372 | ||||||||
| Net Unrealized Gains (Losses) on Investments with: | ISCR on FG VIEs’ Liabilities with Recourse | Cumulative Translation Adjustment | Cash Flow Hedge | Total AOCI | |||||||||||||||||||||||||||||||
| No Credit Impairment | Credit Impairment | ||||||||||||||||||||||||||||||||||
| (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 | 189 | (29) | 7 | 2 | — | 169 | |||||||||||||||||||||||||||||
| Less: Amounts reclassified from AOCI to: | |||||||||||||||||||||||||||||||||||
| Net realized investment gains (losses) | 30 | (16) | — | — | — | 14 | |||||||||||||||||||||||||||||
| Total before tax | 30 | (16) | — | — | — | 14 | |||||||||||||||||||||||||||||
| Tax (provision) benefit | (4) | 3 | — | — | — | (1) | |||||||||||||||||||||||||||||
| Total amount reclassified from AOCI, net of tax | 26 | (13) | — | — | — | 13 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 163 | (16) | 7 | 2 | — | 156 | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 577 | $ | (30) | $ | (20) | $ | (36) | $ | 7 | $ | 498 | |||||||||||||||||||||||
21. Earnings Per Share
Accounting Policy
The Company computes EPSearnings per share (EPS) using athe two-class method, which is an earnings allocation formula that determines EPS forfor: (i) each class of common stockshares (the Company has a single class of common stock),shares); and (ii) participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. Restricted stock awardsAwards and share units under the AGS SERP with non-forfeitable dividends are considered participating securities as they received non-forfeitable rightssecurities.
241
Assured Guaranty Ltd.
Notes to dividends (or dividend equivalents) similar to common stock.Consolidated Financial Statements, Continued
Basic EPS is calculatedcomputed by dividing net income (loss) available to common shareholders of Assured Guaranty by the weighted‑averageweighted-average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock, restricted stock units, stock options and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive ofof: (1) the treasury stock methodmethod; or (2) the two-class method assuming nonvested shares are not converted into common shares.
Computation of Earnings Per Share
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||
| Basic EPS: | |||||||||||||||||
| Net income (loss) attributable to AGL | $ | 124 | $ | 389 | 362 | ||||||||||||
| Less: Distributed and undistributed income (loss) available to nonvested shareholders | 1 | — | 1 | ||||||||||||||
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 123 | $ | 389 | 361 | ||||||||||||
| Basic shares | 62.9 | 73.5 | 85.5 | ||||||||||||||
| Basic EPS | $ | 1.95 | $ | 5.29 | $ | 4.22 | |||||||||||
| Diluted EPS: | |||||||||||||||||
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 123 | $ | 389 | $ | 361 | |||||||||||
| 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 | $ | 123 | $ | 389 | $ | 361 | |||||||||||
| Basic shares | 62.9 | 73.5 | 85.5 | ||||||||||||||
| Dilutive securities: | |||||||||||||||||
| Options and restricted stock awards | 1.0 | 0.8 | 0.7 | ||||||||||||||
| Diluted shares | 63.9 | 74.3 | 86.2 | ||||||||||||||
| Diluted EPS | $ | 1.92 | $ | 5.23 | $ | 4.19 | |||||||||||
| Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | 0.6 | 0.1 | 0.8 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions, except per share amounts) | |||||||||||
| Basic EPS: | |||||||||||
| Net income (loss) attributable to AGL | $ | 402 | $ | 521 | 730 | ||||||
| Less: Distributed and undistributed income (loss) available to nonvested shareholders | 1 | 1 | 1 | ||||||||
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 401 | $ | 520 | 729 | ||||||
| Basic shares | 99.3 | 110.0 | 120.6 | ||||||||
| Basic EPS | $ | 4.04 | $ | 4.73 | $ | 6.05 | |||||
| Diluted EPS: | |||||||||||
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 401 | $ | 520 | $ | 729 | |||||
| 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 | $ | 401 | $ | 520 | $ | 729 | |||||
| Basic shares | 99.3 | 110.0 | 120.6 | ||||||||
| Dilutive securities: | |||||||||||
| Options and restricted stock awards | 0.9 | 1.3 | 1.7 | ||||||||
| Diluted shares | 100.2 | 111.3 | 122.3 | ||||||||
| Diluted EPS | $ | 4.00 | $ | 4.68 | $ | 5.96 | |||||
| Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | — | 0.1 | 0.1 | ||||||||
242
| 2019 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | |||||||||||||||
| (dollars in millions, except per share data) | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||
| Net earned premiums | $ | 118 | $ | 112 | $ | 123 | $ | 123 | $ | 476 | ||||||||||
| Net investment income | 98 | 110 | 88 | 82 | 378 | |||||||||||||||
| Asset management fees | — | — | — | 22 | 22 | |||||||||||||||
| Net realized investment gains (losses) | (12 | ) | 8 | 16 | 10 | 22 | ||||||||||||||
| Net change in fair value of credit derivatives | (22 | ) | (8 | ) | 5 | 19 | (6 | ) | ||||||||||||
| Fair value gains (losses) on FG VIEs | 5 | 33 | 4 | — | 42 | |||||||||||||||
| Foreign exchange gains (losses) on remeasurement | 11 | (14 | ) | (21 | ) | 48 | 24 | |||||||||||||
| Commutation gains | — | 1 | — | — | 1 | |||||||||||||||
| Other income (loss) | (3 | ) | 24 | (9 | ) | (8 | ) | 4 | ||||||||||||
| Expenses | ||||||||||||||||||||
| Loss and LAE | 46 | (1 | ) | 30 | 18 | 93 | ||||||||||||||
| Interest expense | 23 | 22 | 22 | 22 | 89 | |||||||||||||||
| Amortization of DAC | 6 | 4 | 3 | 5 | 18 | |||||||||||||||
| Employee compensation and benefit expenses | 41 | 39 | 38 | 60 | 178 | |||||||||||||||
| Other operating expenses | 23 | 21 | 27 | 54 | 125 | |||||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 56 | 181 | 86 | 137 | 460 | |||||||||||||||
| Equity in net earnings of investees | 2 | 1 | — | 1 | 4 | |||||||||||||||
| Income (loss) before income taxes | 58 | 182 | 86 | 138 | 464 | |||||||||||||||
| Provision (benefit) for income taxes | 4 | 40 | 17 | 2 | 63 | |||||||||||||||
| Net income (loss) | 54 | 142 | 69 | 136 | 401 | |||||||||||||||
| Less: Redeemable noncontrolling interests | — | — | — | (1 | ) | (1 | ) | |||||||||||||
| Net income (loss) attributable to AGL | 54 | 142 | 69 | 137 | 402 | |||||||||||||||
| Earnings (loss) per share(1): | ||||||||||||||||||||
| Basic | $ | 0.52 | $ | 1.40 | $ | 0.71 | $ | 1.43 | $ | 4.04 | ||||||||||
| Diluted | $ | 0.52 | $ | 1.39 | $ | 0.70 | $ | 1.42 | $ | 4.00 | ||||||||||
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
| 2018 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | |||||||||||||||
| (dollars in millions, except per share data) | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||
| Net earned premiums | $ | 145 | $ | 136 | $ | 142 | $ | 125 | $ | 548 | ||||||||||
| Net investment income | 100 | 98 | 99 | 98 | 395 | |||||||||||||||
| Net realized investment gains (losses) | (5 | ) | (2 | ) | (7 | ) | (18 | ) | (32 | ) | ||||||||||
| Net change in fair value of credit derivatives | 34 | 48 | 21 | 9 | 112 | |||||||||||||||
| Fair value gains (losses) on FG VIEs | 4 | 2 | 5 | 3 | 14 | |||||||||||||||
| Foreign exchange gains (losses) on remeasurement | 22 | (36 | ) | (8 | ) | (15 | ) | (37 | ) | |||||||||||
| Commutation gains | 1 | (18 | ) | 1 | — | (16 | ) | |||||||||||||
| Other income (loss) | (8 | ) | (8 | ) | 22 | 11 | 17 | |||||||||||||
| Expenses | ||||||||||||||||||||
| Loss and LAE | (18 | ) | 44 | 17 | 21 | 64 | ||||||||||||||
| Interest expense | 24 | 24 | 23 | 23 | 94 | |||||||||||||||
| Amortization of DAC | 5 | 4 | 3 | 4 | 16 | |||||||||||||||
| Employee compensation and benefit expenses | 40 | 36 | 36 | 40 | 152 | |||||||||||||||
| Other operating expenses | 25 | 26 | 20 | 25 | 96 | |||||||||||||||
| Income (loss) before income taxes and equity in net earnings of investees | 217 | 86 | 176 | 100 | 579 | |||||||||||||||
| Equity in net earnings of investees | — | 1 | (1 | ) | 1 | 1 | ||||||||||||||
| Income (loss) before income taxes | 217 | 87 | 175 | 101 | 580 | |||||||||||||||
| Provision (benefit) for income taxes | 20 | 12 | 14 | 13 | 59 | |||||||||||||||
| Net income (loss) | 197 | 75 | 161 | 88 | 521 | |||||||||||||||
| Less: Noncontrolling interests | — | — | — | — | — | |||||||||||||||
| Net income (loss) attributable to AGL | 197 | 75 | 161 | 88 | 521 | |||||||||||||||
| Earnings (loss) per share(1): | ||||||||||||||||||||
| Basic | $ | 1.71 | $ | 0.67 | $ | 1.48 | $ | 0.84 | $ | 4.73 | ||||||||||
| Diluted | $ | 1.68 | $ | 0.67 | $ | 1.47 | $ | 0.83 | $ | 4.68 | ||||||||||
The following tables present the condensed consolidating financial information for AGUS and AGMH, 100%-owned subsidiariesstatements of AGL, which have issued publicly traded debt securities that are fully and unconditionally guaranteed by AGL. The information for AGL, AGUS and AGMH presents their subsidiaries on the equity method of accounting.
Assured Guaranty Ltd. (Parent Company)
Condensed Balance Sheets
(in millions)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Assets | |||||||||||
| Investments | $ | 26 | $ | 188 | |||||||
| Investments in subsidiaries | 4,984 | 5,994 | |||||||||
| Dividends receivable from subsidiaries | 18 | 81 | |||||||||
| Other assets (1) | 58 | 46 | |||||||||
| Total assets | $ | 5,086 | $ | 6,309 | |||||||
| Liabilities | |||||||||||
| Other liabilities (1) | $ | 22 | $ | 17 | |||||||
| Total liabilities | $ | 22 | $ | 17 | |||||||
| Total shareholders’ equity attributable to AGL | $ | 5,064 | $ | 6,292 | |||||||
| Total liabilities and shareholders’ equity | $ | 5,086 | $ | 6,309 | |||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) (1) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Total investment portfolio and cash | $ | 135 | $ | 364 | $ | 15 | $ | 10,408 | $ | (513 | ) | $ | 10,409 | ||||||||||
| Investment in subsidiaries | 6,450 | 6,224 | 4,258 | 383 | (17,315 | ) | — | ||||||||||||||||
| Premiums receivable, net of commissions payable | — | — | — | 1,502 | (216 | ) | 1,286 | ||||||||||||||||
| Deferred acquisition costs | — | — | — | 145 | (34 | ) | 111 | ||||||||||||||||
| Intercompany loan receivable | — | — | — | 290 | (290 | ) | — | ||||||||||||||||
| FG VIEs’ assets, at fair value | — | — | — | 442 | — | 442 | |||||||||||||||||
| Assets of consolidated investment vehicles | — | — | — | 595 | (23 | ) | 572 | ||||||||||||||||
| Dividends receivable from affiliate | 40 | 10 | — | — | (50 | ) | — | ||||||||||||||||
| Goodwill and other intangible assets | — | — | — | 216 | — | 216 | |||||||||||||||||
| Other | 31 | 32 | 27 | 2,769 | (1,569 | ) | 1,290 | ||||||||||||||||
| Total assets | $ | 6,656 | $ | 6,630 | $ | 4,300 | $ | 16,750 | $ | (20,010 | ) | $ | 14,326 | ||||||||||
| Liabilities and shareholders' equity | |||||||||||||||||||||||
| Unearned premium reserves | $ | — | $ | — | $ | — | $ | 4,584 | $ | (848 | ) | $ | 3,736 | ||||||||||
| Loss and LAE reserve | — | — | — | 1,316 | (266 | ) | 1,050 | ||||||||||||||||
| Long-term debt | — | 844 | 476 | 4 | (89 | ) | 1,235 | ||||||||||||||||
| Intercompany loans payable | — | 290 | — | 300 | (590 | ) | — | ||||||||||||||||
| Credit derivative liabilities | — | — | — | 225 | (34 | ) | 191 | ||||||||||||||||
| FG VIEs’ liabilities, at fair value | — | — | — | 469 | — | 469 | |||||||||||||||||
| Liabilities of consolidated investment vehicles | — | — | — | 505 | (23 | ) | 482 | ||||||||||||||||
| Dividends payable to affiliate | — | 40 | 10 | — | (50 | ) | — | ||||||||||||||||
| Other | 17 | 69 | 66 | 1,010 | (651 | ) | 511 | ||||||||||||||||
| Total liabilities | 17 | 1,243 | 552 | 8,413 | (2,551 | ) | 7,674 | ||||||||||||||||
| Redeemable noncontrolling interests in consolidated investment vehicles | — | — | — | — | 7 | 7 | |||||||||||||||||
| Total shareholders' equity attributable to AGL | 6,639 | 5,387 | 3,748 | 7,954 | (17,089 | ) | 6,639 | ||||||||||||||||
| Nonredeemable noncontrolling interests | — | — | — | 383 | (377 | ) | 6 | ||||||||||||||||
| Total shareholders' equity | 6,639 | 5,387 | 3,748 | 8,337 | (17,466 | ) | 6,645 | ||||||||||||||||
| Total liabilities, redeemable noncontrolling interests and shareholders' equity | $ | 6,656 | $ | 6,630 | $ | 4,300 | $ | 16,750 | $ | (20,010 | ) | $ | 14,326 | ||||||||||
Assured Guaranty Ltd. (Parent Company)
Condensed Statements of Operations and Comprehensive Income
(in millions)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenues | |||||||||||||||||
| Net investment income | $ | 3 | $ | 1 | $ | — | |||||||||||
| Net realized investment gains (losses) | (4) | — | — | ||||||||||||||
| Total revenues | (1) | 1 | — | ||||||||||||||
| Expenses | |||||||||||||||||
| Other expenses (1) | 45 | 35 | 34 | ||||||||||||||
| Total expenses | 45 | 35 | 34 | ||||||||||||||
| Income (loss) before equity in earnings of subsidiaries | (46) | (34) | (34) | ||||||||||||||
| Equity in earnings of subsidiaries | 170 | 423 | 396 | ||||||||||||||
| Net income attributable to AGL | 124 | 389 | 362 | ||||||||||||||
| Other comprehensive income (loss) attributable to AGL | (815) | (198) | 156 | ||||||||||||||
| Comprehensive income (loss) attributable to AGL | $ | (691) | $ | 191 | $ | 518 | |||||||||||
____________________
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) (1) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Total investment portfolio and cash | $ | 45 | $ | 334 | $ | 23 | $ | 11,000 | $ | (425 | ) | $ | 10,977 | ||||||||||
| Investment in subsidiaries | 6,440 | 5,835 | 3,991 | 226 | (16,492 | ) | — | ||||||||||||||||
| Premiums receivable, net of commissions payable | — | — | — | 1,071 | (167 | ) | 904 | ||||||||||||||||
| Deferred acquisition costs | — | — | — | 143 | (38 | ) | 105 | ||||||||||||||||
| Deferred tax asset, net | — | — | — | 162 | (94 | ) | 68 | ||||||||||||||||
| Intercompany loan receivable | — | — | — | 50 | (50 | ) | — | ||||||||||||||||
| FG VIEs’ assets, at fair value | — | — | — | 569 | — | 569 | |||||||||||||||||
| Dividends receivable from affiliate | 60 | — | — | — | (60 | ) | — | ||||||||||||||||
| Other | 29 | 66 | 24 | 2,437 | (1,576 | ) | 980 | ||||||||||||||||
| Total assets | $ | 6,574 | $ | 6,235 | $ | 4,038 | $ | 15,658 | $ | (18,902 | ) | $ | 13,603 | ||||||||||
| Liabilities and shareholders' equity | |||||||||||||||||||||||
| Unearned premium reserves | $ | — | $ | — | $ | — | $ | 4,452 | $ | (940 | ) | $ | 3,512 | ||||||||||
| Loss and LAE reserve | — | — | — | 1,467 | (290 | ) | 1,177 | ||||||||||||||||
| Long-term debt | — | 844 | 468 | 5 | (84 | ) | 1,233 | ||||||||||||||||
| Intercompany loans payable | — | 50 | — | 300 | (350 | ) | — | ||||||||||||||||
| Credit derivative liabilities | — | — | — | 236 | (27 | ) | 209 | ||||||||||||||||
| Deferred tax liabilities, net | — | 49 | 50 | — | (99 | ) | — | ||||||||||||||||
| FG VIEs’ liabilities, at fair value | — | — | — | 619 | — | 619 | |||||||||||||||||
| Dividends payable to affiliate | — | 60 | — | — | (60 | ) | — | ||||||||||||||||
| Other | 19 | 3 | 17 | 763 | (504 | ) | 298 | ||||||||||||||||
| Total liabilities | 19 | 1,006 | 535 | 7,842 | (2,354 | ) | 7,048 | ||||||||||||||||
| Redeemable noncontrolling interests in consolidated investment vehicles | — | — | — | — | — | — | |||||||||||||||||
| Total shareholders' equity attributable to AGL | 6,555 | 5,229 | 3,503 | 7,590 | (16,322 | ) | 6,555 | ||||||||||||||||
| Noncontrolling interests | — | — | — | 226 | (226 | ) | — | ||||||||||||||||
| Total shareholders' equity | 6,555 | 5,229 | 3,503 | 7,816 | (16,548 | ) | 6,555 | ||||||||||||||||
| Total liabilities, redeemable noncontrolling interests and shareholders' equity | $ | 6,574 | $ | 6,235 | $ | 4,038 | $ | 15,658 | $ | (18,902 | ) | $ | 13,603 | ||||||||||
243
Assured Guaranty Ltd.
Assured Guaranty Ltd. (Parent Company)
(in millions)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income attributable to AGL | $ | 124 | $ | 389 | $ | 362 | |||||||||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||||||||
| Equity in earnings of subsidiaries | (170) | (423) | (396) | ||||||||||||||
| Net realized investment losses (gains) | 4 | — | — | ||||||||||||||
| Cash dividends from subsidiaries | 437 | 539 | 547 | ||||||||||||||
| Other | 32 | 22 | 19 | ||||||||||||||
| Net cash flows provided by (used in) operating activities | 427 | 527 | 532 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Short-term investments with maturities of over three months: | |||||||||||||||||
| Purchases | — | — | (4) | ||||||||||||||
| Sales | 52 | — | — | ||||||||||||||
| Maturities and paydowns | 5 | 4 | — | ||||||||||||||
| Net sales (purchases) of short-term investments with original maturities of less than three months | 92 | 41 | (3) | ||||||||||||||
| Net cash flows provided by (used in) investing activities | 149 | 45 | (7) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Dividends paid | (64) | (66) | (69) | ||||||||||||||
| Repurchases of common shares | (500) | (496) | (446) | ||||||||||||||
| Other | (12) | (10) | (10) | ||||||||||||||
| Net cash flows provided by (used in) financing activities | (576) | (572) | (525) | ||||||||||||||
| Increase (decrease) in cash | — | — | — | ||||||||||||||
| Cash at beginning of period | — | — | — | ||||||||||||||
| Cash at end of period | $ | — | $ | — | $ | — | |||||||||||
| Supplemental disclosure of non-cash investing activities: | |||||||||||||||||
| Dividend from a subsidiary in the form of fixed-maturity securities | $ | — | $ | 46 | $ | 47 | |||||||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Net earned premiums | $ | — | $ | — | $ | — | $ | 486 | $ | (10 | ) | $ | 476 | ||||||||||
| Net investment income | — | 11 | 1 | 388 | (22 | ) | 378 | ||||||||||||||||
| Asset management fees | — | — | — | 22 | — | 22 | |||||||||||||||||
| Net realized investment gains (losses) | — | — | — | 22 | — | 22 | |||||||||||||||||
| Net change in fair value of credit derivatives | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||
| Other | — | — | — | 78 | (7 | ) | 71 | ||||||||||||||||
| Total revenues | — | 11 | 1 | 990 | (39 | ) | 963 | ||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Loss and LAE | — | — | — | 98 | (5 | ) | 93 | ||||||||||||||||
| Interest expense | — | 51 | 54 | 11 | (27 | ) | 89 | ||||||||||||||||
| Amortization of deferred acquisition costs | — | — | — | 22 | (4 | ) | 18 | ||||||||||||||||
| Other operating expenses | 31 | 10 | — | 266 | (4 | ) | 303 | ||||||||||||||||
| Total expenses | 31 | 61 | 54 | 397 | (40 | ) | 503 | ||||||||||||||||
| Equity in net earnings of investees | — | — | — | 2 | 2 | 4 | |||||||||||||||||
| Income (loss) before income taxes and equity in net earnings of subsidiaries | (31 | ) | (50 | ) | (53 | ) | 595 | 3 | 464 | ||||||||||||||
| Total (provision) benefit for income taxes | — | 10 | 11 | (84 | ) | — | (63 | ) | |||||||||||||||
| Equity in net earnings of subsidiaries | 433 | 422 | 327 | 18 | (1,200 | ) | — | ||||||||||||||||
| Net income (loss) | 402 | 382 | 285 | 529 | (1,197 | ) | 401 | ||||||||||||||||
| Less: noncontrolling interests | — | — | — | 18 | (19 | ) | (1 | ) | |||||||||||||||
| Net income (loss) attributable to AGL | $ | 402 | $ | 382 | $ | 285 | $ | 511 | $ | (1,178 | ) | $ | 402 | ||||||||||
| Comprehensive income (loss) | $ | 651 | $ | 553 | $ | 440 | $ | 781 | $ | (1,775 | ) | $ | 650 | ||||||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Net earned premiums | $ | — | $ | — | $ | — | $ | 563 | $ | (15 | ) | $ | 548 | ||||||||||
| Net investment income | 1 | 9 | 1 | 398 | (14 | ) | 395 | ||||||||||||||||
| Net realized investment gains (losses) | — | — | — | (32 | ) | — | (32 | ) | |||||||||||||||
| Net change in fair value of credit derivatives | — | — | — | 112 | — | 112 | |||||||||||||||||
| Other | 12 | — | — | 192 | (226 | ) | (22 | ) | |||||||||||||||
| Total revenues | 13 | 9 | 1 | 1,233 | (255 | ) | 1,001 | ||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Loss and LAE | — | — | — | 70 | (6 | ) | 64 | ||||||||||||||||
| Interest expense | — | 49 | 54 | 10 | (19 | ) | 94 | ||||||||||||||||
| Amortization of deferred acquisition costs | — | — | — | 21 | (5 | ) | 16 | ||||||||||||||||
| Other operating expenses | 41 | 10 | — | 394 | (197 | ) | 248 | ||||||||||||||||
| Total expenses | 41 | 59 | 54 | 495 | (227 | ) | 422 | ||||||||||||||||
| Equity in net earnings of investees | — | — | — | 1 | — | 1 | |||||||||||||||||
| Income (loss) before income taxes and equity in net earnings of subsidiaries | (28 | ) | (50 | ) | (53 | ) | 739 | (28 | ) | 580 | |||||||||||||
| Total (provision) benefit for income taxes | — | 52 | 11 | (123 | ) | 1 | (59 | ) | |||||||||||||||
| Equity in net earnings of subsidiaries | 549 | 412 | 277 | 24 | (1,262 | ) | — | ||||||||||||||||
| Net income (loss) | 521 | 414 | 235 | 640 | (1,289 | ) | 521 | ||||||||||||||||
| Less: noncontrolling interests | — | — | — | 24 | (24 | ) | — | ||||||||||||||||
| Net income (loss) attributable to AGL | $ | 521 | $ | 414 | $ | 235 | $ | 616 | $ | (1,265 | ) | $ | 521 | ||||||||||
| Comprehensive income (loss) | $ | 274 | $ | 218 | $ | 107 | $ | 395 | $ | (720 | ) | $ | 274 | ||||||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Net earned premiums | $ | — | $ | — | $ | — | $ | 728 | $ | (38 | ) | $ | 690 | ||||||||||
| Net investment income | — | 2 | — | 426 | (11 | ) | 417 | ||||||||||||||||
| Net realized investment gains (losses) | — | — | — | 45 | (5 | ) | 40 | ||||||||||||||||
| Net change in fair value of credit derivatives | — | — | — | 111 | — | 111 | |||||||||||||||||
| Bargain purchase gain and settlement of pre-existing relationships | — | — | — | 58 | — | 58 | |||||||||||||||||
| Other | 10 | — | — | 609 | (196 | ) | 423 | ||||||||||||||||
| Total revenues | 10 | 2 | — | 1,977 | (250 | ) | 1,739 | ||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Loss and LAE | — | — | — | 327 | 61 | 388 | |||||||||||||||||
| Interest expense | — | 47 | 54 | 11 | (15 | ) | 97 | ||||||||||||||||
| Amortization of deferred acquisition costs | — | — | — | 26 | (7 | ) | 19 | ||||||||||||||||
| Other operating expenses | 38 | 12 | 1 | 394 | (201 | ) | 244 | ||||||||||||||||
| Total expenses | 38 | 59 | 55 | 758 | (162 | ) | 748 | ||||||||||||||||
| Equity in net earnings of investees | — | — | — | — | — | — | |||||||||||||||||
| Income (loss) before income taxes and equity in net earnings of subsidiaries | (28 | ) | (57 | ) | (55 | ) | 1,219 | (88 | ) | 991 | |||||||||||||
| Total (provision) benefit for income taxes | — | 17 | 54 | (359 | ) | 27 | (261 | ) | |||||||||||||||
| Equity in net earnings of subsidiaries | 758 | 636 | 395 | 32 | (1,821 | ) | — | ||||||||||||||||
| Net income (loss) | 730 | 596 | 394 | 892 | (1,882 | ) | 730 | ||||||||||||||||
| Less: noncontrolling interests | — | — | — | 32 | (32 | ) | — | ||||||||||||||||
| Net income (loss) attributable to AGL | $ | 730 | $ | 596 | $ | 394 | $ | 860 | $ | (1,850 | ) | $ | 730 | ||||||||||
| Comprehensive income (loss) | $ | 897 | $ | 754 | $ | 482 | $ | 1,084 | $ | (2,320 | ) | $ | 897 | ||||||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Net cash flows provided by (used in) operating activities | $ | 679 | $ | 190 | $ | 172 | $ | (287 | ) | $ | (1,263 | ) | $ | (509 | ) | ||||||||
| Cash flows from investing activities | |||||||||||||||||||||||
| Fixed-maturity securities: | |||||||||||||||||||||||
| Purchases | — | (3 | ) | — | (873 | ) | 3 | (873 | ) | ||||||||||||||
| Sales | — | — | — | 1,805 | — | 1,805 | |||||||||||||||||
| Maturities and paydowns | — | 11 | 8 | 762 | — | 781 | |||||||||||||||||
| Short-term investments with maturities of over three months: | |||||||||||||||||||||||
| Purchases | — | — | — | (229 | ) | — | (229 | ) | |||||||||||||||
| Sales | — | — | — | 2 | — | 2 | |||||||||||||||||
| Maturities and paydowns | — | 12 | — | 304 | — | 316 | |||||||||||||||||
| Net sales (purchases) of short-term investments with maturities of less than three months | (90 | ) | (44 | ) | 4 | (493 | ) | — | (623 | ) | |||||||||||||
| Net proceeds from paydowns on FG VIEs’ assets | — | — | — | 139 | — | 139 | |||||||||||||||||
| Net proceeds from sales of FG VIEs’ assets | — | — | — | 51 | — | 51 | |||||||||||||||||
| Repayment of intercompany loans | — | — | — | 10 | (10 | ) | — | ||||||||||||||||
| Issuance of intercompany loans | — | — | — | (250 | ) | 250 | — | ||||||||||||||||
| Investment in subsidiaries | — | 65 | 5 | (175 | ) | 105 | — | ||||||||||||||||
| Return of capital from subsidiaries | — | 100 | — | 10 | (110 | ) | — | ||||||||||||||||
| BlueMountain Acquisition, net of cash acquired | — | (157 | ) | — | 12 | — | (145 | ) | |||||||||||||||
| Other | — | — | — | (55 | ) | — | (55 | ) | |||||||||||||||
| Net cash flows provided by (used in) investing activities | (90 | ) | (16 | ) | 17 | 1,020 | 238 | 1,169 | |||||||||||||||
| Cash flows from financing activities | |||||||||||||||||||||||
| Return of capital | — | — | — | (10 | ) | 10 | — | ||||||||||||||||
| Capital contribution | — | — | — | 105 | (105 | ) | — | ||||||||||||||||
| Dividends paid | (74 | ) | (414 | ) | (186 | ) | (649 | ) | 1,249 | (74 | ) | ||||||||||||
| Repurchases of common stock | (500 | ) | — | — | (100 | ) | 100 | (500 | ) | ||||||||||||||
| Net paydowns of FG VIEs’ liabilities | — | — | — | (181 | ) | — | (181 | ) | |||||||||||||||
| Paydown of long-term debt | — | — | — | (1 | ) | (3 | ) | (4 | ) | ||||||||||||||
| Repayment of intercompany loans | — | (10 | ) | — | — | 10 | — | ||||||||||||||||
| Issuance of intercompany loans | — | 250 | — | — | (250 | ) | — | ||||||||||||||||
| Proceeds from issuance of CLO obligations | — | — | — | 482 | — | 482 | |||||||||||||||||
| Repayment of warehouse loans and equity | — | — | — | (306 | ) | — | (306 | ) | |||||||||||||||
| Contributions from noncontrolling interests to investment vehicles | — | — | — | — | 18 | 18 | |||||||||||||||||
| Distributions to redeemable noncontrolling interests from investment vehicles | — | — | — | — | (4 | ) | (4 | ) | |||||||||||||||
| Other | (15 | ) | — | — | — | — | (15 | ) | |||||||||||||||
| Net cash flows provided by (used in) financing activities | (589 | ) | (174 | ) | (186 | ) | (660 | ) | 1,025 | (584 | ) | ||||||||||||
| Effect of exchange rate changes | — | — | — | 3 | — | 3 | |||||||||||||||||
| Increase (decrease) in cash and restricted cash | — | — | 3 | 76 | — | 79 | |||||||||||||||||
| Cash and restricted cash at beginning of period | — | 1 | — | 103 | — | 104 | |||||||||||||||||
| Cash and restricted cash at end of period | $ | — | $ | 1 | $ | 3 | $ | 179 | $ | — | $ | 183 | |||||||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Net cash flows provided by (used in) operating activities | $ | 587 | $ | 308 | $ | 183 | $ | 517 | $ | (1,133 | ) | $ | 462 | ||||||||||
| Cash flows from investing activities | |||||||||||||||||||||||
| Fixed-maturity securities: | |||||||||||||||||||||||
| Purchases | — | (104 | ) | (12 | ) | (1,865 | ) | 100 | (1,881 | ) | |||||||||||||
| Sales | — | 104 | 8 | 1,068 | — | 1,180 | |||||||||||||||||
| Maturities and paydowns | — | 28 | — | 934 | — | 962 | |||||||||||||||||
| Short-term investments with maturities of over three months: | |||||||||||||||||||||||
| Purchases | — | (34 | ) | — | (209 | ) | — | (243 | ) | ||||||||||||||
| Sales | — | 22 | — | 1 | — | 23 | |||||||||||||||||
| Maturities and paydowns | — | — | — | 207 | — | 207 | |||||||||||||||||
| Net sales (purchases) of short-term investments with maturities of less than three months | (9 | ) | (50 | ) | 7 | (32 | ) | — | (84 | ) | |||||||||||||
| Net proceeds from paydowns on FG VIEs’ assets | — | — | — | 116 | — | 116 | |||||||||||||||||
| Investment in subsidiaries | — | (9 | ) | (1 | ) | (1 | ) | 11 | — | ||||||||||||||
| Repayment of intercompany loans | — | — | — | 10 | (10 | ) | — | ||||||||||||||||
| Return of capital from subsidiaries | — | 200 | — | — | (200 | ) | — | ||||||||||||||||
| Other | — | (15 | ) | — | 32 | — | 17 | ||||||||||||||||
| Net cash flows provided by (used in) investing activities | (9 | ) | 142 | 2 | 261 | (99 | ) | 297 | |||||||||||||||
| Cash flows from financing activities | |||||||||||||||||||||||
| Capital contribution | — | — | — | 11 | (11 | ) | — | ||||||||||||||||
| Dividends paid | (71 | ) | (472 | ) | (187 | ) | (474 | ) | 1,133 | (71 | ) | ||||||||||||
| Repurchases of common stock | (500 | ) | — | — | (200 | ) | 200 | (500 | ) | ||||||||||||||
| Net paydowns of FG VIEs’ liabilities | — | — | — | (116 | ) | — | (116 | ) | |||||||||||||||
| Paydown of long-term debt | — | — | — | (1 | ) | (100 | ) | (101 | ) | ||||||||||||||
| Repayment of intercompany loans | — | (10 | ) | — | — | 10 | — | ||||||||||||||||
| Other | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||||
| Net cash flows provided by (used in) financing activities | (578 | ) | (482 | ) | (187 | ) | (780 | ) | 1,232 | (795 | ) | ||||||||||||
| Effect of exchange rate changes | — | — | — | (4 | ) | — | (4 | ) | |||||||||||||||
| Increase (decrease) in cash and restricted cash | — | (32 | ) | (2 | ) | (6 | ) | — | (40 | ) | |||||||||||||
| Cash and restricted cash at beginning of period | — | 33 | 2 | 109 | — | 144 | |||||||||||||||||
| Cash and restricted cash at end of period | $ | — | $ | 1 | $ | — | $ | 103 | $ | — | $ | 104 | |||||||||||
Assured Guaranty Ltd. (Parent) | AGUS (Issuer) | AGMH (Issuer) | Other Entities | Consolidating Adjustments | Assured Guaranty Ltd. (Consolidated) | ||||||||||||||||||
| Net cash flows provided by (used in) operating activities | $ | 579 | $ | 442 | $ | 158 | $ | 477 | $ | (1,223 | ) | $ | 433 | ||||||||||
| Cash flows from investing activities | |||||||||||||||||||||||
| Fixed-maturity securities: | |||||||||||||||||||||||
| Purchases | — | (158 | ) | (17 | ) | (2,404 | ) | 27 | (2,552 | ) | |||||||||||||
| Sales | — | 112 | 21 | 1,568 | — | 1,701 | |||||||||||||||||
| Maturities and paydowns | — | 13 | — | 808 | — | 821 | |||||||||||||||||
| Short-term investments with maturities of over three months: | |||||||||||||||||||||||
| Purchases | — | (26 | ) | (5 | ) | (224 | ) | — | (255 | ) | |||||||||||||
| Sales | — | 1 | 5 | 96 | — | 102 | |||||||||||||||||
| Maturities and paydowns | — | 30 | — | 161 | — | 191 | |||||||||||||||||
| Net sales (purchases) of short-term investments with maturities of less than three months | — | 126 | (8 | ) | (82 | ) | — | 36 | |||||||||||||||
| Net proceeds from paydowns on FG VIEs’ assets | — | — | — | 147 | — | 147 | |||||||||||||||||
| Investment in subsidiaries | — | (28 | ) | — | (139 | ) | 167 | — | |||||||||||||||
| Repayment of intercompany loans | — | — | — | 10 | (10 | ) | — | ||||||||||||||||
| Proceeds from sale of subsidiaries | — | — | — | 139 | (139 | ) | — | ||||||||||||||||
| Return of capital from subsidiaries | — | — | 101 | 70 | (171 | ) | — | ||||||||||||||||
| Acquisition of MBIA UK, net of cash acquired | — | — | — | 95 | — | 95 | |||||||||||||||||
| Other | — | — | — | 59 | — | 59 | |||||||||||||||||
| Net cash flows provided by (used in) investing activities | — | 70 | 97 | 304 | (126 | ) | 345 | ||||||||||||||||
| Cash flows from financing activities | |||||||||||||||||||||||
| Return of capital | — | — | — | (70 | ) | 70 | — | ||||||||||||||||
| Capital contribution | — | — | 25 | 3 | (28 | ) | — | ||||||||||||||||
| Dividends paid | (70 | ) | (470 | ) | (278 | ) | (475 | ) | 1,223 | (70 | ) | ||||||||||||
| Repurchases of common stock | (501 | ) | — | — | (101 | ) | 101 | (501 | ) | ||||||||||||||
| Net paydowns of FG VIEs’ liabilities | — | — | — | (157 | ) | — | (157 | ) | |||||||||||||||
| Paydown of long-term debt | — | — | — | (3 | ) | (27 | ) | (30 | ) | ||||||||||||||
| Repayment of intercompany loans | — | (10 | ) | — | — | 10 | — | ||||||||||||||||
| Other | (8 | ) | — | — | — | — | (8 | ) | |||||||||||||||
| Net cash flows provided by (used in) financing activities | (579 | ) | (480 | ) | (253 | ) | (803 | ) | 1,349 | (766 | ) | ||||||||||||
| Effect of exchange rate changes | — | — | — | 5 | — | 5 | |||||||||||||||||
| Increase (decrease) in cash and restricted cash | — | 32 | 2 | (17 | ) | — | 17 | ||||||||||||||||
| Cash and restricted cash at beginning of period | — | 1 | — | 126 | — | 127 | |||||||||||||||||
| Cash and restricted cash at end of period | $ | — | $ | 33 | $ | 2 | $ | 109 | $ | — | $ | 144 | |||||||||||
Guaranties of Obligations of Affiliates
AGL fully and unconditionally guarantees all of the U.S. Holding Companies’ debt. See Note 12, Long-Term Debt and Credit Facilities, for additional information.
244
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Credit Facility with Affiliate
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. In September 2018, AGL and AGUS amended the revolving credit facility to extend the commitment until October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Section 1274(d) of the Code, and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan commitment termination date. No amounts are currently outstanding under the credit facility.
Income Taxes
AGL is not subject to any income, withholding or capital gains taxes under current Bermuda law. 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. See Note 14, Income Taxes, for further information regarding AGL’s income taxes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Assured Guaranty'sGuaranty’s management, with the participation of AGL's President andAGL’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of AGL'sAGL’s disclosure controls and procedures (as such term is defined in Rules 13a 15(e)13a-15(e) and 15d 15(e)15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of December 31, 2022. The controls and procedures are designed to ensure that information required to be disclosed by the end ofCompany in the period covered by this report.reports that it files or submits under the Exchange Act is accumulated and communicated to management, including AGL’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, AGL's PresidentAGL’s CEO and Chief Executive Officer and Chief Financial OfficerCFO have concluded that, as of the end of such period, AGL'sDecember 31, 2022, AGL’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis,within the time periods specified in the Commission’s rules and forms, information required to be disclosed by AGL (including its consolidated subsidiaries) in the reports that it files or submits under the Exchange Act.
Changes in Internal Control over Financial Reporting
The management of AGL is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of the Company's PresidentCompany’s CEO and Chief Executive Officer and Chief Financial OfficerCFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company'sCompany’s consolidated financial statements for external purposes in accordance with GAAP.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Management of the Company has assessed the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 20192022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based on this evaluation, management concluded that the Company'sCompany’s internal control over financial reporting was effective as of December 31, 20192022 based on criteria in the 2013 Internal Control- IntegratedControl-Integrated Framework issued by the COSO.
The effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 20192022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their "Report“Report of Independent Registered Public Accounting Firm"Firm” included in Item 8, Financial Statements and Supplementary Data.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information pertaining to this item is incorporated by reference to the sections entitled “Proposal No. 1: Election Of Directors”, “Corporate Governance—Delinquent Section 16(a) Reports”, “Corporate Governance—How Are Directors Nominated?” and “Corporate Governance—Committees Of The Board—The Audit Committee” of the definitive proxy statement for the Annual General Meeting of Shareholders, which involves the election of directors and will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
Information about the executive officers of AGL is set forth at the end of Part I of this Form 10-K and is hereby incorporated by reference.
Code of ConductEthics
The Company has adopted a Global Code of Conduct,Ethics, which sets forth standards by which all employees, officers and directors of the Company must abide as they work for the Company. The Global Code of ConductEthics is available at www.assuredguaranty.com/governance. The Company intends to disclose on its internet site any amendments to, or waivers from, its Global Code of ConductEthics that are required to be publicly disclosed pursuant to the rules of the SEC or the NYSE.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to the sections entitled “Executive Compensation”, “Corporate Governance—Compensation Committee Interlocking And Insider Participation” and “Corporate Governance—How Are Directors Compensated?” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This item is incorporated by reference to the sections entitled "Information“Information About Our Common Share Ownership"Ownership” and "Equity“Equity Compensation Plans Information"Information” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This item is incorporated by reference to the sections entitled “Corporate Governance—What Is Our Related Person Transactions Approval Policy And What Procedures Do We Use To Implement It?”, “Corporate Governance—What Related Person Transactions Do We Have?” and “Corporate Governance—Director Independence” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This item is incorporated by reference to the section entitled “Proposal No. 3: Appointment Of Independent Auditor—Independent Auditor Fee Information” and “Proposal No. 3: Appointment Of Independent Auditor—Pre-Approval Policy Of Audit And Non-Audit Services” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Financial Statement Schedules and Exhibits
1.Financial Statements
The following financial statements of Assured Guaranty Ltd. have been included in, Part II, Item 8, Financial Statements and Supplementary Data, hereof:
2. Financial Statement Schedules
The financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits*
| Description of Document | |||||
| 3.1 | |||||
| 3.2 | |||||
| 4.1 | |||||
| 4.2 | |||||
| 4.3 | |||||
| 4.4 | |||||
| 4.5 | |||||
| 4.6 | |||||
| 4.7 | |||||
| 4.8 | |||||
| 4.9 | |||
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| 4.16 | |||||
| 4.17 | |||||
| 10.1 | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | |||||
| 10.6 | |||||
| 10.7 | |||||
| 10.8 | |||||
| 10.9 | |||||
| 10.10 | |||||
| 10.11 | |||||
| 10.12 | |||||
| 10.13 | |||||
| 10.14 | |||||
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| Description of Document | |||||
| 10.15 | |||||
| 10.16 | |||||
| 10.17 | |||||
| 10.18 | |||||
| 10.19 | |||||
| 10.20 | |||||
| 10.21 | |||||
| 10.22 | |||||
| 10.23 | |||||
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| 10.27 | |||||
| 10.28 | |||||
| 10.29 | |||||
| 10.30 | |||||
| 10.31 | |||||
| 10.32 | |||||
| 10.33 | |||||
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| Description of Document | |||||
| 10.34 | |||||
| 10.35 | |||||
| 10.36 | |||||
| 10.37 | |||||
| 10.38 | |||||
| 10.39 | |||||
| 10.40 | |||||
| 10.41 | |||||
| 10.42 | |||||
| 10.43 | |||||
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| Description of Document | |||||
| 10.60 | |||||
| 10.61 | |||||
| 10.62 | |||||
| 10.63 | |||||
| 10.64 | |||||
| 10.67 | |||||
| 10.68 | |||||
| 10.69 | |||||
| 10.70 | |||||
| 10.73 | |||||
| 10.74 | |||||
| 10.75 | |||||
| 10.76 | |||||
| 10.77 | |||||
| 10.78 | |||||
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| Description of Document | |||||
| 21.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.1 | The following financial information | ||||
| 104.1 | The Cover Page Interactive Data File from Assured Guaranty Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2022 formatted, in Inline XBRL | ||||
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Assured Guaranty Ltd. | ||||||||
| By: | ||||||||
Name: Dominic J. Frederico Title: President and Chief Executive Officer | ||||||||
Date: February 28, 2020March 1, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name | Position | Date | ||||||||||||||||||||||||||
| /s/ Francisco L. Borges | Chairman of the Board; Director | March 1, 2023 | ||||||||||||||||||||||||||
| Francisco L. Borges | ||||||||||||||||||||||||||||
| /s/ Dominic J. Frederico | President and Chief Executive Officer; Director | March 1, 2023 | ||||||||||||||||||||||||||
| Dominic J. Frederico | ||||||||||||||||||||||||||||
| /s/ Robert A. Bailenson | Chief Financial Officer (Principal Financial Officer) | March 1, 2023 | ||||||||||||||||||||||||||
| Robert A. Bailenson | ||||||||||||||||||||||||||||
| /s/ Laura Bieling | Chief Accounting Officer and Controller (Principal Accounting Officer) | March 1, 2023 | ||||||||||||||||||||||||||
| Laura Bieling | ||||||||||||||||||||||||||||
| Director | March 1, 2023 | |||||||||||||||||||||||||||
| Bonnie L. Howard | ||||||||||||||||||||||||||||
| /s/ Thomas W. Jones | Director | March 1, 2023 | ||||||||||||||||||||||||||
| Thomas W. Jones | ||||||||||||||||||||||||||||
| /s/ Patrick W. Kenny | Director | March 1, 2023 | ||||||||||||||||||||||||||
| Patrick W. Kenny | ||||||||||||||||||||||||||||
| /s/ Alan J. Kreczko | Director | March 1, 2023 | ||||||||||||||||||||||||||
| Alan J. Kreczko | ||||||||||||||||||||||||||||
| /s/ Simon W. Leathes | Director | March 1, 2023 | ||||||||||||||||||||||||||
| Simon W. Leathes | ||||||||||||||||||||||||||||
/s/ Yukiko Omura | Director | March 1, 2023 | ||||||||||||||||||||||||||
| Yukiko Omura | ||||||||||||||||||||||||||||
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| Name | Position | Date | ||||||||||||||||||
| /s/ Lorin P.T. Radtke | Director | March 1, 2023 | ||||||||||||||||||
| Lorin P.T. Radtke | ||||||||||||||||||||
| /s/ Courtney C. Shea | Director | March 1, 2023 | ||||||||||||||||||
| Courtney C. Shea | ||||||||||||||||||||
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