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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| | | | | | | |
ý☒ | | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2017March 31, 2022
Or
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| | | | | | | |
o☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition Period from to
Commission File No. 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 |
of incorporation) | | identification no.) |
30 Woodbourne Avenue
Hamilton HM 08,
Bermuda
(Address of principal executive offices)
(441) 279-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | |
| Title of each class: | Trading Symbol(s) | Name of exchange on which registered |
| Common Shares | $0.01 par value per share | AGO | New York Stock Exchange |
| Assured Guaranty 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 |
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 x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filerx | ☒ | Accelerated filero |
☐ | Non-accelerated filero | ☐ | Smaller reporting companyo |
(Do not check if a smaller reporting company) | ☐ | Emerging growth companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
Yes o No x
The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 1, 2017May 4, 2022 was 117,453,84964,130,598 (includes 50,22536,403 unvested restricted shares).
ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
ITEM 1. FINANCIAL STATEMENTS
Assured Guaranty Ltd.
Condensed Consolidated Balance Sheets (unaudited)(Unaudited)
(dollars in millions except per share and share amounts)data)
| | | | | | | | | | | |
| As of |
| | March 31, 2022 | | December 31, 2021 |
| Assets | | | |
| Investments: | | | |
| Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $47 and $42 (amortized cost of $8,227 and $7,822) | $ | 8,156 | | | $ | 8,202 | |
| Fixed-maturity securities, trading, at fair value | 174 | | | — | |
| Short-term investments, at fair value | 585 | | | 1,225 | |
| Other invested assets (includes $24 and $31, at fair value) | 152 | | | 181 | |
| Total investments | 9,067 | | | 9,608 | |
| Cash | 119 | | | 120 | |
| Premiums receivable, net of commissions payable | 1,335 | | | 1,372 | |
| Deferred acquisition costs | 135 | | | 131 | |
| Salvage and subrogation recoverable | 529 | | | 801 | |
| Financial guaranty variable interest entities’ assets, at fair value | 307 | | | 260 | |
| Assets of consolidated investment vehicles (includes $5,404 and $4,902, at fair value) | 5,700 | | | 5,271 | |
| Goodwill and other intangible assets | 172 | | | 175 | |
| Other assets (includes $132 and $132, at fair value) | 481 | | | 470 | |
| Total assets | $ | 17,845 | | | $ | 18,208 | |
| Liabilities | | | |
| Unearned premium reserve | $ | 3,596 | | | $ | 3,716 | |
| Loss and loss adjustment expense reserve | 718 | | | 869 | |
| Long-term debt | 1,673 | | | 1,673 | |
| Credit derivative liabilities, at fair value | 157 | | | 156 | |
| Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $316 and $269, without recourse $19 and $20) | 335 | | | 289 | |
| Liabilities of consolidated investment vehicles (includes $3,994 and $3,849, at fair value) | 4,854 | | | 4,436 | |
| Other liabilities | 496 | | | 569 | |
| Total liabilities | 11,829 | | | 11,708 | |
| | | |
| Commitments and contingencies (Note 13) | 0 | | 0 |
| Redeemable noncontrolling interests (Note 8) | 21 | | | 22 | |
| | | |
| Shareholders’ equity | | | |
| Common shares ($0.01 par value, 500,000,000 shares authorized; 65,043,547 and 67,518,424 shares issued and outstanding) | 1 | | | 1 | |
| Retained earnings | 5,878 | | | 5,990 | |
| Accumulated other comprehensive income (loss), net of tax of $(12) and $60 | (78) | | | 300 | |
| Deferred equity compensation | 1 | | | 1 | |
| Total shareholders’ equity attributable to Assured Guaranty Ltd. | 5,802 | | | 6,292 | |
| Nonredeemable noncontrolling interests (Note 8) | 193 | | | 186 | |
| Total shareholders’ equity | 5,995 | | | 6,478 | |
| Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 17,845 | | | $ | 18,208 | |
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| Assets | |
| | |
|
| Investment portfolio: | |
| | |
|
| Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,045 and $9,974) | $ | 10,546 |
| | $ | 10,233 |
|
| Short-term investments, at fair value | 949 |
| | 590 |
|
| Other invested assets | 96 |
| | 162 |
|
| Total investment portfolio | 11,591 |
| | 10,985 |
|
| Cash | 72 |
| | 118 |
|
| Premiums receivable, net of commissions payable | 922 |
| | 576 |
|
| Ceded unearned premium reserve | 108 |
| | 206 |
|
| Deferred acquisition costs | 105 |
| | 106 |
|
| Reinsurance recoverable on unpaid losses | 39 |
| | 80 |
|
| Salvage and subrogation recoverable | 497 |
| | 365 |
|
| Credit derivative assets | 3 |
| | 13 |
|
| Deferred tax asset, net | 135 |
| | 497 |
|
| Current income tax receivable | 72 |
| | 12 |
|
| Financial guaranty variable interest entities’ assets, at fair value | 707 |
| | 876 |
|
| Other assets | 398 |
| | 317 |
|
| Total assets | $ | 14,649 |
| | $ | 14,151 |
|
| Liabilities and shareholders’ equity | |
| | |
|
| Unearned premium reserve | $ | 3,597 |
| | $ | 3,511 |
|
| Loss and loss adjustment expense reserve | 1,326 |
| | 1,127 |
|
| Reinsurance balances payable, net | 45 |
| | 64 |
|
| Long-term debt | 1,292 |
| | 1,306 |
|
| Credit derivative liabilities | 305 |
| | 402 |
|
| Financial guaranty variable interest entities’ liabilities with recourse, at fair value | 657 |
| | 807 |
|
| Financial guaranty variable interest entities’ liabilities without recourse, at fair value | 111 |
| | 151 |
|
| Other liabilities | 438 |
| | 279 |
|
| Total liabilities | 7,771 |
| | 7,647 |
|
| Commitments and contingencies (See Note 14) |
| |
|
| Common stock ($0.01 par value, 500,000,000 shares authorized; 117,937,242 and 127,988,230 shares issued and outstanding) | 1 |
| | 1 |
|
| Additional paid-in capital | 637 |
| | 1,060 |
|
| Retained earnings | 5,913 |
| | 5,289 |
|
| Accumulated other comprehensive income, net of tax of $148 and $70 | 326 |
| | 149 |
|
| Deferred equity compensation | 1 |
| | 5 |
|
| Total shareholders’ equity | 6,878 |
| | 6,504 |
|
| Total liabilities and shareholders’ equity | $ | 14,649 |
| | $ | 14,151 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Operations (unaudited)(Unaudited)
(dollars in millions except per share amounts)data)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| | 2022 | | 2021 |
| Revenues | | | |
| Net earned premiums | $ | 214 | | | $ | 103 | |
| Net investment income | 62 | | | 70 | |
| Asset management fees | 34 | | | 24 | |
| Net realized investment gains (losses) | 3 | | | (3) | |
| Fair value gains (losses) on credit derivatives | (3) | | | (19) | |
| Fair value gains (losses) on committed capital securities | 1 | | | (19) | |
| Fair value gains (losses) on financial guaranty variable interest entities | 6 | | | 5 | |
| Fair value gains (losses) on consolidated investment vehicles | 14 | | | 16 | |
| Foreign exchange gains (losses) on remeasurement | (30) | | | — | |
| Other income (loss) | (1) | | | — | |
| Total revenues | 300 | | | 177 | |
| Expenses | | | |
| Loss and loss adjustment expenses | 57 | | | 30 | |
| Interest expense | 20 | | | 21 | |
| Amortization of deferred acquisition costs | 4 | | | 3 | |
| Employee compensation and benefit expenses | 73 | | | 60 | |
| Other operating expenses | 42 | | | 57 | |
| Total expenses | 196 | | | 171 | |
| Income (loss) before income taxes and equity in earnings (losses) of investees | 104 | | | 6 | |
| Equity in earnings (losses) of investees | (11) | | | 9 | |
| Income (loss) before income taxes | 93 | | | 15 | |
| Less: Provision (benefit) for income taxes | 18 | | | — | |
| Net income (loss) | 75 | | | 15 | |
| Less: Noncontrolling interests | 9 | | | 4 | |
| Net income (loss) attributable to Assured Guaranty Ltd. | $ | 66 | | | $ | 11 | |
| | | |
| Earnings per share: | | | |
| Basic | $ | 1.00 | | | $ | 0.14 | |
| Diluted | $ | 0.98 | | | $ | 0.14 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| Net earned premiums | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
| Net investment income | 99 |
| | 94 |
| | 322 |
| | 291 |
|
| Net realized investment gains (losses): | | | | | | | |
| Other-than-temporary impairment losses | (20 | ) | | (4 | ) | | (23 | ) | | (32 | ) |
| Less: portion of other-than-temporary impairment loss recognized in other comprehensive income | (7 | ) | | 1 |
| | 6 |
| | (6 | ) |
| Net impairment loss | (13 | ) | | (5 | ) | | (29 | ) | | (26 | ) |
| Other net realized investment gains (losses) | 20 |
| | 3 |
| | 83 |
| | 21 |
|
| Net realized investment gains (losses) | 7 |
| | (2 | ) | | 54 |
| | (5 | ) |
| Net change in fair value of credit derivatives: | | | | | | | |
| Realized gains (losses) and other settlements | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
| Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
| Net change in fair value of credit derivatives | 58 |
| | 21 |
| | 106 |
| | 24 |
|
| Fair value gains (losses) on committed capital securities | (4 | ) | | (23 | ) | | (4 | ) | | (50 | ) |
| Fair value gains (losses) on financial guaranty variable interest entities | 3 |
| | (11 | ) | | 25 |
| | 11 |
|
| Bargain purchase gain and settlement of pre-existing relationships | — |
| | 259 |
| | 58 |
| | 259 |
|
| Other income (loss) | 274 |
| | (3 | ) | | 385 |
| | 49 |
|
| Total revenues | 623 |
| | 566 |
| | 1,458 |
| | 1,207 |
|
| Expenses | | | | | | | |
| Loss and loss adjustment expenses | 223 |
| | (9 | ) | | 354 |
| | 183 |
|
| Amortization of deferred acquisition costs | 5 |
| | 4 |
| | 13 |
| | 13 |
|
| Interest expense | 24 |
| | 26 |
| | 73 |
| | 77 |
|
| Other operating expenses | 58 |
| | 65 |
| | 183 |
| | 188 |
|
| Total expenses | 310 |
| | 86 |
| | 623 |
| | 461 |
|
| Income (loss) before income taxes | 313 |
| | 480 |
| | 835 |
| | 746 |
|
| Provision (benefit) for income taxes | | | | | | | |
| Current | (148 | ) | | 18 |
| | (102 | ) | | 80 |
|
| Deferred | 253 |
| | (17 | ) | | 259 |
| | (18 | ) |
| Total provision (benefit) for income taxes | 105 |
| | 1 |
| | 157 |
| | 62 |
|
| Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
| | | | | | | | |
| Earnings per share: | | | | | | | |
| Basic | $ | 1.75 |
| | $ | 3.63 |
| | $ | 5.56 |
| | $ | 5.10 |
|
| Diluted | $ | 1.72 |
| | $ | 3.60 |
| | $ | 5.48 |
| | $ | 5.06 |
|
| Dividends per share | $ | 0.1425 |
| | $ | 0.13 |
| | $ | 0.4275 |
| | $ | 0.39 |
|
Assured Guaranty Ltd.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in millions)
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| Net income (loss) | $ | 75 | | | $ | 15 | |
| Change in net unrealized gains (losses) on: | | | |
| Investments with no credit impairment, net of tax provision (benefit) of $(63) and $(20) | (338) | | | (119) | |
| Investments with credit impairment, net of tax provision (benefit) of $(9) and $(1) | (39) | | | (6) | |
| Change in net unrealized gains (losses) on investments | (377) | | | (125) | |
| Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | — | | | (1) | |
| Other, net of tax | (1) | | | 1 | |
| Other comprehensive income (loss) | (378) | | | (125) | |
| Comprehensive income (loss) | (303) | | | (110) | |
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 9 | | | 4 | |
| Comprehensive income (loss) attributable to Assured Guaranty Ltd. | $ | (312) | | | $ | (114) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Comprehensive Income (unaudited)Shareholders’ Equity (Unaudited)
(dollars in millions)millions, except share data)
For the Three Months Ended March 31, 2022 |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
| Unrealized holding gains (losses) arising during the period on: | | | | | | | |
| Investments with no other-than-temporary impairment, net of tax provision (benefit) of $10, $(14), $63 and $48 | 27 |
| | (33 | ) | | 133 |
| | 146 |
|
| Investments with other-than-temporary impairment, net of tax provision (benefit) of $(7), $8, $44 and $(5) | (15 | ) | | 13 |
| | 81 |
| | (10 | ) |
| Unrealized holding gains (losses) arising during the period, net of tax | 12 |
| | (20 | ) | | 214 |
| | 136 |
|
| Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $3, $(1), $29 and $(1) | 4 |
| | 0 |
| | 52 |
| | (1 | ) |
| Change in net unrealized gains (losses) on investments | 8 |
| | (20 | ) | | 162 |
| | 137 |
|
| Other, net of tax provision | 3 |
| | (5 | ) | | 15 |
| | (16 | ) |
| Other comprehensive income (loss) | $ | 11 |
| | $ | (25 | ) | | $ | 177 |
| | $ | 121 |
|
| Comprehensive income (loss) | $ | 219 |
| | $ | 454 |
| | $ | 855 |
| | $ | 805 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | | |
| | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity |
| Balance at December 31, 2021 | 67,518,424 | | | | $ | 1 | | | $ | 5,990 | | | $ | 300 | | | $ | 1 | | | $ | 6,292 | | | $ | 186 | | | $ | 6,478 | |
| Net income | — | | | | — | | | 66 | | | — | | | — | | | 66 | | | 10 | | | 76 | |
| Dividends ($0.25 per share) | — | | | | — | | | (17) | | | — | | | — | | | (17) | | | — | | | (17) | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
| Common shares repurchases | (2,738,223) | | | | — | | | (155) | | | — | | | — | | | (155) | | | — | | | (155) | |
| Share-based compensation | 263,346 | | | | — | | | (6) | | | — | | | — | | | (6) | | | — | | | (6) | |
| Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| Other comprehensive loss | — | | | | — | | | — | | | (378) | | | — | | | (378) | | | — | | | (378) | |
| Balance at March 31, 2022 | 65,043,547 | | | | $ | 1 | | | $ | 5,878 | | | $ | (78) | | | $ | 1 | | | $ | 5,802 | | | $ | 193 | | | $ | 5,995 | |
For the Three Months Ended March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | | |
| | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity |
| Balance at December 31, 2020 | 77,546,896 | | | | $ | 1 | | | $ | 6,143 | | | $ | 498 | | | $ | 1 | | | $ | 6,643 | | | $ | 41 | | | $ | 6,684 | |
| Net income | — | | | | — | | | 11 | | | — | | | — | | | 11 | | | 4 | | | 15 | |
| Dividends ($0.22 per share) | — | | | | — | | | (17) | | | — | | | — | | | (17) | | | — | | | (17) | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
| Common shares repurchases | (1,986,534) | | | | — | | | (77) | | | — | | | — | | | (77) | | | — | | | (77) | |
| Share-based compensation | 375,020 | | | | — | | | (5) | | | — | | | — | | | (5) | | | — | | | (5) | |
| Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Other comprehensive loss | — | | | | — | | | — | | | (125) | | | — | | | (125) | | | — | | | (125) | |
| Balance at March 31, 2021 | 75,935,382 | | | | $ | 1 | | | $ | 6,055 | | | $ | 373 | | | $ | 1 | | | $ | 6,430 | | | $ | 42 | | | $ | 6,472 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated StatementStatements of Shareholders’ Equity (unaudited)Cash Flows (Unaudited)
(in millions)
For the Nine Months Ended September 30, 2017 | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| Net cash flows provided by (used in) operating activities | $ | (892) | | | $ | (466) | |
| Investing activities | | | |
| Fixed-maturity securities: | | | |
| Purchases | (68) | | | (396) | |
| Sales | 57 | | | 120 | |
| Maturities and paydowns | 179 | | | 225 | |
| Short-term investments with original maturities of over three months: | | | |
| Purchases | (17) | | | — | |
| Maturities and paydowns | — | | | 30 | |
| Net sales (purchases) of short-term investments with original maturities of less than three months | 656 | | | 120 | |
| Paydowns of financial guaranty variable interest entities’ assets | 18 | | | 14 | |
| Purchases of other invested assets | (5) | | | (32) | |
| Return of capital from and sales of other invested assets | 31 | | | 45 | |
| Other | (1) | | | (1) | |
| Net cash flows provided by (used in) investing activities | 850 | | | 125 | |
| Financing activities | | | |
| Dividends paid | (17) | | | (18) | |
| Repurchases of common shares | (152) | | | (77) | |
| Net paydowns of financial guaranty variable interest entities’ liabilities | (41) | | | (13) | |
| Other | (10) | | | 7 | |
| Cash flows from consolidated investment vehicles: | | | |
| Proceeds from issuance of collateralized loan obligations | 371 | | | 752 | |
| Repayment of collateralized loan obligations | (372) | | | — | |
| Proceeds from issuance of warehouse financing debt | 215 | | | 217 | |
| Repayment of warehouse financing debt | — | | | (476) | |
| Payments under credit facilities | (1) | | | — | |
| Contributions from noncontrolling interests to consolidated investment vehicles | 3 | | | 3 | |
| Distributions to noncontrolling interests from consolidated investment vehicles | (6) | | | (6) | |
| Net cash flows provided by (used in) financing activities | (10) | | | 389 | |
| Effect of foreign exchange rate changes | (1) | | | — | |
| Increase (decrease) in cash and restricted cash | (53) | | | 48 | |
| Cash and restricted cash at beginning of period | 342 | | | 298 | |
| Cash and restricted cash at end of period | $ | 289 | | | $ | 346 | |
(dollars in millions, except share data)continued on next page)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares Outstanding | | | Common Stock Par Value | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Deferred Equity Compensation | | Total Shareholders’ Equity |
Balance at
December 31, 2016 | 127,988,230 |
| | | $ | 1 |
| | $ | 1,060 |
| | $ | 5,289 |
| | $ | 149 |
| | $ | 5 |
| | $ | 6,504 |
|
| Net income | — |
| | | — |
| | — |
| | 678 |
| | — |
| | — |
| | 678 |
|
| Dividends ($0.4275 per share) | — |
| | | — |
| | — |
| | (53 | ) | | — |
| | — |
| | (53 | ) |
| Common stock repurchases | (10,734,653 | ) | | | 0 |
| | (431 | ) | | — |
| | — |
| | — |
| | (431 | ) |
| Share-based compensation and other | 683,665 |
| | | 0 |
| | 8 |
| | — |
| | — |
| | (4 | ) | | 4 |
|
| Other comprehensive income | — |
| | | — |
| | — |
| | — |
| | 177 |
| | — |
| | 177 |
|
| Other | — |
| | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Balance at
September 30, 2017 | 117,937,242 |
| | | $ | 1 |
| | $ | 637 |
| | $ | 5,913 |
| | $ | 326 |
| | $ | 1 |
| | $ | 6,878 |
|
Condensed Consolidated Statements of Cash Flows (Unaudited) - (Continued)
(in millions)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Supplemental cash flow information | | | |
| Interest paid on long-term debt | $ | 9 | | | $ | 8 | |
| | | |
| Supplemental disclosure of non-cash activities: | | | |
| Fixed-maturity securities, available-for-sale, received as salvage | $ | 610 | | | $ | — | |
| Fixed-maturity securities, available-for-sale, ceded to a reinsurer | 27 | | | — | |
| Fixed-maturity securities, trading, received as salvage | 184 | | | — | |
| Fixed-maturity securities, trading, ceded to a reinsurer | 6 | | | — | |
| Debt securities of financial guaranty variable interest entities received as salvage | 54 | | | — | |
| | | |
| As of |
| March 31, 2022 | | March 31, 2021 |
| Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | | | |
| Cash | $ | 119 | | | $ | 95 | |
| Restricted cash (included in other assets) | 12 | | | 1 | |
| Cash and cash equivalents of consolidated investment vehicles (Note 8) | 158 | | | 250 | |
| Cash and cash equivalents and restricted cash at the end of period | $ | 289 | | | $ | 346 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Consolidated Statements of Cash Flows (unaudited)
(in millions)
|
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Net cash flows provided by (used in) operating activities | $ | 354 |
| | $ | (189 | ) |
| Investing activities | |
| | |
|
| Fixed-maturity securities: | |
| | |
|
| Purchases | (1,615 | ) | | (1,028 | ) |
| Sales | 1,128 |
| | 877 |
|
| Maturities | 689 |
| | 861 |
|
| Net sales (purchases) of short-term investments | (240 | ) | | 80 |
|
| Net proceeds from paydowns on financial guaranty variable interest entities’ assets | 117 |
| | 590 |
|
| Acquisition of MBIA UK, net of cash acquired (see Note 2) | 95 |
| | — |
|
| Acquisition of CIFG, net of cash acquired | — |
| | (435 | ) |
| Other | 58 |
| | (12 | ) |
| Net cash flows provided by (used in) investing activities | 232 |
| | 933 |
|
| Financing activities | |
| | |
|
| Dividends paid | (53 | ) |
| (52 | ) |
| Repurchases of common stock | (431 | ) |
| (190 | ) |
| Repurchases of common stock to pay withholding taxes | (13 | ) | | (2 | ) |
| Net paydowns of financial guaranty variable interest entities’ liabilities | (124 | ) | | (567 | ) |
| Repayment/ extinguishment of long-term debt | (29 | ) | | (2 | ) |
| Proceeds from option exercises | 5 |
| | 6 |
|
| Net cash flows provided by (used in) financing activities | (645 | ) | | (807 | ) |
| Effect of foreign exchange rate changes | 4 |
| | (4 | ) |
| Increase (decrease) in cash and restricted cash | (55 | ) | | (67 | ) |
| Cash and restricted cash at beginning of period (see Note 10) | 127 |
| | 166 |
|
| Cash and restricted cash at end of period (see Note 10) | $ | 72 |
| | $ | 99 |
|
| Supplemental cash flow information | |
| | |
|
| Cash paid (received) during the period for: | |
| | |
|
| Income taxes | $ | 3 |
| | $ | 2 |
|
| Interest | $ | 53 |
| | $ | 55 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)
September 30, 2017
1. Business and Basis of Presentation
| |
1. | Business and Basis of Presentation |
Business
Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (U.S.) and international public finance (including infrastructure) and structured finance markets. Themarkets, 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 AustraliaWestern Europe, Canada and Western Europe.Australia. The Company also provides other forms ofspecialty insurance that are in lineand reinsurance on transactions with its risk profile and benefit from its underwriting experience.
In the past, the Company sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (CDS). Contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments areprofiles similar to those forof its structured finance exposures written in financial guaranty insurance contracts. The Company’s credit derivative transactions are governed by International Swapsform.
Through Assured Investment Management LLC (AssuredIM LLC) and Derivative Association, Inc. (ISDA) documentation. Theits investment management affiliates (together with AssuredIM LLC, AssuredIM), the Company has not entered into any new CDS in order to sell credit protectionsignificantly increased its participation in the U.S.asset management business with the completion on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain Capital Management, LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities. AssuredIM is a diversified asset manager that serves as investment advisor to collateralized loan obligations (CLOs), opportunity and liquid strategy funds, 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 the beginning of 2009, when regulatory guidelines were issued that limited the terms under2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributedaims to the Company not entering into such new CDS in the U.S. since 2009. The Company actively pursues opportunities to terminate existing CDS, which terminations have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.maximize returns for its clients.
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and, in the. In management’s opinion, of management, reflect all material adjustments that are of a normal recurring nature, 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) for, are reflected in the periods presented.presented and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These unaudited interim condensed consolidated financial statements are as of September 30, 2017March 31, 2022 and cover the three-monththree month period ended September 30, 2017 (ThirdMarch 31, 2022 (First Quarter 2017),2022) and the three-monththree month period ended September 30, 2016 (ThirdMarch 31, 2021 (First Quarter 2016), the nine-month period ended September 30, 2017 (Nine Months 2017) and the nine-month period ended September 30, 2016 (Nine Months 2016)2021). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements, except Note 18, Subsidiary Information, which reflects transfers of businesses between entities within the consolidated group that occurred inbut does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current reporting period consistently for all prior periods presented.year’s presentation.
The unaudited interim condensed 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. Certain prior year balances have been reclassified to conform to the current year's presentation.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in AGL’sthe Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the U.S. Securities and Exchange Commission (the SEC)(SEC).
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The Company'sCompany’s principal insurance company subsidiaries are:
•Assured Guaranty Municipal Corp. (AGM), domiciled in New York;
Municipal Assurance Corp. (MAC), domiciled in New York;
•Assured Guaranty Corp. (AGC), domiciled in Maryland;
•Assured Guaranty (Europe) plc (AGE)UK Limited (AGUK), organized in the U.K.; and
•Assured Guaranty (Europe) 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’s organizational structure includes variousprincipal asset management subsidiaries are:
•Assured Investment Management LLC;
•Assured Investment Management (London) LLP; and
•Assured Healthcare Partners LLC.
Until April 1, 2021, Municipal Assurance Corp. (MAC) was also a principal insurance subsidiary domiciled in New York. On April 1, 2021, MAC was merged with and into AGM, with AGM as the surviving company. As a result, the Company wrote-off the $16 million carrying value of MAC’s insurance licenses in First Quarter 2021, which was recorded in other operating expenses in the Insurance segment.
AGM, AGC and, until its merger with AGM on April 1, 2021, MAC, (collectively, the U.S. Insurance Subsidiaries), jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by AssuredIM (AssuredIM Funds).
AGL directly or indirectly owns several holding companies, two2 of which - Assured Guaranty US Holdings Inc. (AGUS) and AGMHAssured Guaranty Municipal Holdings Inc. (AGMH) (collectively, the U.S. Holding Companies) - have public debt outstanding. Please refer to Note 15, Long-Term Debt and Credit Facilities and Note 18, Subsidiary Information.
The Company is actively working to combine the operations of its European subsidiaries, AGE, Assured Guaranty (UK) plc (AGUK), Assured Guaranty (London) plc (AGLN) and CIFG Europe S.A. (CIFGE), through a multi-step transaction, which ultimately is expected to result in AGUK, AGLN and CIFGE transferring their insurance portfolios to and merging with and into AGE. As a preparatory step for the merger, AGE, AGUK and AGLN were re-registered as public limited companies on June 1, 2017. As a further preparatory step, AGUK, AGLN and CIFGE were sold by AGC to AGM and then contributed by AGM to AGE on June 26, 2017. While the Company and its European subsidiaries have received certain regulatory approvals, the combination is subject to further regulatory and court approvals. As a result, the Company cannot predict whether, or when, such combination will be completed.
AdoptedRecent Accounting Standards Adopted
Statement of Cash FlowsReference Rate Reform
In November 2016,March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows2020-04, Reference Rate Reform (Topic 230)848): Restricted Cash (a consensusFacilitation of the Emerging Issues Task Force), which addressesEffects of Reference Rate Reform on Financial Reporting. This ASU provides 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 amendments in this ASU only apply to contracts that reference the presentation of changes in restricted cashLondon Interbank Offered Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform. This ASU became effective upon issuance and restricted cash equivalents in the statement of cash flows with the objective of reducing the existing diversity in practice. Under the ASU, entities are required to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the ASU requires a reconciliationmay be presented either on the face of the statement of cash flows or in the notes to the financial statements showing the totals in the statement of cash flows to the related captions in the balance sheet. The ASU was adopted onapplied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022 (the Reference Rate Transition Period).
In January 1, 2017 and was applied retrospectively. The required reconciliation is shown in Note 10, Investments and Cash.
In August 2016,2021, the FASB issued ASU 2016-15, Statement of Cash Flows2021-01, Reference Rate Reform (Topic 230)848): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)Scope, which addresses eight specific cash flow issues withclarifies the objectivescope of reducingrelief related to ASU 2020-04. This ASU became effective upon issuance and may be applied on a full retrospective basis as of any date from the existing diversitybeginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively for contract modifications made on or before December 31, 2022.
The Company adopted the optional relief afforded by these ASUs in practice.the third quarter of 2021 on a prospective basis, and the guidance will be followed until the optional relief terminates on December 31, 2022. The ASUCompany 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 adopted on January 1, 2017 and did not have an effect onno impact to the Company’s consolidated financial statements upon the initial adoption of cash flowsthese ASUs.
Recent Accounting Standards Not Yet Adopted
Targeted Improvements to the Accounting for the periods presented.Long-Duration Contracts
Share-Based Payments
In March 2016,August 2018, the FASB issued ASU 2016-09, Compensation2018-12, Financial Services - Stock CompensationInsurance (Topic 718) -944): Targeted Improvements to Employee Share-Based Paymentthe Accounting for Long-Duration Contracts. The amendments in this ASU:
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), which simplifies several aspectsContinued
•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 employee share-based payment transactions, includingcertain market-based options or guarantees associated with deposit (or account balance) contracts,
•simplify the amortization of deferred acquisition costs (DAC), and
•improve the effectiveness of the required disclosures.
This ASU does not affect the Company’s financial guaranty insurance contracts, but may affect its accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification incertain specialty (non-financial guaranty) insurance contracts. In November 2020, the statementFASB deferred the effective date of cash flows. The new guidance requires all income tax effects of awardsthis ASU to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it previously could for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The ASU was adopted January 1, 20172023 with no material effect on the consolidated financial statements.
Future Application of Accounting Standards
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which removes the current prohibition against immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. Under the ASU, the selling (transferring) entity is required to recognize a current income tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, andearly adoption permitted. If early adoption is permitted. The ASU’s amendments areelected, there is transition relief allowing for the transition date to be applied on a modified retrospective basis recognizing the effects in retained earnings as ofeither the beginning of the yearprior period presented or the beginning of adoption.the earliest period presented. If early adoption is not elected, the transition date is required to be the beginning of the earliest period presented. The Company does not expect this ASU to have a material effect on its consolidated financial statements.
Financial Instruments
2. Segment Information
The Company reports its results of operations in 2 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’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources.
The Insurance segment primarily consists of: (i) the Company’s insurance subsidiaries; and (ii) AGAS. The Asset Management segment consists of AssuredIM, which provides asset management services to third-party investors as well as to the U.S. Insurance Subsidiaries and AGAS.
The Corporate division primarily consists of interest expense on the debt of the U.S. Holding Companies and any losses on extinguishment or repurchases of their debt, as well as other operating expenses attributed to the corporate activities of AGL and the U.S. Holding Companies.
The Other category 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 segments differ from the consolidated financial statements in certain respects. The Insurance segment 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’s 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 is 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’s interest in CIVs are presented in “Other.” In January 2016,addition, under GAAP, reimbursable fund expenses are shown as a component of asset management fees and included in total revenues, whereas in the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - RecognitionAsset 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.” Results for each segment include specifically identifiable expenses as well as intersegment expense allocations, as applicable, based on time studies and Measurementother 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 Financial Assetsrealized gains (losses) on the Company’s investments, except for gains and Financial Liabilities. The amendments in this ASU are intended to make targeted improvements to GAAP by addressing certain aspectslosses on securities classified as trading.
•Elimination of recognition, measurement, presentation, and disclosure of financial instruments.
Under the ASU, certain equity securities will need to be accounted for atnon-credit impairment-related unrealized fair value with changesgains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value recognized through net income insteadgains (losses) in excess of other comprehensive income (OCI). The Company does not expect that the amendment related to certain equity securities will have a material effect on its consolidated financial statements. present value of the expected estimated economic credit losses, and non-economic payments.
Another amendment pertains to liabilities that an entity has elected to measure at fair value in accordance with the fair value option for financial instruments. For these liabilities, the portion•Elimination of fair value change related to instrument specific credit risk will be separately presented in OCI as opposed to the income statement. The Company elected the fair value option to account for its consolidated FG VIEs. The Company is evaluating the effect that the ASU will have on its consolidated FG VIEs.
The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year in which the guidance is adopted.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Topic 310-20) - Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This ASU has no effectgains (losses) on the accounting for purchased callable debtCompany’s committed capital securities held at a discount. ASU 2017-08 is to be applied using a modified retrospective approach through a cumulative-effect adjustment directly to retained earnings as(CCS) that are recognized in net income.
•Elimination of the beginning of the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this ASU to have a material effectforeign exchange gains (losses) on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to present right-of-use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect that this ASU will have on its consolidated financial statements.
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will use forward-looking information to better inform their credit loss estimates as a result of the ASU. While many of the loss estimation techniques applied today will still be permitted, the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization’s portfolio.
In addition, the ASU amends the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration. The ASU also eliminates the concept of “other than temporary” from the impairment model for certain available-for-sale securities. Accordingly, the ASU states that an entity must use an allowance approach, must limit the allowance to an amount by which the security’s fair value is less than its amortized cost basis, may not consider the length of time fair value has been less than amortized cost, and may not consider recoveries in fair value after the balance sheet date when assessing whether a credit loss exists. For purchased financial assets with credit deterioration, the ASU requires an entity’s method for measuring credit losses to be consistent with its method for measuring expected losses for originated and purchased non-credit-deteriorated assets.
The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For debt securities classified as available-for-sale, 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 and changes to purchased financial assets with credit deterioration are to be applied prospectively. The Company is evaluating the effect that this ASU will have on its consolidated financial statements.
MBIA UK Insurance Limited
On January 10, 2017 (the MBIA UK Acquisition Date), AGC completed its acquisition of MBIA UK Insurance Limited (MBIA UK), the U.K. operating subsidiary of MBIA Insurance Corporation (MBIA) (the MBIA UK Acquisition). 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 billionremeasurement 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). Further, AGLN was sold by AGC to AGM and then contributed by AGM to AGE on June 26, 2017. Please refer to Note 1, Business and Basis of Presentation for additional information on the Company's European subsidiaries combination.
The MBIA UK Acquisition was accounted for under the acquisition method of accounting which requires that the assets and liabilities acquired 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 the MBIA UK Acquisition. The most significant of these determinations related to the valuation of MBIA UK's financial guaranty insurance contracts. On an aggregate basis, MBIA UK's contractual premiums for financial guaranty insurance contracts were less than the premiums a market participant of similar credit quality would demand to acquire those contracts on the MBIA UK Acquisition Date, particularly for below-investment-grade (BIG) transactions, resulting in a significant amount of the purchase price being allocated to these contracts. For information on the methodology used to measure the fair value of assets acquired and liabilities assumed in the MBIA UK Acquisition, please refer to Note 7, Fair Value Measurement.
The fair value of the Company's stand-ready obligation on the MBIA UK Acquisition Date is recorded in unearned premium reserve. After the MBIA UK Acquisition Date, loss reservesreceivables and loss and loss adjustment expensesexpense (LAE) will be recorded when the expected losses for each contract exceeds the remaining unearned premium reserve,reserves that are recognized in accordance with thenet income.
Company's accounting policy described in the Annual Report on Form 10-K. The expected losses acquired by the Company as partAssured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
•Elimination of the MBIA UK Acquisitiontax effects related to the above adjustments, which are includeddetermined by applying the statutory tax rate in Note 5, Expected Losses to be Paid.each of the jurisdictions that generate these adjustments.
The excess ofCompany does not report assets by reportable segment as the fair value of netCODM does not use assets acquired over the consideration transferred was recorded as a bargain purchase gain in "bargain purchase gainto assess performance and settlement of pre-existing relationships" in net income. In addition, the Company and MBIA UK had pre-existing reinsurance relationships, which were also effectively settled at fair value on the MBIA UK Acquisition Date. The gain on settlement of these pre-existing reinsurance relationships represents the net difference between the historical assumed balances that were recorded by the Company and the fair value of ceded balances acquired from MBIA UK. 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.allocate resources.
The following table showspresents information for the net effectCompany’s operating segments.
Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | Insurance | | Asset Management | | Insurance | | Asset Management |
| | (in millions) |
| Third-party revenues | | $ | 276 | | | $ | 30 | | | $ | 177 | | | $ | 18 | |
| Intersegment revenues | | 2 | | | 9 | | | 2 | | | 2 | |
| Segment revenues | | 278 | | | 39 | | | 179 | | | 20 | |
| Segment expenses | | 122 | | | 39 | | | 106 | | | 29 | |
| Segment equity in earnings (losses) of investees | | (1) | | | — | | | 19 | | | — | |
| Less: Segment provision (benefit) for income taxes | | 22 | | | — | | | 13 | | | (2) | |
| Segment adjusted operating income (loss) | | $ | 133 | | | $ | — | | | $ | 79 | | | $ | (7) | |
The tables below present a reconciliation of the MBIA UK Acquisition, including the effectssignificant components of the settlement of pre-existing relationships.
|
| | | | | | | | | | | |
| | 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 |
|
_____________________ | |
(1) | The purchase price of $334 million was allocated as follows: (1) $329 million for the purchase of net assets of $385 million, and (2) the settlement of pre-existing relationships between MBIA UK and Assured Guaranty at a fair value of $5 million. |
Revenue and net income related to MBIA UK from the MBIA UK Acquisition Date through September 30, 2017 included in the consolidated statement of operations were approximately $176 million and $129 million, respectively, including the bargain purchase gain, settlement of pre-existing relationships, quarterly activity and realized gain on the disposition of AGC's Zohar II Notes. For Nine Months 2017, the Company recognized transaction expenses relatedsegment information to the MBIA UK Acquisitioncomparable consolidated amounts.
Reconciliation of $7 million comprising primarily legal and financial advisors fees.Segment Information to Consolidated Information
First Quarter 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| | (in millions) |
| Segments: | | | | | | | | | | | |
| Insurance | $ | 278 | | | $ | 122 | | | $ | (1) | | | $ | 22 | | | $ | — | | | $ | 133 | |
| Asset Management | 39 | | | 39 | | | — | | | — | | | — | | | — | |
| Total segments | 317 | | | 161 | | | (1) | | | 22 | | | — | | | 133 | |
| Corporate division | 1 | | | 34 | | | — | | | — | | | — | | | (33) | |
| Other | 14 | | | 5 | | | (10) | | | — | | | 9 | | | (10) | |
| Subtotal | 332 | | | 200 | | | (11) | | | 22 | | | 9 | | | 90 | |
| Reconciling items: | | | | | | | | | | | |
| Realized gains (losses) on investments | 3 | | | — | | | — | | | — | | | — | | | 3 | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (7) | | | (4) | | | — | | | — | | | — | | | (3) | |
| Fair value gains (losses) on CCS | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (29) | | | — | | | — | | | — | | | — | | | (29) | |
| Tax effect | — | | | — | | | — | | | (4) | | | — | | | 4 | |
| Total consolidated | $ | 300 | | | $ | 196 | | | $ | (11) | | | $ | 18 | | | $ | 9 | | | $ | 66 | |
Unaudited Pro Forma Results
The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and MBIA UK as if the acquisition had been completed on January 1, 2016, as required under GAAP. The pro forma accounts include the estimated historical resultsLtd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of the Company and MBIA UK and pro forma adjustments primarily comprising the earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships, the realized gain on the disposition of the Zohar II Notes and MBIA UK acquisition related expenses, all net of tax at the applicable statutory rate.Segment Information to Consolidated Information
First Quarter 2021
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, 2016, nor is it indicative of the results of operations in future periods. The Company did not include any pro forma combined financial information for 2017 as substantially all of MBIA UK's results of operations for 2017 are included in Nine Months 2017 consolidated statements of operations. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| | (in millions) |
| Segments: | | | | | | | | | | | |
| Insurance | $ | 179 | | | $ | 106 | | | $ | 19 | | | $ | 13 | | | $ | — | | | $ | 79 | |
| Asset Management | 20 | | | 29 | | | — | | | (2) | | | — | | | (7) | |
| Total segments | 199 | | | 135 | | | 19 | | | 11 | | | — | | | 72 | |
| Corporate division | — | | | 32 | | | — | | | (3) | | | — | | | (29) | |
| Other | 21 | | | 7 | | | (10) | | | — | | | 4 | | | — | |
| Subtotal | 220 | | | 174 | | | 9 | | | 8 | | | 4 | | | 43 | |
| Reconciling items: | | | | | | | | | | | |
| Realized gains (losses) on investments | (3) | | | — | | | — | | | — | | | — | | | (3) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (22) | | | (3) | | | — | | | — | | | — | | | (19) | |
| Fair value gains (losses) on CCS | (19) | | | — | | | — | | | — | | | — | | | (19) | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| Tax effect | — | | | — | | | — | | | (8) | | | — | | | 8 | |
| Total consolidated | $ | 177 | | | $ | 171 | | | $ | 9 | | | $ | — | | | $ | 4 | | | $ | 11 | |
Unaudited Pro Forma Results of Operations
0
|
| | | | |
| | | Nine Months 2016 |
| | | (in millions, except per share amounts) |
| Pro forma revenues | | $ | 1,358 |
|
| Pro forma net income | | 796 |
|
| Pro forma earnings per share (EPS): | | |
| Basic | | 5.93 |
|
| Diluted | | 5.89 |
|
CIFG Holding Inc.
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFG Holding Inc. (together with its subsidiaries, CIFGH), the parent of financial guaranty insurer CIFG Assurance North America, Inc. (CIFGNA) (the CIFG Acquisition), for $450.6 million in cash. AGUS previously owned 1.6% of the outstanding shares of CIFGH, for which it received $7.1 million in consideration from AGC, resulting in a net consolidated purchase price of $443 million. AGC merged CIFGNA with and into AGC, with AGC as the surviving company, on July 5, 2016. The CIFG Acquisition added $4.2 billion of net par insured on July 1, 2016.
Please refer to Note 2, Acquisitions, in Part II, Item 8. “Financial Statements and Supplementary Data” of AGL’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on the acquisition of CIFG Holding Inc., including the purchase price and the allocation of the purchase price to net assets acquired and the resulting bargain purchase gain and the loss on settlement of pre-existing relationships.
3. RatingsOutstanding Exposure
The Company sells credit protection primarily in financial strength ratings (or similar ratings)guaranty insurance form. Until 2009, the Company also sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (CDS). The Company’s contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for its financial guaranty insurance companies, along with the date of the most recent rating action (or confirmation) by the rating agency, are showncontracts. The Company has not entered into any new CDS in order to sell credit protection in the table below. Ratings are subjectU.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 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 ofnot entering into such assessment may request that a rating agency add or drop a rating from certain of its companies.
|
| | | | | | | |
| S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC | | Kroll Bond Rating
Agency
| | Moody’s Investors Service, Inc. | | A.M. Best Company,
Inc.
|
AGM | AA (stable) (6/26/17) | | AA+ (stable) (12/14/16) | | A2 (stable) (8/8/16) | | — |
AGC | AA (stable) (6/26/17) | | AA (stable) (9/20/16) | | (1) | | — |
MAC | AA (stable) (6/26/17) | | AA+ (stable) (7/14/17) | | — | | — |
AG Re | AA (stable) (6/26/17) | | — | | — | | — |
AGRO | AA (stable) (6/26/17) | | — | | — | | A+ (stable) (6/15/17) |
AGE | AA (stable) (6/26/17) | | — | | A2 (stable) (8/8/16) | | — |
AGUK | AA (stable) (6/26/17) | | — | | (1) | | — |
AGLN | BB (positive) (1/12/17) | | — | | (2) | | — |
CIFGE | — | | — | | — | | — |
____________________
| |
(1) | AGC requested that Moody’s Investors Service, Inc. (Moody's) withdraw its financial strength ratings of AGC and AGUK in January 2017, but Moody's denied that request. Moody’s continues to rate AGC A3 (stable) and AGUK A3; Moody's put AGUK on review for upgrade on June 27, 2017, following its transfer to AGM. |
| |
(2) | Assured Guaranty did not request that Moody's rate AGLN. Moody's continues to rate AGLN, and upgraded its rating to Baa2 (stable) on January 13, 2017, following its acquisition by AGC, and then to Baa1 on review for further upgrade on June 27, 2017, following its transfer to AGM. |
There can be no assurance that any of the rating agencies will not take negative action on their financial strength ratings of AGL's insurance subsidiariesnew CDS in the future.
For a discussion of the effects of rating actions on theU.S. since 2009. The Company please refer to Note 6, Contracts Accounted for as Insurance, and Note 13, Reinsurance and Other Monoline Exposures.
The Company’shas, however, acquired or reinsured portfolios since 2009 that include financial guaranty contracts are written in either insurance or credit derivative form, but collectively are consideredform.
The Company also writes specialty insurance and reinsurance that is consistent with its risk profile and benefits from its underwriting experience and other types of financial guaranty contracts. guarantees not subject to insurance accounting guidance.
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 to be below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled credits,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 underwrite new issuances that it viewsinclude some BIG exposures, as BIG.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, generally requires rigorous subordination or collateralization requirements.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 primarily 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
purposes, including utilities, toll roads, health carehealthcare 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 9, Consolidated8, 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 provides specialty insurance and reinsurance on transactions without special purpose entities but with risk profiles similar to those of its structured finance exposures written in financial guaranty form.
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 creditsexposures in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’sexposure’s credit quality, loss potential, volatility and sector. Ratings on creditsexposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’squarter, although the Company may also review a rating in response to developments impacting a credit when a ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such informationreview is not available, in which case,scheduled. For assumed exposures, the Company may use the ceding company’s credit ratings of the transactions are used.where it is impractical for it to assign its own rating.
CreditsExposures identified as BIG are subjected to further review to determine the probability of a loss. Please refer toSee Note 5,4, 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 the tax-equivalent 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 surveillancefinancial statement measurement purposes, the Company calculates present value using a discount rate of 4% or 5% depending on the insurance subsidiary. (Risk-freeuses risk-free rates, which are used for calculatingdetermined each quarter, to calculate the expected loss for financial statement measurement purposes.)loss.
More extensive monitoring and intervention isare employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. TheFor 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 more claims on that transaction in the future than itthat will havenot 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.
•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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Impact of COVID-19 Pandemic
Variants of COVID-19 continue to spread throughout the world, while the production, acceptance, and distribution of vaccines and therapeutics for it are proceeding unevenly across the globe. The emergence 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. Consequently, and due to the nature of the Company’s business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time.
From 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 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 significant federal funding in 2021 and the performance it observed, the Company’s surveillance department has reduced these supplemental procedures, but is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments. The Company has 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 claims.
Financial Guaranty Exposure
Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The Company classifies those portionsmeasures its financial guaranty exposure in terms 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.(i) gross and net par outstanding and (ii) gross and net debt service.
The Company purchasestypically guarantees the payment of debt 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 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 net par outstanding is translated at the spot rate at the end of the reporting period.
The Company has, 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 securities (unless otherwise indicated) from par and debt service outstanding, whichand instead includes such amounts are included in the investment portfolio, because itthe Company manages such securities as investments and not insurance exposure. As of September 30, 2017March 31, 2022 and December 31, 2016,2021, the Company excluded $2.0from net par outstanding $1.2 billion and $2.1$1.3 billion, respectively, of net par relatedattributable to loss mitigation securities.
Gross debt service outstanding represents the sum of all estimated future debt service payments on the insured obligations, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any reinsurance. Future debt service payments include the impact of any consumer price index inflator after the reporting date, as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date.
The Company calculates its debt service outstanding as follows:
•for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company’s public finance transactions), as the total estimated contractual future debt 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
•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 (which(RMBS)), as the total estimated expected future debt service 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
principal payments are mostly BIG),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 loss mitigation strategies. The following table presentsassumptions based on the grosscharacteristics of each insured obligation. 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 netother remedies available to it under its financial guaranty contract.
Actual debt service for financial guaranty contracts.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 and Par Outstanding
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | As of December 31, 2021 |
| | Gross | | Net | | Gross | | Net |
| | (in millions) |
| Debt Service | | | | | | | |
| Public finance | $ | 352,611 | | | $ | 352,285 | | | $ | 357,694 | | | $ | 357,314 | |
| Structured finance | 9,734 | | | 9,704 | | | 10,076 | | | 10,046 | |
| Total financial guaranty | $ | 362,345 | | | $ | 361,989 | | | $ | 367,770 | | | $ | 367,360 | |
| | | | | | | |
| Par Outstanding | | | | | | | |
| Public finance | $ | 224,763 | | | $ | 224,463 | | | $ | 227,507 | | | $ | 227,164 | |
| Structured finance | 8,946 | | | 8,916 | | | 9,258 | | | 9,228 | |
| Total financial guaranty | $ | 233,709 | | | $ | 233,379 | | | $ | 236,765 | | | $ | 236,392 | |
|
| | | | | | | | | | | | | | | |
| | Gross Debt Service Outstanding | | Net Debt Service Outstanding |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 |
| | (in millions) |
| Public finance | $ | 407,539 |
| | $ | 425,849 |
| | $ | 399,347 |
| | $ | 409,447 |
|
| Structured finance | 17,464 |
| | 29,151 |
| | 17,377 |
| | 28,088 |
|
| Total financial guaranty | $ | 425,003 |
| | $ | 455,000 |
| | $ | 416,724 |
| | $ | 437,535 |
|
In addition to amounts shown in the tablestable above, the Company had outstanding commitments to provide guaranties of $43$1,174 million of public finance direct gross par and $860 million of structured finance direct gross par as of the date of this filing. TheMarch 31, 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 September 30, 2017March 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 | | $ | 270 | | | 0.2 | % | | $ | 2,102 | | | 4.3 | % | | $ | 757 | | | 9.3 | % | | $ | 482 | | | 59.1 | % | | $ | 3,611 | | | 1.5 | % |
| AA | | 16,472 | | | 9.4 | | | 3,975 | | | 8.2 | | | 4,633 | | | 57.2 | | | 21 | | | 2.7 | | | 25,101 | | | 10.8 | |
| A | | 94,442 | | | 53.6 | | | 10,382 | | | 21.4 | | | 801 | | | 9.9 | | | 156 | | | 19.1 | | | 105,781 | | | 45.3 | |
| BBB | | 61,039 | | | 34.7 | | | 31,486 | | | 64.9 | | | 566 | | | 7.0 | | | 156 | | | 19.1 | | | 93,247 | | | 40.0 | |
| BIG | | 3,734 | | | 2.1 | | | 561 | | | 1.2 | | | 1,344 | | | 16.6 | | | — | | | — | | | 5,639 | | | 2.4 | |
| Total net par outstanding | | $ | 175,957 | | | 100.0 | % | | $ | 48,506 | | | 100.0 | % | | $ | 8,101 | | | 100.0 | % | | $ | 815 | | | 100.0 | % | | $ | 233,379 | | | 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 | | $ | 915 |
| | 0.4 | % | | $ | 2,523 |
| | 5.9 | % | | $ | 2,333 |
| | 17.8 | % | | $ | 419 |
| | 25.0 | % | | $ | 6,190 |
| | 2.2 | % |
| AA | | 33,614 |
| | 15.4 |
| | 301 |
| | 0.7 |
| | 4,853 |
| | 36.9 |
| | 76 |
| | 4.5 |
| | 38,844 |
| | 14.1 |
|
| A | | 124,332 |
| | 57.0 |
| | 13,657 |
| | 32.0 |
| | 1,778 |
| | 13.5 |
| | 268 |
| | 15.9 |
| | 140,035 |
| | 50.8 |
|
| BBB | | 52,021 |
| | 23.8 |
| | 23,965 |
| | 56.1 |
| | 724 |
| | 5.5 |
| | 762 |
| | 45.3 |
| | 77,472 |
| | 28.1 |
|
| BIG | | 7,334 |
| | 3.4 |
| | 2,281 |
| | 5.3 |
| | 3,454 |
| | 26.3 |
| | 157 |
| | 9.3 |
| | 13,226 |
| | 4.8 |
|
| Total net par outstanding (1) | | $ | 218,216 |
| | 100.0 | % |
| $ | 42,727 |
|
| 100.0 | % |
| $ | 13,142 |
|
| 100.0 | % |
| $ | 1,682 |
|
| 100.0 | % |
| $ | 275,767 |
|
| 100.0 | % |
_____________________
| |
(1) | The September 30, 2017 amounts include $13.0 billion of net par from the MBIA UK Acquisition. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for the effect of commutations on net par outstanding. |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio by Internal Rating
As of December 31, 20162021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 2,066 |
| | 0.8 | % | | $ | 2,221 |
| | 8.4 | % | | $ | 9,757 |
| | 44.2 | % | | $ | 1,447 |
| | 47.0 | % | | $ | 15,491 |
| | 5.2 | % |
| AA | | 46,420 |
| | 19.0 |
| | 170 |
| | 0.6 |
| | 5,773 |
| | 26.2 |
| | 127 |
| | 4.1 |
| | 52,490 |
| | 17.7 |
|
| A | | 133,829 |
| | 54.7 |
| | 6,270 |
| | 23.8 |
| | 1,589 |
| | 7.2 |
| | 456 |
| | 14.8 |
| | 142,144 |
| | 48.0 |
|
| BBB | | 55,103 |
| | 22.5 |
| | 16,378 |
| | 62.1 |
| | 879 |
| | 4.0 |
| | 759 |
| | 24.6 |
| | 73,119 |
| | 24.7 |
|
| BIG | | 7,380 |
| | 3.0 |
| | 1,342 |
| | 5.1 |
| | 4,059 |
| | 18.4 |
| | 293 |
| | 9.5 |
| | 13,074 |
| | 4.4 |
|
| Total net par outstanding | | $ | 244,798 |
| | 100.0 | % | | $ | 26,381 |
| | 100.0 | % | | $ | 22,057 |
| | 100.0 | % | | $ | 3,082 |
| | 100.0 | % | | $ | 296,318 |
| | 100.0 | % |
Components of BIGFinancial Guaranty Portfolio
Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of September 30, 2017March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | BIG Net Par Outstanding | | Net Par |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | | (in millions) | | | | |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 1,462 | | | $ | 116 | | | $ | 2,156 | | | $ | 3,734 | | | $ | 175,957 | |
| Non-U.S. public finance | 518 | | | — | | | 43 | | | 561 | | | 48,506 | |
| Public finance | 1,980 | | | 116 | | | 2,199 | | | 4,295 | | | 224,463 | |
| Structured finance: | | | | | | | | | |
| U.S. RMBS | 53 | | | 81 | | | 1,095 | | | 1,229 | | | 2,277 | |
| Other structured finance | — | | | 39 | | | 76 | | | 115 | | | 6,639 | |
| Structured finance | 53 | | | 120 | | | 1,171 | | | 1,344 | | | 8,916 | |
| Total | $ | 2,033 | | | $ | 236 | | | $ | 3,370 | | | $ | 5,639 | | | $ | 233,379 | |
|
| | | | | | | | | | | | | | | | | | | |
| | BIG Net Par Outstanding | | Net Par |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | | (in millions) | | | | |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 2,563 |
| | $ | 662 |
| | $ | 4,109 |
| | $ | 7,334 |
| | $ | 218,216 |
|
| Non-U.S. public finance | 2,007 |
| | 274 |
| | — |
| | 2,281 |
| | 42,727 |
|
| Public finance | 4,570 |
| | 936 |
| | 4,109 |
| | 9,615 |
| | 260,943 |
|
| Structured finance: | | | | | | | | | |
| U.S. Residential mortgage-backed securities (RMBS) | 177 |
| | 354 |
| | 2,338 |
| | 2,869 |
| | 5,064 |
|
| Triple-X life insurance transactions | — |
| | — |
| | 85 |
| | 85 |
| | 2,058 |
|
| Trust preferred securities (TruPS) | 239 |
| | — |
| | — |
| | 239 |
| | 1,455 |
|
| Other structured finance | 186 |
| | 157 |
| | 75 |
| | 418 |
| | 6,247 |
|
| Structured finance | 602 |
| | 511 |
| | 2,498 |
| | 3,611 |
| | 14,824 |
|
| Total | $ | 5,172 |
| | $ | 1,447 |
| | $ | 6,607 |
| | $ | 13,226 |
| | $ | 275,767 |
|
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 20162021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | |
| | BIG Net Par Outstanding | | Net Par |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | | (in millions) | | | | |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 2,402 |
| | $ | 3,123 |
| | $ | 1,855 |
| | $ | 7,380 |
| | $ | 244,798 |
|
| Non-U.S. public finance | 1,288 |
| | 54 |
| | — |
| | 1,342 |
| | 26,381 |
|
| Public finance | 3,690 |
| | 3,177 |
| | 1,855 |
| | 8,722 |
| | 271,179 |
|
| Structured finance: | | | | | | | | | |
| U.S. RMBS | 197 |
| | 493 |
| | 2,461 |
| | 3,151 |
| | 5,637 |
|
| Triple-X life insurance transactions | — |
| | — |
| | 126 |
| | 126 |
| | 2,057 |
|
| TruPS | 304 |
| | 126 |
| | — |
| | 430 |
| | 1,892 |
|
| Other structured finance | 304 |
| | 263 |
| | 78 |
| | 645 |
| | 15,553 |
|
| Structured finance | 805 |
| | 882 |
| | 2,665 |
| | 4,352 |
| | 25,139 |
|
| Total | $ | 4,495 |
| | $ | 4,059 |
| | $ | 4,520 |
| | $ | 13,074 |
| | $ | 296,318 |
|
Financial Guaranty Portfolio
BIG Net Par Outstanding
and Number of Risks
As of September 30, 2017March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 2,027 | | | $ | 6 | | | $ | 2,033 | | | 108 | | | 1 | | | 109 | |
| Category 2 | | 225 | | | 11 | | | 236 | | | 20 | | | 2 | | | 22 | |
| Category 3 | | 3,327 | | | 43 | | | 3,370 | | | 127 | | | 8 | | | 135 | |
| Total BIG | | $ | 5,579 | | | $ | 60 | | | $ | 5,639 | | | 255 | | | 11 | | | 266 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 4,628 |
| | $ | 544 |
| | $ | 5,172 |
| | 150 |
| | 9 |
| | 159 |
|
| Category 2 | | 1,382 |
| | 65 |
| | 1,447 |
| | 48 |
| | 4 |
| | 52 |
|
| Category 3 | | 6,520 |
| | 87 |
| | 6,607 |
| | 151 |
| | 8 |
| | 159 |
|
| Total BIG | | $ | 12,530 |
| | $ | 696 |
| | $ | 13,226 |
| | 349 |
| | 21 |
| | 370 |
|
Financial Guaranty Portfolio
BIG Net Par Outstanding
and Number of Risks
As of December 31, 20162021
| | | | | Net Par Outstanding | | Number of Risks(2) | | | Net Par Outstanding | | Number of Risks (2) |
| Description | | Financial Guaranty Insurance(1) | | Credit Derivative | | Total | | Financial Guaranty Insurance(1) | | Credit Derivative | | Total | Description | | Financial
Guaranty
Insurance (1) | | Credit
Derivatives | | Total | | Financial
Guaranty
Insurance (1) | | Credit
Derivatives | | Total |
| | | (dollars in millions) | | | (dollars in millions) |
| BIG: | | |
| | |
| | |
| | |
| | |
| | |
| BIG: | | | | | | | | | | | | |
| Category 1 | | $ | 3,861 |
| | $ | 634 |
| | $ | 4,495 |
| | 165 |
| | 10 |
| | 175 |
| Category 1 | | $ | 2,429 | | | $ | 14 | | | $ | 2,443 | | | 117 | | | 2 | | | 119 | |
| Category 2 | | 3,857 |
| | 202 |
| | 4,059 |
| | 79 |
| | 6 |
| | 85 |
| Category 2 | | 177 | | | 4 | | | 181 | | | 16 | | | 1 | | | 17 | |
| Category 3 | | 4,383 |
| | 137 |
| | 4,520 |
| | 148 |
| | 9 |
| | 157 |
| Category 3 | | 4,687 | | | 45 | | | 4,732 | | | 129 | | | 8 | | | 137 | |
| Total BIG | | $ | 12,101 |
| | $ | 973 |
| | $ | 13,074 |
| | 392 |
| | 25 |
| | 417 |
| Total BIG | | $ | 7,293 | | | $ | 63 | | | $ | 7,356 | | | 262 | | | 11 | | | 273 | |
_____________________
(1)Includes net par outstandingFG VIEs.
(2)A risk represents the aggregate of the financial guaranty policies that share the same revenue source for VIEs.purposes of making debt service payments.
| |
(2) | A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. |
Exposure to Puerto Rico
The Company hashad 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 $5.0 billion$2,237 million net par outstanding as of September 30, 2017,March 31, 2022, a decrease of $1,335 million from the $3,572 million net par outstanding as of December 31, 2021. All of the Company’s insured exposure to Puerto Rico is rated BIG. The Company has paid claims as a result of payment defaults on all of which are rated BIG. This amount includes $389 million related to the 2017 commutations of previously ceded business. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. In recent years,its outstanding Puerto Rico has experienced significant general fund budget deficitsexposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and a challenging economic environment. Beginning on January 1, 2016, a numberSewer Authority (PRASA), and the University of Puerto Rico credits have defaulted on bond payments, and the Company has now paid claims on most(U of its Puerto Rico credits as shown in the table "Puerto Rico Net Par Outstanding" below.PR).
On November 30, 2015 and December 8, 2015, Governor García Padilla of Puerto Rico (the Former Governor) 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 credits insured by the Company subject to clawback are shown in the table “Puerto Rico Net Par Outstanding” below.
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.law. PROMESA establishesestablished a seven-member federal 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. 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 January 2, 2017, Ricardo Antonio Rosselló Nevares (the Governor) took office, replacing the Former Governor. On January 29, 2017, the Governor signed the Puerto Rico Emergency and Fiscal Responsibility Act (Emergency Act) that, among other things, defined an emergency period that has since been extended to December 31, 2017, continued diversion of collateral away from bonds the Company insures, and defined the powers and duties of the Fiscal Agency and Financial Advisory Authority (FAFAA).
In mid-March 2017, the Oversight Board certified Puerto Rico’s fiscal plan, dated March 13, 2017 (Fiscal Plan). The Fiscal Plan provides only approximately $7.9 billion for Commonwealth debt service over the next ten years, an amount less than scheduled debt service for such period. The Fiscal Plan itself acknowledges that there are a number of legal and contractual issues not addressed by the Fiscal Plan. On April 28, 2017, the Oversight Board approved fiscal plans for Puerto Rico Electric Power Authority (PREPA) and PRHTA, and directed Puerto Rico Aqueduct and Sewer Authority (PRASA) to amend its proposed plan in several ways. The Oversight Board approved the amended PRASA plan on June 30, 2017. The PRHTA plan assumes that PRHTA will not pay any debt service at least through 2026. The PRASA plan assumes it will pay only approximately 65% of its debt service through 2026. The Company does not believe the fiscal plans of PRHTA or PRASA in their current forms comply with certain mandatory requirements of PROMESA.
On May 3, 2017, the Oversight Board filed a petition with the Federal District Court of Puerto Rico for the Commonwealth under Title III of PROMESA. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under chapterChapter 9 of the United States Bankruptcy Code (Bankruptcy Code).
After over five years of negotiations, on March 15, 2022, a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with three orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico):
•On May 5, 2017,January 18, 2022, the Oversight Board certified a filingFederal District Court of Puerto Rico, acting under Title III of PROMESA, forentered 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 Sales Tax Financing Corporation (COFINA)Public Buildings Authority (GO/PBA Plan). The GO/PBA Plan restructured approximately $35 billion of
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
debt (including the Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) bonds insured by the Company) and other claims against the government of Puerto Rico and certain entities as well as $50 billion in pension obligations (none of the pension obligations are insured by the Company), all consistent with the terms of the settlement embodied in a revised GO and PBA plan support agreement (PSA) entered into by AGM and AGC on February 22, 2021, with certain other stakeholders, the Commonwealth, and the FOMB (GO/PBA PSA).
•On May 21, 2017,January 20, 2022, the Board filed a petitionFederal District Court of Puerto Rico, acting under Title IIIVI of PROMESA, for PRHTA. entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of the Puerto Rico Convention Center District Authority (PRCCDA).
•On July 2, 2017, afterJanuary 20, 2022, the rejectionFederal 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).
As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification (together, the March Puerto Rico Resolutions), including claim payments made by the Oversight Board and termination by PREPACompany under the March Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the Restructuring Support Agreement (RSA) described below, the Oversight Board commenced proceedings for PREPA under Title III of PROMESA.PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO and PBA was greatly reduced.
The Company believesis continuing its efforts to resolve two other Puerto Rico insured exposures that a numberare in payment default, the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Electric Power Authority (PREPA). Both economic and political developments, including those related to the COVID-19 pandemic, may impact any resolution of the actions taken byCompany’s PRHTA and PREPA insured exposures and the Commonwealth,value of the Oversight Board and others with respect to obligationsconsideration the Company insures are illegalhas received in connection with the March Puerto Rico Resolutions or unconstitutional or both, and has taken legal action, and may take additional legal actionreceive in the future to enforce its rightsin connection with respect to these matters. Please see “Puerto Rico Recovery Litigation” below.
Judge Laura Taylor Swainany future resolutions of the Southern DistrictCompany’s PRHTA and/or PREPA insured exposures. The impact of New York was selected by Chief Justice John Roberts of the United States Supreme Courtdevelopments relating to preside over any proceedings under PROMESA. Judge Swain has selected a team of five federal judges to act as mediators for certain issues and disputes.
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 in the Commonwealth. Damageduring any quarter or year could be material to the Commonwealth’s infrastructure, including the power grid, water systemCompany’s results of operations and transportation system, was extensive, with the entire island being without power in the aftermath of the storm. Officials continue to assess the extent of the damage, but rebuilding and economic recovery are expected to take years. While the federal government is expected to provide very substantial resources for relief and rebuilding -- which is expected to help economic activity and address the Commonwealth’s infrastructure needs in the intermediate and longer term -- economic activity in general and tourism in particular, as well as tax collections, are all expected to decline in the short term. Out migration to the mainland is also expected to increase, at least initially.shareholders’ equity.
Litigation and mediation related to the Commonwealth’s debt have been delayed by Hurricane Maria. The final form and timing 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, after resolution of legal challenges, of any such responses on obligations insured by the Company, are uncertain.
The Company groups its Puerto Rico exposure into three categories:GO and PBA
Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year. The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company. Prior to the enactment of PROMESA, the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico asserting that Puerto Rico's attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief. Please see "Puerto Rico Recovery Litigation" below.
Other Public Corporations. The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.
Constitutionally Guaranteed
General Obligation. As of September 30, 2017,March 31, 2022, the Company had $1,419remaining $47 million of 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. On July 1, 2016, despite the requirements of Article VI of its Constitution, the Commonwealth defaulted on most of the debt service payment due that day, and the Company made its first claim payments on theseGO bonds and has continued to make claim payments on these bonds. As noted above, the Oversight Board filed a petition under Title III$5 million of PROMESA with respect to the Commonwealth.
Puerto Rico Public Buildings Authority (PBA). As of September 30, 2017, the Company had $141 million insured net par outstanding of PBA bonds, consisting of direct exposure, second-to-pay exposure, and assumed reinsurance exposure.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Direct | | Second-to-Pay | | Assumed | | Total |
| | | (in millions) |
| GO | | $ | 36 | | | $ | 10 | | | $ | 1 | | | $ | 47 | |
| PBA | | 5 | | | — | | | — | | | 5 | |
| Total GO and PBA | | $ | 41 | | | $ | 10 | | | $ | 1 | | | $ | 52 | |
Under the GO/PBA Plan the Company received (including amounts received in connection with the second election described further below):
•$530 million in cash, net of ceded reinsurance,
•$605 million of new recovery bonds (see Note 7, Investments 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 contingent value instruments (CVIs) (see Note 7, Investments 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 Company expects to receive amounts in addition to the amounts listed above (and to make additional payments) in connection with its $1 million in net outstanding par of assumed reinsurance and $10 million in net outstanding par of second-to-pay exposure.
The CVIs are supported by a pledgeintended to provide creditors with additional recoveries tied to the outperformance of the rents duePuerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The Company has sold a portion of the new recovery bonds and CVIs it received on March 15, 2022, and may sell in the future
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
any new recovery bonds or CVIs it continues to hold. The fair value of any new recovery bonds or CVIs the Company retains will fluctuate. Any gains or losses on sales of new recovery bonds and CVIs relative to their values on March 15, 2022, were and will be reported as realized gains and losses on investments, rather than loss and LAE. The notional amount of the CVI represents the sum of the maximum distributions the holder could receive under leasesthe CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time.
In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of government facilities to departments, agencies, instrumentalitiespayments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the principal of all GO bonds and municipalities ofPBA bonds insured by the Company was accelerated against the Commonwealth and that benefit from a Commonwealth guaranty supportedbecame due and payable as of March 15, 2022. With respect to certain insured securities covered by a pledgethe GO/PBA Plan, insured bondholders were permitted to elect either: (i) to receive on March 15, 2022, 100% of the Commonwealth’s good faith, creditthen 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 cash, new recovery bonds and taxing power. On July 1, 2016, despiteCVIs (in aggregate, Plan Consideration) that constitute distributions under the requirementsGO/PBA Plan. For those who made the second election, distributions of Article VIPlan 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 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 Constitution,obligations under the PBA defaulted on mostinsurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the debt service payment due that day, and the Company made its first claim payments on thesethen outstanding principal amount of insured bonds and has continued to make claim payments on these bonds.
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA. plus accrued interest. As of September 30, 2017,March 31, 2022, the net insured par outstanding under the legacy GO and PBA insurance policies was $41 million, and constituted all of the Company’s remaining net par exposure to the GO and PBA bonds it had directly insured.
PRCCDA and PRIFA
As of March 31, 2022, the Company had $882no 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 (net of ceded reinsurance) and $98 million in notional amount of CVIs (net of ceded reinsurance).
PRHTA
As of March 31, 2022, the Company had $1.3 billion of insured net par outstanding that is covered by a PSA with respect to PRHTA entered into on May 5, 2021, by AGM and AGC and certain other stakeholders, the Commonwealth, and the FOMB (the HTA PSA): $799 million insured net par outstanding of PRHTA (transportation revenue) bonds and $495$457 million insured net par outstanding of PRHTA (highways(highway revenue) bonds. The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on up to $120 million annually of taxes on crude oil, unfinished oil and derivative products. The highwayshighway 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 revenuesHTA PSA provides for payments to AGM and AGC consisting of: (i) cash; (ii) new bonds expected to be backed by toll revenue (Toll Bonds); and (iii) a CVI. The HTA PSA contemplates a Title III proceeding requiring court approval of excise taxesa disclosure statement, solicitation and fees collectedvoting process, and a plan confirmation hearing. On May 2, 2022, the FOMB took the first step in this process by filing with the Title III Court a plan of adjustment for HTA (HTA Plan) which it believes to be consistent with the HTA PSA. The HTA PSA includes a number of conditions and the HTA Plan is subject to confirmation 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 accountsTitle III Court, so there can be no assurance that the Company believes should have been employed to fund debt service,consensual resolution for PRHTA defaulted onembodied in the full July 1, 2017 insured debt service payment, andHTA PSA will be achieved in its current form, or at all.
On February 22, 2022, the Company made its first claim payments on these bonds. As noted above, on April 28, 2017, the Oversight Board approvedFOMB certified a revised fiscal plan for PRHTA that PRHTA will not pay any debt service at least through 2026. The Company does not believegenerally consistent with the PRHTA fiscal plan in its current form complies with certain mandatory requirements of PROMESA.HTA PSA.
PRCCDA. PREPA
As of September 30, 2017,March 31, 2022, 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 made its first claim payments on these bonds.
PRIFA. As of September 30, 2017, the Company had $18 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to Puerto Rico of federal excise taxes paid on rum. These revenues are potentially subject to the clawback. The Company made its first claim payment on PRIFA bonds in January 2016, and has continued to make claim payments on PRIFA bonds.
Other Public Corporations
PREPA. As of September 30, 2017, the Company had $853$748 million insured net par outstanding of PREPA obligations. The PREPA obligations which are secured by a lien on the revenues of the electric system.
On December 24, 2015,May 3, 2019, AGM and AGC entered into an RSAa restructuring support agreement with respect to PREPA with PREPA an ad hocand other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and a groupthe FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
Assured Guaranty Ltd.
Notes to certain conditions, result in, among other things, modernizationCondensed Consolidated Financial Statements (Unaudited), Continued
On April 8, 2022, Judge Laura Taylor Swain of the utility and a restructuringFederal District Court of current debt. Upon finalization of the contemplated restructuring transaction, insured PREPA revenue bonds (with no reduction to par or stated interest rate) would be supportedPuerto Rico issued an order, in an action initiated by securitization bonds issued by a special purpose corporation and secured by a transition charge assessed on ratepayers.
In March 2017, the Governor indicated a desire to modify certain aspects of the RSA. On April 6, 2017, the Governor announced that an agreement in principle had been reached to supplement the RSA. As supplemented, the RSA called for AGM and AGC to provide surety insurance policies aggregating approximately $113 million ($14 million for AGCACG in 2017, appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and $99 million for AGM) to supportBrendan Shannon. Judge Swain also entered a separate order establishing the securitization bonds contemplatedterms and conditions of mediation, including that mediation shall terminate on June 1, 2022, unless extended by the RSA,PREPA mediation team to extend the maturity of all of the relending financing provided in 2016, and to provide $120 million of principal payment deferrals in 2018 through 2023. In addition, the RSA as supplemented provided for a consensual restructuring under Title VI of PROMESA.July 1, 2022.
The Oversight Board did not certify the RSA under Title VI of PROMESA as the Company believes is required by PROMESA, but rather, on July 2, 2017, commenced proceedingslast revised fiscal plan for PREPA under Title III of PROMESA. PREPA defaultedwas certified by the FOMB on its July 1, 2017May 27, 2021.
Other Puerto Rico Exposures
All debt service payments andfor the CompanyCompany’s remaining Puerto Rico exposures have been made its first claim payments on these bonds to bondholders as a result of these defaults. The Company believes that a number of the actions takenin full by the Commonwealth, the Oversight Board and others with respect to the PREPA obligations it insures and the RSA 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. Please see “Puerto Rico Recovery Litigation” below.
PRASA. Asobligors as of September 30, 2017, the Company had $373 million of insured net par outstanding to PRASA bonds, which are secured by a lien on the gross revenues of the water and sewer system. On September 15, 2015, PRASA entered into a settlement with the U.S. Department of Justice and the U.S. Environmental Protection Agency that requires it to spend $1.6 billion to upgrade and improve its sewer system island-wide. 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. As noted above, on April 28, 2017, the Oversight Board considered a fiscal plan for PRASA that assumes PRASA will pay only approximately 65% of its debt service through 2026, and approved the amended plan on June 30, 2017. Because PRASA has several categories of debt outstanding and the Company insures only PRASA debt with a senior lien on gross revenues of PRASA, it is unclear whether (or to what extent, if any) the payment of only 65% of debt service through 2026 would result in a reduction in PRASA payments of Company-insured debt. The Company does not believe the PRASA fiscal plan in its current form complies with certain mandatory requirements of PROMESA.filing. Such exposures comprise:
Municipal Finance Agency (MFA). MFA. As of September 30, 2017,March 31, 2022, the Company had $360$179 million insured 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
U of this filing that were guaranteed by the Company, and those payments were made in full.
COFINA. PR.As of September 30, 2017, the Company had $272 million insured net par outstanding of junior COFINA bonds, which are secured primarily by a second lien on certain sales and use taxes. As noted above, the Oversight Board filed a petition on behalf of the Commonwealth under Title III of PROMESA. COFINA defaulted on its August 1, 2017 insured debt service payment, and the Company made its first claim payments on these bonds.
University of Puerto Rico (U of PR). As of September 30, 2017,March 31, 2022, 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,university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.
PRASA. As of March 31, 2022, the dateCompany had $1 million insured net par outstanding of this filing, allPRASA obligations. The Company’s insured PRASA obligations are secured by a lien on the gross revenues of the water and sewer system.
Puerto Rico Litigation
Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its instrumentalities on debt service payments, on U of PR bonds insured byand related matters, and the Company have been made.
Puerto Rico Recovery Litigation
The Company believes thatis a party to a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations it insures are illegal or unconstitutional or both, andthem. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.
On January 7, 2016, AGM, AGC and Ambac Assurance Corporation (Ambac) commenced an action for declaratory judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico (Federal District Court in Puerto Rico) to invalidateobligations which the executive orders issued by the Former Governor on November 30, 2015 and December 8, 2015 directing that the Secretary of the Treasury ofCompany insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.
A number of Puerto Ricolegal actions involving the Company and relating to PRCCDA and PRIFA, as well as claims related to the Puerto Rico Tourism Company claw backclawback of certain excise taxes and revenues pledged to secure the payment of bonds issued by PRHTA, were resolved on March 15, 2022 in connection with the consummation of the March Puerto Rico Resolutions. All other proceedings remain stayed pending the Court’s determination on plans of adjustment or other proceedings related to PRHTA the PRCCDA and the PRIFA.PREPA.
Remaining Stayed Proceedings. The Commonwealth defendants filed a motion to dismiss the action for lack of subject matter jurisdiction,following Puerto Rico proceedings in 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.Company is involved remain stayed:
On May 3, 2017, AGM and AGC filed in the Federal District Court in Puerto Rico an adversary complaint seeking a judgment that the Commonwealth's Fiscal Plan violates various sections of PROMESA and the Contracts, Takings and Due Process Clauses of the U.S. Constitution, an injunction enjoining the Commonwealth and Oversight Board from presenting or proceeding with confirmation of any plan of adjustment based on the Fiscal Plan, and a stay on the confirmation of any plan of adjustment based on the Fiscal Plan pending development of a fiscal plan that complies with PROMESA and the U.S. Constitution. On October 6, 2017, AGC and AGM voluntarily withdrew without prejudice the complaint, based on their expectation that the Fiscal Plan would be modified as a result of Hurricane Maria.
On May 16, 2017, The Bank of New York Mellon, as trustee for the bonds issued by COFINA, filed an adversary complaint for interpleader and declaratory relief with the Federal District Court in Puerto Rico to resolve competing and conflicting demands made by various groups of COFINA bondholders, insurers of certain COFINA Bonds and COFINA, regarding funds held by the trustee for certain COFINA bond debt service payments scheduled to occur on and after June 1, 2017. On May 19, 2017, an order to show cause was entered permitting AGC and AGM to intervene in this matter. While AGM has insured COFINA Bonds, AGC has not.
On June 3, 2017, AGC and AGM filed an adversary complaint in Federal District Court in Puerto Rico seeking (i) a judgment declaring that the application of pledged special revenues to the payment of the PRHTA Bonds is not subject to the PROMESA Title III automatic stay and that the Commonwealth has violated the special revenue protections provided to the PRHTA Bonds under the Bankruptcy Code; (ii) an injunction enjoining the Commonwealth from taking or causing to be taken any action that would further violate the special revenue protections provided to the PRHTA Bonds under the Bankruptcy Code; and (iii) an injunction ordering the Commonwealth to remit the pledged special revenues securing the PRHTA Bonds in accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code.
•On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court inof Puerto Rico seeking (i) a declaratory judgment thatto compel the PREPA RSA is a “Preexisting Voluntary Agreement” under Section 104 of PROMESA and the Oversight Board’s failureFOMB to certify the PREPA RSA is an unlawful applicationfor implementation under Title VI 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 PREPA RSA; and (iii) a writ of mandamus requiring the Oversight Board to comply with its duties under PROMESA and certify the PREPA RSA.PROMESA. On July 21, 2017, in light ofconsidering its PREPA Title III petition on July 2, 2017, the Oversight BoardFOMB 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 proceedingBankruptcy proceeding. 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 form of complaint seekingmotion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver for PREPA. That motion was denied on September 14, 2017.receiver. On May 3, 2019, AGM and AGC filedentered into the PREPA RSA, but on March 8, 2022, the Commonwealth and PREPA terminated the PREPA RSA. Given the termination of the PREPA RSA, the Company is considering several options to enforce its rights in respect of insured PREPA bonds, including, among other things, a noticerenewal of appealthe motion to lift the automatic stay and seek the appointment of a receiver. On April 8, 2022, Judge Swain issued an order appointing as members of the 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 mediation shall terminate on September 28, 2017.June 1, 2022, unless extended by the PREPA mediation team to July 1, 2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
•On August 7, 2017, AGCMay 20, 2019, the FOMB and AGMthe Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court inof 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 September 30, 2019, certain fuel line lenders filed an amended adversary complaint against the FOMB and other parties, including AGC and AGM, seeking among other things, judgment against defendants (i) declaring that the applicationsubordination of pledged special revenuesPREPA bondholder claims to the paymentfuel line lender claims. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA Bonds is not subjectRSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the PROMESA Title III automatic stayapproval of the PREPA RSA settlement continue to be adjourned, and that the Commonwealth has violatedhearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the special revenue protections providedTitle III Court issued an order to that effect.
•On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. 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 Bonds underRSA settlement continue to be adjourned, and that the Bankruptcy Code; (ii) declaringhearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Title III Court issued an order to that capital expenditureseffect.
•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 allAGC and other expenses that do not constitute current, reasonable and necessary operating expenses may not be paid from pledged special revenues priorinsurers of PRHTA bonds, objecting to the payment of debt service on the PREPA Bonds, and (iii) enjoining defendants from taking or causing to be taken any action that would further violate the special revenue protections provided to the PREPA Bonds under
the Bankruptcy Code; and (iv) ordering defendants to remit the pledged special revenues securing the PREPA Bonds in accordance with the terms of the special revenue provisions set forthbond insurers claims in the Bankruptcy Code. On October 13, 2017, AGCPRHTA Title III proceedings and seeking to disallow such claims. Considering the PSA, on May 25, 2021, Judge Swain stayed the participation of AGM voluntarily withdrew without prejudice the complaint, in order to allow PREPA to focus on emergency efforts to restore electricity to the island's residents and businesses in the wake of Hurricane Maria.AGC.
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 | | As of |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 2,256 | | | $ | 3,629 | | | $ | 3,169 | | | $ | 5,322 | |
|
| | | | | | | | | | | | | | | |
| | Gross Par Outstanding | | Gross Debt Service Outstanding |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 5,186 |
| | $ | 5,435 |
| | $ | 8,516 |
| | $ | 9,038 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico
Net Par Outstanding (1)
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | | |
Commonwealth of Puerto Rico - GO (1) | $ | 47 | | | $ | 1,097 | |
| PBA (1) | 5 | | | 122 | |
| Total GO/PBA Plan | 52 | | | 1,219 | |
| PRHTA (Transportation revenue) | 799 | | | 799 | |
| PRHTA (Highway revenue) | 457 | | | 457 | |
| PRCCDA (2) | — | | | 152 | |
| Total HTA/CCDA PSA | 1,256 | | | 1,408 | |
| PRIFA (2) | — | | | 16 | |
| Total Subject to a Plan or Support Agreement | 1,308 | | | 2,643 | |
| Other Puerto Rico Exposures | | | |
| PREPA | 748 | | | 748 | |
| MFA (3) | 179 | | | 179 | |
| PRASA and U of PR (3) | 2 | | | 2 | |
| Total Other Puerto Rico Exposures | 929 | | | 929 | |
| Total net exposure to Puerto Rico | $ | 2,237 | | | $ | 3,572 | |
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (in millions) |
| Commonwealth Constitutionally Guaranteed | | | |
| Commonwealth of Puerto Rico - General Obligation Bonds (2) (3) | $ | 1,419 |
| | $ | 1,476 |
|
| PBA (2) | 141 |
| | 169 |
|
| Public Corporations - Certain Revenues Potentially Subject to Clawback | | | |
| PRHTA (Transportation revenue) (2) (3) | 882 |
| | 918 |
|
| PRHTA (Highways revenue) (2) (3) | 495 |
| | 350 |
|
| PRCCDA (2) | 152 |
| | 152 |
|
| PRIFA (2) | 18 |
| | 18 |
|
| Other Public Corporations | | | |
| PREPA (2) (3) | 853 |
| | 724 |
|
| PRASA | 373 |
| | 373 |
|
| MFA | 360 |
| | 334 |
|
| COFINA (2) (3) | 272 |
| | 271 |
|
| U of PR | 1 |
| | 1 |
|
| Total net exposure to Puerto Rico | $ | 4,966 |
| | $ | 4,786 |
|
| |
(1) | The September 30, 2017 amounts include $389 million (which comprises $36 million of General Obligation Bonds, $134 million of PREPA, $144 million of PRHTA (Highways revenue), and $75 million of MFA) related to 2017 commutations of previously ceded business. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. |
(2) As(1)On March 15, 2022, the Modified Eighth Amended Title III Joint Plan of the date of this filing,Adjustment, confirmed on January 18, 2022, was consummated, pursuant to which the Company, hasamong other things, fully paid claims on these credits.all of its directly insured Puerto Rico GO bonds, other than certain GO bonds whose holders made certain elections. On the same date and pursuant to the same Plan of Adjustment, the Company fully paid claims on all of its directly insured PBA bonds, other than certain PBA bonds whose holders made certain elections.
(2) On March 15, 2022, the Company fully paid claims on all of its insured PRCCDA and PRIFA bonds, eliminating its exposure to insured PRCCDA and PRIFA bonds, pursuant to Title VI orders entered on January 20, 2022.
(3) As ofAll debt service on these insured exposures have been paid to date without any insurance claim being made on the date of this filing, the Oversight Board has certified a filing under Title III of PROMESA for these credits.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 payments 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Amortization Schedule of Puerto Rico
Net Par Outstanding
and Net Debt Service Outstanding
As of September 30, 2017March 31, 2022
| | | | | | | | | | | |
| Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| (in millions) |
| 2022 (April 1 - June 30) | $ | — | | | $ | 3 | |
| 2022 (July 1 - September 30) | 159 | | | 213 | |
| 2022 (October 1 - December 31) | — | | | 3 | |
| Subtotal 2022 | 159 | | | 219 | |
| 2023 | 186 | | | 289 | |
| 2024 | 149 | | | 243 | |
| 2025 | 151 | | | 237 | |
| 2026 | 170 | | | 249 | |
| 2027-2031 | 639 | | | 935 | |
| 2032-2036 | 577 | | | 732 | |
| 2037-2041 | 201 | | | 237 | |
| 2042 | 5 | | | 5 | |
| Total | $ | 2,237 | | | $ | 3,146 | |
|
| | | | | | | |
| | Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| | (in millions) |
| 2017 (October 1 - December 31) | $ | 0 |
| | $ | 3 |
|
| 2018 (January 1 - March 31) | 0 |
| | 123 |
|
| 2018 (April 1 - June 30) | 0 |
| | 3 |
|
| 2018 (July 1 - September 30) | 200 |
| | 322 |
|
| 2018 (October 1 - December 31) | 0 |
| | 3 |
|
| Subtotal 2018 | 200 |
| | 451 |
|
| 2019 | 223 |
| | 464 |
|
| 2020 | 285 |
| | 516 |
|
| 2021 | 147 |
| | 364 |
|
| 2022-2026 | 1,045 |
| | 1,995 |
|
| 2027-2031 | 981 |
| | 1,655 |
|
| 2032-2036 | 1,250 |
| | 1,669 |
|
| 2037-2041 | 417 |
| | 588 |
|
| 2042-2047 | 418 |
| | 492 |
|
| Total | $ | 4,966 |
| | $ | 8,197 |
|
Exposure to the U.S. Virgin Islands
The As of March 31, 2022, the Company has $498had $443 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rates $224rated $185 million BIG. The $274BIG (down from $469 million USVI net parBIG as of December 31, 2021). During First Quarter 2022, the Company rates investment grade is comprised primarilyupgraded $256 million insured par net outstanding of USVI bonds secured byin anticipation of a lienlegal defeasance of such bonds, which occurred on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum.April 6, 2022. The $224$185 million of BIG USVI net par comprises (a)outstanding consisted of: (i) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVIUSVI; and (b)(ii) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.
Hurricane Irma caused significant damage in St. John The COVID-19 pandemic and St. Thomas, while Hurricane Maria made landfall on St. Croix as a Category 4 hurricane onevolving governmental and private responses to the Saffir-Simpson scale, causing loss of life and substantial damage to St. Croix’s businesses and infrastructure, includingpandemic have been impacting the power grid.USVI economy, especially the tourism sector. The USVI is benefitingcontinues to benefit from the federal response to this year’sthe 2017 hurricanes and COVID-19, has seen improvement in portions of the tourism sector, recently took actions to address its pension shortfalls, and has made its debt service payments to date.
Specialty Insurance and Reinsurance Exposure to the Selected European Countries
The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal, Spain and Turkey (collectively, the Selected European Countries). The Company’s direct economic exposure to the Selected European Countries, based on par, is shown in the following table, net of ceded reinsurance.
Net Direct Economic Exposure to Selected European Countries(1)
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Hungary | | Italy | | Portugal | | Spain | | Turkey | | Total |
| | (in millions) |
| Sub-sovereign exposure(2) | $ | 214 |
| | $ | 1,034 |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 1,779 |
|
| Non-sovereign exposure(3) | 125 |
| | 449 |
| | — |
| | — |
| | 200 |
| | 774 |
|
| Total | $ | 339 |
| | $ | 1,483 |
| | $ | 75 |
| | $ | 456 |
| | $ | 200 |
| | $ | 2,553 |
|
| Total BIG (See Note 5) | $ | 262 |
| | $ | — |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 793 |
|
____________________
| |
(1) | While exposures are shown in U.S. dollars, the obligations are in various currencies, primarily euros.
|
| |
(2) | Sub-sovereign exposure in Selected European Countries includes transactions backed by receivables from, or supported by, sub-sovereigns, which are governmental or government-backed entities other than the ultimate governing body of the country.
|
| |
(3) | Non-sovereign exposure in Selected European Countries includes debt of regulated utilities, RMBS and diversified payment rights (DPR) securitizations.
|
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. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies, in which case the Company depends upon geographic information provided by the primary insurer.
The Company's $200 million net insured par exposure in Turkey is to DPR securitizations sponsored by a major Turkish bank. These DPR securitizations were established outside of Turkey and involve payment orders in U.S. dollars, pounds sterling and euros from persons outside of Turkey to beneficiaries in Turkey who are customers of the sponsoring bank. The sponsoring bank's correspondent banks have agreed to remit all such payments to a trustee-controlled account outside Turkey, where debt service payments for the DPR securitization are given priority over payments to the sponsoring bank.
The Company has excluded from the exposure tables abovealso provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporatestructured finance exposures written in financial guaranty form. As of both March 31, 2022 and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculatedDecember 31, 2021, gross exposure of $46$144 million to Selected European Countries in transactions with $0.7 billionand net exposure of net par outstanding.
Non-Financial Guaranty Insurance
The Company provided capital relief triple-X excess of loss life reinsurance on approximately $540$84 million of exposure as of September 30, 2017 and $390 million as of December 31, 2016. The triple-X excess of loss life reinsurance exposure is expected to increase to approximately $1.2 billion prior to September 30, 2036.
In addition, the Company started providing reinsurance on aircraft residual value insurance (RVI) policieswas rated BIG. All other exposures in the first quarter of 2017table below are investment-grade quality.
Specialty Insurance and hadReinsurance Exposure
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of December 31, 2021 |
| | Gross Exposure | | Net Exposure | | Gross Exposure | | Net Exposure |
| | (in millions) |
| Life insurance transactions (1) | | $ | 1,261 | | | $ | 890 | | | $ | 1,250 | | | $ | 871 | |
| Aircraft residual value insurance policies | | 355 | | | 200 | | | 355 | | | 200 | |
| Total | | $ | 1,616 | | | $ | 1,090 | | | $ | 1,605 | | | $ | 1,071 | |
____________________
(1) The life insurance transactions’ net exposure is projected to reach $1.1 billion by March 31, 2026.
Guarantee
On March 31, 2022, the Company’s subsidiary, AGRO, entered into an agreement (internally rated AA) which guarantees the receipt of $116a minimum rental income from a multifamily and commercial real estate portfolio. AGRO’s attachment point is significantly below current annual rental income, and further protective provisions are triggered when rental
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
income falls below a certain level. In addition, AGRO is entitled to be reimbursed for any claims made on the guarantee from future rental income generated by the portfolio. The Company’s maximum potential exposure under the guarantee was $257 million to such reinsurance as of September 30, 2017.March 31, 2022. The Company accounts for the guarantee in accordance with Accounting Standards Codification (ASC) 460, Guarantees.
The capital relief triple-X excess of
4. Expected Loss to be Paid (Recovered)
Expected loss life reinsurance and aircraft residual value reinsurance are all rated investment grade internally. This non-financial guaranty exposure has a similar risk profileto be paid (recovered) is equal to the Company'spresent value of expected future cash outflows for loss and
LAE payments, net of: (i) inflows for expected salvage, subrogation and other structured finance investment grade exposure writtenrecoveries; 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 financial guaranty form.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 estimates of all possible scenarios.
| |
5. | Expected Loss to be Paid |
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. Expected loss to be paid (recovered) 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.
Loss Estimation Process
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 loss to be paid (recovered) 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.
In circumstances where the Company has 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.
Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects
of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic
effects of loss mitigation efforts.
The insured portfolio regardlessincludes 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 the following accounting model.models : insurance, derivative and FG VIE.
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, and 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, and 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 lossesloss on a policy is subject to significant uncertainty over
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the long 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. Such information includes management’s view of the potential impact of COVID-19 on its distressed exposures. Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction.
Changes over a resultreporting period in the Company’s loss estimates for municipal 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 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 change materiallyalso 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 that same period.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.
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 and may be influenced by many
interrelated 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. For information on
In some instances, the Company's loss estimation process, please referterms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to Note 5,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.
Net Expected Loss to be Paid of Part II, Item 8, Financial Statements(Recovered) and Supplementary Data in AGL's Annual Report on Form 10-K for the year ended December 31, 2016.Net Economic Loss Development (Benefit)
by Accounting Model
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of | | First Quarter |
| Accounting Model | | March 31, 2022 | | December 31, 2021 | | 2022 | | 2021 |
| | | (in millions) |
| Insurance (see Note 5) | | $ | 388 | | | $ | 364 | | | $ | (44) | | | $ | 16 | |
| FG VIEs (see Note 8) | | 38 | | | 42 | | | (4) | | | (6) | |
| Credit derivatives (see Note 6) | | 6 | | | 5 | | | 4 | | | 3 | |
| Total | | $ | 432 | | | $ | 411 | | | $ | (44) | | | $ | 13 | |
The following tables present a roll forward of the present value of net expected loss to be paid (recovered) for all contracts whetherunder , which are accounted for asunder one of the following accounting models: insurance, credit derivatives or financial guaranty (FG) VIEs, by sector, after the expected recoveries/ (payables) for breaches of representationsderivative and warranties (R&W) and other expected recoveries.FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.0%0.00% to 2.94%2.61% with a weighted average of 2.27%2.26% as of September 30, 2017March 31, 2022 and 0.0%0.00% to 3.23%1.98% with a weighted average of 2.73%1.02% as of December 31, 2016.2021. Expected losses to be paid
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
for U.S. dollar denominated transactions represented approximately 98.0% and 97.2% of the total as of March 31, 2022 and December 31, 2021, respectively.
Net Expected Loss to be Paid (Recovered)
Roll Forward
| | | | | | | | | | | |
| | First Quarter |
| 2022 | | 2021 |
| | (in millions) |
| Net expected loss to be paid (recovered), beginning of period | $ | 411 | | | $ | 529 | |
| Economic loss development (benefit) due to: | | | |
| Accretion of discount | 2 | | | 1 | |
| Changes in discount rates | (47) | | | (48) | |
| Changes in timing and assumptions | 1 | | | 60 | |
| Total economic loss development (benefit) | (44) | | | 13 | |
| Net (paid) recovered losses | 65 | | | (70) | |
| Net expected loss to be paid (recovered), end of period | $ | 432 | | | $ | 472 | |
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Net expected loss to be paid, beginning of period | $ | 1,297 |
| | $ | 1,326 |
| | $ | 1,198 |
| | $ | 1,391 |
|
| Net expected loss to be paid on the MBIA UK portfolio as of January 10, 2017 | — |
| | — |
| | 21 |
| | — |
|
| Net expected loss to be paid on the CIFG portfolio as of July 1, 2016 | — |
| | 22 |
| | — |
| | 22 |
|
| Economic loss development (benefit) due to: | | | | | | | |
| Accretion of discount | 8 |
| | 5 |
| | 24 |
| | 20 |
|
| Changes in discount rates | (6 | ) | | (29 | ) | | 28 |
| | 79 |
|
| Changes in timing and assumptions | 202 |
| | (20 | ) | | 246 |
| | (62 | ) |
| Total economic loss development (benefit) | 204 |
| | (44 | ) | | 298 |
| | 37 |
|
| Net (paid) recovered losses | (209 | ) | | (214 | ) | | (225 | ) | | (360 | ) |
| Net expected loss to be paid, end of period | $ | 1,292 |
| | $ | 1,090 |
| | $ | 1,292 |
| | $ | 1,090 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Third Quarter 2017
|
| | | | | | | | | | | | | | | |
| | Net Expected
Loss to be
Paid (Recovered) as of
June 30, 2017 | | Economic Loss Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected
Loss to be Paid (Recovered) as of
September 30, 2017 (2) |
| | (in millions) |
| Public finance: | | | | | | | |
| U.S. public finance | $ | 1,044 |
| | $ | 229 |
| | $ | (227 | ) | | $ | 1,046 |
|
| Non-U.S. public finance | 42 |
| | 0 |
| | 5 |
| | 47 |
|
| Public finance | 1,086 |
| | 229 |
| | (222 | ) | | 1,093 |
|
| Structured finance: | | | | | | | |
| U.S. RMBS | 182 |
| | (19 | ) | | 13 |
| | 176 |
|
| Triple-X life insurance transactions | (4 | ) | | (1 | ) | | (2 | ) | | (7 | ) |
| Other structured finance | 33 |
| | (5 | ) | | 2 |
| | 30 |
|
| Structured finance | 211 |
| | (25 | ) | | 13 |
| | 199 |
|
| Total | $ | 1,297 |
| | $ | 204 |
| | $ | (209 | ) | | $ | 1,292 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Third Quarter 2016
|
| | | | | | | | | | | | | | | | | | | |
| | Net Expected
Loss to be
Paid (Recovered) as of
June 30, 2016 | | Net Expected Loss to be Paid (Recovered) on CIFG as of July 1, 2016 | | Economic Loss
Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected
Loss to be
Paid (Recovered) as of
September 30, 2016 |
| | (in millions) |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 963 |
| | $ | 40 |
| | $ | 9 |
| | $ | (196 | ) | | $ | 816 |
|
| Non-U.S. public finance | 37 |
| | 2 |
| | (1 | ) | | — |
| | 38 |
|
| Public finance | 1,000 |
| | 42 |
| | 8 |
| | (196 | ) | | 854 |
|
| Structured finance: | |
| | | | |
| | |
| | |
|
| U.S. RMBS | 192 |
| | (22 | ) | | (27 | ) | | 5 |
| | 148 |
|
| Triple-X life insurance transactions | 100 |
| | — |
| | (23 | ) | | (23 | ) | | 54 |
|
| Other structured finance | 34 |
| | 2 |
| | (2 | ) | | 0 |
| | 34 |
|
| Structured finance | 326 |
| | (20 | ) | | (52 | ) | | (18 | ) | | 236 |
|
| Total | $ | 1,326 |
| | $ | 22 |
| | $ | (44 | ) | | $ | (214 | ) | | $ | 1,090 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Nine Months 2017
|
| | | | | | | | | | | | | | | | | | | |
| | Net Expected
Loss to be Paid (Recovered) as of
December 31, 2016 (2) | | Net Expected
Loss to be Paid
on MBIA UK as of
January 10, 2017 | | Economic Loss
Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected
Loss to be Paid (Recovered) as of
September 30, 2017 (2) |
| | (in millions) |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 871 |
| | $ | — |
| | $ | 431 |
| | $ | (256 | ) | | $ | 1,046 |
|
| Non-U.S. public finance | 33 |
| | 13 |
| | (4 | ) | | 5 |
| | 47 |
|
| Public finance | 904 |
| | 13 |
| | 427 |
| | (251 | ) | | 1,093 |
|
| Structured finance: | | | | | | | | | |
| U.S. RMBS | 206 |
| | — |
| | (70 | ) | | 40 |
| | 176 |
|
| Triple-X life insurance transactions | 54 |
| | — |
| | (56 | ) | | (5 | ) | | (7 | ) |
| Other structured finance | 34 |
| | 8 |
| | (3 | ) | | (9 | ) | | 30 |
|
| Structured finance | 294 |
| | 8 |
| | (129 | ) | | 26 |
| | 199 |
|
| Total | $ | 1,198 |
| | $ | 21 |
| | $ | 298 |
| | $ | (225 | ) | | $ | 1,292 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Nine Months 2016
|
| | | | | | | | | | | | | | | | | | | |
| | Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2015 | | Net Expected Loss to be Paid (Recovered) on CIFG as of July 1, 2016 | | Economic Loss
Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected
Loss to be
Paid (Recovered) as of
September 30, 2016 |
| | (in millions) |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 771 |
| | $ | 40 |
| | $ | 218 |
| | $ | (213 | ) | | $ | 816 |
|
| Non-U.S. public finance | 38 |
| | 2 |
| | (2 | ) | | — |
| | 38 |
|
| Public finance | 809 |
| | 42 |
| | 216 |
| | (213 | ) | | 854 |
|
| Structured finance: | |
| | | | |
| | |
| | |
|
| U.S. RMBS | 409 |
| | (22 | ) | | (139 | ) | | (100 | ) | | 148 |
|
| Triple-X life insurance transactions | 99 |
| | — |
| | (21 | ) | | (24 | ) | | 54 |
|
| Other structured finance | 74 |
| | 2 |
| | (19 | ) | | (23 | ) | | 34 |
|
| Structured finance | 582 |
| | (20 | ) | | (179 | ) | | (147 | ) | | 236 |
|
| Total | $ | 1,391 |
| | $ | 22 |
| | $ | 37 |
| | $ | (360 | ) | | $ | 1,090 |
|
____________________
| |
(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 in reinsurance recoverable on paid losses included in other assets. The Company paid $7 million and $3 million inLAE for Third Quarter 2017 and 2016, respectively and $16 million and $12 million in LAE for Nine Months 2017 and 2016, respectively.
|
| |
(2) | Includes expected LAE to be paid of $23 million as of September 30, 2017 and $12 million as of December 31, 2016. |
The following table presents the present value of net expected loss to be paid and the net economic loss development for all contracts by accounting model.
Net Expected Loss to be Paid (Recovered) and
Net Economic Loss Development (Benefit)Roll Forward by Sector
By Accounting Model
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter 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 March 31, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 197 | | | $ | (48) | | | $ | 32 | | | $ | 181 | |
| Non-U.S. public finance | | 12 | | | (2) | | | — | | | 10 | |
| Public finance | | 209 | | | (50) | | | 32 | | | 191 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 150 | | | 7 | | | 38 | | | 195 | |
| Other structured finance | | 52 | | | (1) | | | (5) | | | 46 | |
| Structured finance | | 202 | | | 6 | | | 33 | | | 241 | |
| Total | | $ | 411 | | | $ | (44) | | | $ | 65 | | | $ | 432 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of September 30, 2017 | | As of December 31, 2016 | | Third Quarter 2017 | | Third Quarter 2016 | | Nine Months 2017 | | Nine Months 2016 |
| | (in millions) |
| Financial guaranty insurance | $ | 1,205 |
| | $ | 1,083 |
| | $ | 207 |
| | $ | (35 | ) | | $ | 328 |
| | $ | 66 |
|
| FG VIEs (1) and other | 93 |
| | 105 |
| | (2 | ) | | (3 | ) | | (6 | ) | | (6 | ) |
| Credit derivatives (2) | (6 | ) | | 10 |
| | (1 | ) | | (6 | ) | | (24 | ) | | (23 | ) |
| Total | $ | 1,292 |
| | $ | 1,198 |
| | $ | 204 |
| | $ | (44 | ) | | $ | 298 |
| | $ | 37 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter 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 March 31, 2021 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 305 | | | $ | 15 | | | $ | (92) | | | $ | 228 | |
| Non-U.S. public finance | | 36 | | | (12) | | | — | | | 24 | |
| Public finance | | 341 | | | 3 | | | (92) | | | 252 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 148 | | | 11 | | | 22 | | | 181 | |
| Other structured finance | | 40 | | | (1) | | | — | | | 39 | |
| Structured finance | | 188 | | | 10 | | | 22 | | | 220 | |
| Total | | $ | 529 | | | $ | 13 | | | $ | (70) | | | $ | 472 | |
_______________________________________
(1) ReferNet 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) LAE paid of $13 million and $4 million for First Quarter 2022 and First Quarter 2021, respectively, and (b) expected LAE to Note 9, Consolidated Variable Interest Entities.be paid of $17 million as of March 31, 2022 and $26 million as of December 31, 2021. Ceded expected loss to be recovered (paid) was $(2) million as of March 31, 2022 and $10 million as of December 31, 2021.
(2) Refer to Note 8, Contracts Accounted for as Credit Derivatives.
Selected U.S. Public Finance Transactions
The Company insuresinsured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.0$2.2 billion net par outstanding as of September 30, 2017,March 31, 2022, all of which arewas BIG. For additional information regarding the Company's exposure to general obligations of Commonwealth ofCompany’s Puerto Rico and various obligations of its related authorities and public corporations, please refer to "Exposureexposure, see “Exposure to Puerto Rico"Rico” in Note 4,3, Outstanding Exposure.
AsOn March 15, 2022, the GO/PBA Plan, PRCCDA Modification, and PRIFA Modification were consummated, as described under “Exposure to Puerto Rico” in Note 3, Outstanding Exposure. The fair value of September 30, 2017, the Company has insured $346 million net par outstanding of general obligationrecoveries received under these March Puerto Rico Resolutions (which included cash, new recovery bonds issued by the City of Hartford, Connecticut, which has recently experienced financial distress.and CVIs) was higher than expected. The Company rates $345 million net par ofalso updated its assumptions for certain other defaulted Puerto Rico credits that BIG, with the remainder being a second-to-pay policy rated investment grade. The mayor of Hartford announced that the city would be unable to meet its financial obligations by early November 2017 if the State of Connecticut failed to enact a budget, and hired bankruptcy consultants. On October 31, 2017, the State adopted a budget providing for substantial payments to the City, placing the City under State oversight and providing an avenue for the City to issue debt backed by the State.
The Company has approximately $19 million of net par exposure as of September 30, 2017 to bonds issued by Parkway East Public Improvement District (District), which is located in Madison County, Mississippi (the County). The bonds, which are rated BIG, are payable from special assessments on properties within the District, as well as amounts paid under a contribution agreement with the County in which the County covenants that it will provide funds in the event special assessments are not sufficient to make a debt service payment. The special assessments have not yet been sufficient to pay debt service in full. In earlier years, the County provided funding to cover the balance of the debt service requirement, but subsequently claimed the District’s failure to reimburse it within the two years stipulated in the contribution agreement means that the County is not required to provide funding until it is reimbursed. On May 31, 2017, the United States Court of Appeals for the Fifth Circuit reversed a district court ruling favorable to the Company in its declaratory judgment action disputing the County’s interpretation. See “Recovery Litigation” below.settled.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the U.S. Bankruptcy Code became effective. As of September 30, 2017,March 31, 2022, the Company’s net par outstanding subject to the plan consistsconsisted of $113$100 million of pension obligation bonds. As part of the plan of adjustment, the City will repay any claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth.
The Company projects that its total net expected loss to be paid across its troubled U.S. public finance creditsexposures as of September 30, 2017March 31, 2022, including those mentioned above, which incorporated the likelihood of the various outcomes, willto be $1.0 billion,$181 million, compared with a net expected loss of $871$197 million as of December 31, 2016. Economic loss development in Third2021. The economic benefit for U.S. public finance transactions was $48 million during First Quarter 2017 was $229 million and economic loss development for Nine Months 2017 was $431 million,2022, which was primarily attributable to Puerto Rico exposures.exposures and changes in discount rates. The changes attributable to the Company’s Puerto Rico exposures reflect adjustments the Company made to the assumptions it used in its scenarios and valuation of certain recovery components based on the public information as discussed under “Exposure to Puerto Rico” in Note 3, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period.
Selected Non - U.S. Public Finance Transactions
The Company insures and reinsures credits 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. The Company's exposure net of reinsurance to these Spanish and Portuguese credits is $456 million and $75 million, respectively. The Company rates all of these exposures BIG due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities. The Company's exposure, net of reinsurance, to these Hungarian credits is $214 million, all of which is rated BIG.
As part of the MBIA UK Acquisition, the Company now also insures an obligation backed by the availability and toll revenues of a major arterial road into a city in the U.K. with $218 million of net par outstanding as of September 30, 2017. This transaction has been underperforming due to lower traffic volume and higher costs compared with expectations at underwriting.
These transactions, together with other non-U.S. public finance insured obligations, had expectedExpected loss to be paid of $47for non-U.S. public finance transactions was $10 million as of September 30, 2017,March 31, 2022, compared with $33$12 million as of December 31, 2016. The MBIA UK Acquisition added $13 million of net expected loss as of January 2017. There was little economic loss development during Third Quarter 2017.2021. The economic benefit offor non-U.S. public finance transactions was approximately $4$2 million during Nine Months 2017 was due mainlyFirst Quarter 2022.
Assured Guaranty Ltd.
Notes to the improved internal outlook of certain European sovereigns and sub-sovereign entities.Condensed Consolidated Financial Statements (Unaudited), Continued
Approach to Projecting Losses in U.S. RMBS Loss Projections
The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any expected R&W recoveriesrepresentation and warranty (R&W) recoveries/payables to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates.
Third Quarter 2017 U.S.Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS Loss Projections
Basedloss projections based on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, liquidation rateslate-stage delinquencies and loss severities)severity) as well as the residential property market and economy in general, the Company chose to make the changesand, 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 itthat the Company uses to project RMBS losses are shown in the tables of assumptions in the sections below.
Net Economic Loss Development (Benefit)
U.S. RMBS
| | | | | | | | | | | |
| First Quarter |
| 2022 | | 2021 |
| | |
| First lien U.S. RMBS | $ | 18 | | | $ | 25 | |
| Second lien U.S. RMBS | (11) | | | (14) | |
First Lien U.S. RMBS Loss Projections: Alt-A, First Lien,Prime, Option ARM Subprime and PrimeSubprime
The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have recently been two2 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 developmentprojections 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
First Lien Liquidation Rates
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 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 |
|
| | | | | |
| | September 30, 2017 | | June 30, 2017 | | December 31, 2016 |
| Delinquent/Modified in the Previous 12 Months | | | | | |
| Alt A and Prime | 20% | | 20% | | 25% |
| Option ARM | 20 | | 20 | | 25 |
| Subprime | 20 | | 20 | | 25 |
| 30 – 59 Days Delinquent | | | | | |
| Alt A and Prime | 30 | | 30 | | 35 |
| Option ARM | 35 | | 35 | | 35 |
| Subprime | 40 | | 40 | | 40 |
| 60 – 89 Days Delinquent | | | | | |
| Alt A and Prime | 40 | | 40 | | 45 |
| Option ARM | 45 | | 45 | | 50 |
| Subprime | 50 | | 45 | | 50 |
| 90+ Days Delinquent | | | | | |
| Alt A and Prime | 50 | | 50 | | 55 |
| Option ARM | 55 | | 55 | | 55 |
| Subprime | 55 | | 55 | | 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 | | 65 |
| Subprime | 65 | | 65 | | 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 conditional default rate (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.(i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.
In the most heavily weighted scenario (the base case), after the initial 36-month36-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. In the base case, the Company assumes the final CDR will be reached 5.751.25 years 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 case that recent (still historically elevated) loss severities experienced in first lien transactions have reached historically high levels,will improve after loans with accumulated delinquencies and theforeclosure cost are liquidated. The Company is assuming in the base case that these highthe 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
begin returning to levels consistent with underwriting assumptions beginning after the initial 18 month18-month period, declining to 40% in the base case over 2.5 years.
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for direct vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base Case Expected Loss Estimates
First Lien RMBS(1)U.S. RMBS
|
| | | | | | | | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of June 30, 2017 | | As of
December 31, 2016 |
| | Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average |
| Alt A and Prime | | | | | | | | | | | | | | | | | |
| Plateau CDR | 1.0 | % | - | 11.0% | | 5.1% | | 1.1 | % | - | 10.3% | | 5.1 | % | | 1.0 | % | – | 13.5% | | 5.7% |
| Final CDR | 0.0 | % | - | 0.5% | | 0.3% | | 0.1 | % | - | 0.5% | | 0.3 | % | | 0.0 | % | – | 0.7% | | 0.3% |
| Initial loss severity: | | | | | | | | | | | | | |
| 2005 and prior | 60% | | | | 60% | | | | 60% | | |
| 2006 | 80% | | | | 80% | | | | 80% | | |
| 2007+ | 70% | | | | 70% | | | | 70% | | |
| Option ARM | | | | | | | | | | | | | | | | | |
| Plateau CDR | 2.4 | % | - | 6.6% | | 5.3% | | 3.7 | % | - | 6.7% | | 5.4 | % | | 3.2 | % | – | 7.0% | | 5.6% |
| Final CDR | 0.1 | % | - | 0.3% | | 0.3% | | 0.2 | % | - | 0.3% | | 0.3 | % | | 0.2 | % | – | 0.3% | | 0.3% |
| Initial loss severity: | | | | | | | | | | | | | |
| 2005 and prior | 60% | | | | 60% | | | | 60% | | |
| 2006 | 70% | | | | 70% | | | | 70% | | |
| 2007+ | 75% | | | | 75% | | | | 75% | | |
| Subprime | | | | | | | | | | | | | | | | | |
| Plateau CDR | 3.6 | % | - | 13.1% | | 7.9% | | 3.8 | % | - | 13.1% | | 7.8 | % | | 2.8 | % | – | 14.1% | | 8.1% |
| Final CDR | 0.2 | % | - | 0.7% | | 0.4% | | 0.2 | % | - | 0.7% | | 0.4 | % | | 0.1 | % | – | 0.7% | | 0.4% |
| Initial loss severity: | | | | | | | | | | | | | |
| 2005 and prior | 80% | | | | 80% | | | | 80% | | |
| 2006 | 90% | | | | 90% | | | | 90% | | |
| 2007+ | 95% | | | | 95% | | | | 90% | | |
____________________
(1)Represents variables for the base case.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of December 31, 2021 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Alt-A and Prime: | | | | | | | | | | | |
| Plateau CDR | 1.7 | % | - | 14.0% | | 6.1% | | 0.9 | % | - | 11.6% | | 5.9% |
| Final CDR | 0.1 | % | - | 0.7% | | 0.3% | | 0.0 | % | - | 0.6% | | 0.3% |
| Initial loss severity: | | | |
| 2005 and prior | 60% | | | | 60% | | |
| 2006 | 60% | | | | 60% | | |
| 2007+ | 60% | | | | 60% | | |
| Option ARM: | | | |
| Plateau CDR | 1.2 | % | - | 11.1% | | 5.3% | | 1.8 | % | - | 11.9% | | 5.6% |
| Final CDR | 0.1 | % | - | 0.6% | | 0.3% | | 0.1 | % | - | 0.6% | | 0.3% |
| Initial loss severity: | | | |
| 2005 and prior | 60% | | | | 60% | | |
| 2006 | 60% | | | | 60% | | |
| 2007+ | 60% | | | | 60% | | |
| Subprime: | | | |
| Plateau CDR | 2.5 | % | - | 9.8% | | 6.1% | | 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 | 60% | | | | 60% | | |
| 2006 | 60% | | | | 60% | | |
| 2007+ | 60% | | | | 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 pattern to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for June 30, 2017 and December 31, 2016.2021.
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 transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the initial CDR. The Company also
stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five5 scenarios as of SeptemberMarch 31, 2022 and December 31, 2021.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Total expected loss to be paid on all first lien U.S. RMBS was $204 million and $167 million as of March 31, 2022 and December 31, 2021, respectively. The $18 million economic loss development in First Quarter 2022 for first lien U.S. RMBS transactions was primarily attributable to lower excess spread, offset in part by changes in discount rates. 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. LIBOR is anticipated to be discontinued after June 30, 2017. 2023, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio referencing LIBOR.
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of September 30, 2017March 31, 2022 as it used as of June 30, 2017 and December 31, 2016,2021, increasing and decreasing the periods of stress from those used in the base case.
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 15 months, expected loss to be paid would increase from current projections by approximately $24$20 million for Alt-Aall first liens, $9 million for Option ARM, $41 million for subprime and $1 million for primelien 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 nine months), expected loss to be paid would decrease from current projections by approximately $11$12 million for Alt-Aall first liens, $21 million for Option ARM, $22 million for subprime and $0.1 million for primelien U.S. RMBS transactions.
U.S. Second Lien U.S. RMBS Loss Projections
Second lien RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction, the voluntary prepayment rate (typically also referred to as CPR of the collateral),collateral, the interest rate environment and assumptions about loss severity.
In second lien transactions, the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six months by calculating current representative liquidation rates. A liquidation rate is the percent of loans in a given cohort (in this instance, delinquency category) that ultimately default.
Similar to first liens, the Company then calculates a CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau CDR period that follows the embedded plateau losses.
For the base case scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprisingrepresenting six months of delinquent data andloan liquidations, followed by 28 months of decrease to the steady state CDR, the same as of June 30, 2017 and December 31, 2016.2021.
HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. In the prior periods, as the
The HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.
Most of the HELOC loans underlying the Company'sCompany’s insured HELOC transactions are now past their interest onlyoriginal interest-only reset date, although a significant number of HELOC loans were modified to extend the interest only period for another five years. Asoriginal interest-only period. The Company does not apply a result, in Third Quarter 2017, the Company eliminated the CDR increase that was applied when such loans reachedare projected to reach their principal amortization period. In addition, based onperiod due to the average performance history, starting in Third Quarter 2017, thelikelihood that those loans will either prepay or once again have their interest-only periods extended. The Company appliedapplies a CDR floor of 2.5%1.0% for the future steady state CDR on all its HELOC transactions and reduced the liquidation rate assumption for selected vintages.transactions.
When a second lien loan defaults, there is generally a very low recovery. The Company assumed, as of September 30, 2017March 31, 2022 and December 31, 2021, that it will generally recover only 2% of future defaulting collateral at the collateral defaulting in the future and decliningtime of charge-off, with additional amounts of post-default receiptspost charge-off recoveries projected to come in over time. A second lien on previously defaulted collateral. Thisthe borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the sameloss 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
recoveries of charged-off loans observed from period to period. In instances where the Company is able to obtain information on the lien status of charged-off loans, it assumes there will be a certain level of future recoveries of the balance of the charged-off loans where the second lien is still intact. The Company’s recovery assumption usedfor charged-off loans is 30%, as of June 30, 2017 and December 31, 2016.shown in the table below, based on recent observed trends. 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 $40 million. If the recovery rate increases to 40%, expected loss to be paid would decrease from current projections by approximately $40 million.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, an average CPR (based on experience of the past year) is assumed to continue
until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien transactions (in the base case), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is generally consistent with how the Company modeled the CPR as of June 30, 2017 and December 31, 2016.2021. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.
The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices. These variables have been relatively stable and have less impact on the projection results than the variables discussed above. However, in a number of HELOC transactions the servicers have been modifying poorly performing loans from floating to fixed rates, and, as a result, rising interest rates would negatively impact the excess spread available from these modified loans to support the transactions. The Company incorporated these modifications in its assumptions.
In estimating expected losses, the Company modeled and probability weighted five possible5 scenarios, each with a different CDR curvescurve applicable to the period preceding the return to the long-term steady state CDR. The Company used five scenarios at September 30, 2017 and December 31, 2016. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate and the amount of additional defaults because of the expiry of the interest only period are the primary drivers behind the likely 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.
Key Assumptions in Base Case Expected Loss Estimates
HELOCs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | As of December 31, 2021 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Plateau CDR | 3.4 | % | - | 35.3% | | 15.8% | | 6.5 | % | - | 39.6% | | 16.4% |
| Final CDR trended down to | 1.0% | | | | 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. Total net expected recovery for all second lien U.S. RMBS was $9 million as of March 31, 2022 and the net expected recovery was $17 million as of December 31, 2021. The following table shows the range as well as the average, weightedeconomic development in First Quarter 2022 was a benefit of $11 million and was primarily driven by outstanding net insured par,improved transaction performance, higher recoveries for key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 HELOCs.previously charged-off loans and changes in discount rates, partially offset by lower excess spread.
Key Assumptions in Base Case Expected Loss Estimates
HELOCs (1)
|
| | | | | | | | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of June 30, 2017 | | As of
December 31, 2016 |
| | Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average |
| Plateau CDR | 5.2 | % | - | 22.0% | | 11.3% | | 3.2 | % | - | 22.6% | | 13.3 | % | | 3.5 | % | - | 24.8% | | 13.6% |
| Final CDR trended down to | 2.5 | % | - | 3.2% | | 2.5% | | 0.5 | % | - | 3.2% | | 1.3 | % | | 0.5 | % | - | 3.2% | | 1.3% |
| Liquidation rates: | | | | | | | | | | | | | | | | | |
| Delinquent/Modified in the Previous 12 Months | 20% | | | | 20% | | | | 25% | | |
| 30 – 59 Days Delinquent | 45 | | | | 45 | | | | 50 | | |
| 60 – 89 Days Delinquent | 60 | | | | 65 | | | | 65 | | |
| 90+ Days Delinquent | 75 | | | | 80 | | | | 80 | | |
| Bankruptcy | 55 | | | | 55 | | | | 55 | | |
| Foreclosure | 70 | | | | 75 | | | | 75 | | |
| Real Estate Owned | 100 | | | | 100 | | | | 100 | | |
| Loss severity | 98% | | | | 98% | | | | 98% | | |
____________________
| |
(1) | Represents variables for the base case. |
The Company’s base case assumed a six monthsix-month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. IncreasingIn the Company’s most stressful scenario, increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months) would increase the expected loss by approximately $13$5 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, reducing the
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by approximately $14$6 million for HELOC transactions.
Structured Finance Excluding U.S. RMBS
Breaches of Representations and Warranties
As of September 30, 2017, the The Company had aprojected that its total net R&W payable of $3 millionexpected loss to R&W counterparties, compared to an R&W payable of $6 millionbe paid across its troubled structured finance exposures, excluding U.S. RMBS, as of DecemberMarch 31, 2016.
Triple-X Life Insurance Transactions
The Company had $2.1 billion of net par exposure to financial guaranty triple-X life insurance transactions as of September 30, 2017, of which two transactions with $85 million in net par are rated BIG. The triple-X life insurance transactions are based on discrete blocks of individual life insurance business. In older vintage triple-X life insurance transactions, which include the two BIG-rated transactions, the amounts raised by the sale of the notes insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The amounts have been invested since inception in accounts managed by third-party investment managers. In the case of the two BIG-rated transactions, material amounts of their assets were invested in U.S. RMBS. Based on its analysis of the information available, including estimates of future investment performance, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at September 30, 2017, the Company projected net expected recoveries of $72022 was $46 million. The economic benefit during Third Quarter 2017 was approximately $1 million, which was due primarily to improved performance in somelargest component of the underlying assets in which the transactions have invested. The economic benefit during Nine Months 2017 was approximately $56 million, which was due primarily to a settlement with the former investment manager of the two BIG transactions.
Student Loan Transactions
The Company has insured or reinsured $1.4 billion net par ofthese structured finance losses were student loan securitizations issued by private issuers that are classified as structured finance. Of this amount, $116with $53 million is rated BIG. The Company is projecting approximately $34 million ofin BIG net expected loss to be paid on these transactions.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 March 31, 2022. Theeconomic developmentbenefit across all structured finance transactions, excluding U.S. RMBS, during ThirdFirst Quarter 20172022 was approximately $1 million, which was driven primarily by a lower probability of certain deals being commuted. The economic loss development during Nine Months 2017 was approximately $2 million, which was driven primarily by changes in the discount rates and a lower probability of certain deals being commuted.million.
Recovery Litigation
In the ordinary course of their respective businesses, certain of the Company'sAGL’s subsidiaries assert claimsare involved in legal proceedings againstlitigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements.
Public Finance Transactions
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. Please refer toSee Note 4,3, Outstanding Exposure, for a discussion of the Company'sCompany’s exposure to Puerto Rico and related recovery litigation being pursued by the Company.
On November 1, 2013, Radian Asset Assurance Inc. (Radian Asset) commenced a declaratory judgment action in the U.S. District Court
5. Contracts Accounted for the Southern District of Mississippi against Madison County, Mississippi and the Parkway East Public Improvement District to establish its rights under a contribution agreement from the County supporting certain special assessment bonds issued by the District and insured by Radian Asset (now AGC). As of September 30, 2017, $19 million of such bonds were outstanding. The County maintained that its payment obligation is limited to two years of annual debt service, while AGC contended the County’s obligations under the contribution agreement continue so long as the bonds remain outstanding. On April 27, 2016, the Court granted AGC's motion for summary judgment, agreeing with AGC's interpretation of the County's obligations. The County appealed the District Court’s summary judgment ruling to the United States Court of Appeals for the Fifth Circuit, and on May 31, 2017, the appellate court reversed the District Court’s ruling and remanded the matter to the District Court.Insurance
Triple-X Life Insurance Transactions
In December 2008 AGUK filed an action in the Supreme Court of the State of New York against J.P. Morgan Investment Management Inc. (JPMIM), the investment manager for a triple-X life insurance transaction, Orkney Re II plc (Orkney), involving securities guaranteed by AGUK. The action alleged that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the Orkney investments. The trial commenced on March 13, 2017. During a court-ordered mediation session on March 25, 2017, the parties agreed to settle the litigation and subsequently filed a stipulation of discontinuance of the court proceedings with prejudice. The parties have agreed to keep the terms of the settlement confidential.
RMBS Transactions
On February 5, 2009, U.S. Bank National Association, as indenture trustee (U.S. Bank), CIFG Assurance North America Inc. (CIFGNA), as insurer of the Class Ac Notes, and Syncora Guarantee Inc. (Syncora), as insurer of the Class Ax Notes, filed a complaint in the Supreme Court of the State of New York against GreenPoint Mortgage Funding, Inc. (GreenPoint) alleging GreenPoint breached its R&W with respect to the underlying mortgage loans in the GreenPoint Mortgage Funding Trust 2006-HE1 transaction. On March 3, 2010, the court dismissed CIFGNA's and Syncora’s causes of action on standing grounds. On December 16, 2013, GreenPoint moved to dismiss the remaining claims of U.S. Bank on the grounds that it too lacked standing. U.S. Bank cross-moved for partial summary judgment striking GreenPoint’s defense that U.S. Bank lacked standing to directly pursue claims against GreenPoint. On January 28, 2016, the court denied GreenPoint’s motion for summary judgment and granted U.S. Bank’s cross-motion for partial summary judgment, finding that as a matter of law U.S. Bank has standing to directly assert claims against GreenPoint. Oral argument on GreenPoint's appeal was heard by the New York Appellate Division, First Department, on May 2, 2017. CIFGNA originally had $500 million insured net par exposure to this transaction; $19 million insured net par remains outstanding at September 30, 2017.
On November 26, 2012, CIFGNA filed a complaint in the Supreme Court of the State of New York against JP Morgan Securities LLC (JP Morgan) for material misrepresentation in the inducement of insurance and common law fraud, alleging that JP Morgan 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 includes a claim for material misrepresentation in the inducement of insurance.
| |
6. | Contracts Accounted for as Insurance |
Premiums
The portfolio of outstanding exposures discussed in Note 4,3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that meet the definition of insurance contracts, contracts that meet the definition of a derivative, and contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, contracts. Please refer tounless otherwise specified. See Note 8,6, Contracts Accounted for as Credit Derivatives, for amounts that relaterelated to CDS and Note 9, Consolidated8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that relate toare accounted for as consolidated FG VIEs.
Premiums
Net Earned Premiums
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Financial guaranty insurance: | | | |
| Scheduled net earned premiums | $ | 79 | | | $ | 81 | |
| Accelerations from refundings and terminations (1) | 128 | | | 16 | |
| Accretion of discount on net premiums receivable | 6 | | | 5 | |
| Financial guaranty insurance net earned premiums | 213 | | | 102 | |
| Specialty net earned premiums | 1 | | | 1 | |
| Net earned premiums | $ | 214 | | | $ | 103 | |
____________________
(1) First Quarter 2022 accelerations include $104 million related to the March Puerto Rico Resolutions. See Note 3, Outstanding Exposure for additional information.
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Scheduled net earned premiums | $ | 96 |
| | $ | 101 |
| | $ | 296 |
| | $ | 285 |
|
| Accelerations: | | | | | | | |
| Refundings | 84 |
| | 105 |
| | 189 |
| | 267 |
|
| Terminations | 3 |
| | 21 |
| | 15 |
| | 65 |
|
| Total Accelerations | 87 |
| | 126 |
| | 204 |
| | 332 |
|
| Accretion of discount on net premiums receivable | 3 |
| | 4 |
| | 11 |
| | 11 |
|
| Financial guaranty insurance net earned premiums | 186 |
| | 231 |
| | 511 |
| | 628 |
|
| Other | 0 |
| | — |
| | 1 |
| | 0 |
|
| Net earned premiums (1) | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
___________________
| |
(1) | Excludes $3 million and $4 million for Third Quarter 2017 and 2016, respectively, and $11 million and $12 million for Nine Months 2017 and 2016, respectively, related to consolidated FG VIEs. |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Components of Unearned Premium Reserve
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Gross | | Ceded | | Net(1) | | Gross | | Ceded | | Net(1) |
| | (in millions) |
| Deferred premium revenue(2) | $ | 3,647 |
| | $ | 107 |
| | $ | 3,540 |
| | $ | 3,548 |
| | $ | 206 |
| | $ | 3,342 |
|
| Contra-paid (3) | (50 | ) | | 1 |
| | (51 | ) | | (37 | ) | | 0 |
| | (37 | ) |
| Unearned premium reserve | $ | 3,597 |
| | $ | 108 |
| | $ | 3,489 |
| | $ | 3,511 |
| | $ | 206 |
| | $ | 3,305 |
|
____________________
| |
(1) | Excludes $79 million and $90 million of deferred premium revenue, and $18 million and $25 million of contra-paid related to FG VIEs as of September 30, 2017 and December 31, 2016, respectively. |
| |
(2) | Includes $7 million of non- financial guaranty as of September 30, 2017. As of December 31, 2016, non-financial guaranty deferred premium revenue was de minimis. |
| |
(3) | See "Financial Guaranty Insurance Losses– Insurance Contracts' Loss Information" below for an explanation of "contra-paid". |
Gross Premium Receivable,
Net of Commissions Payable on Assumed Business
Roll Forward
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Beginning of year | $ | 1,372 | | | $ | 1,372 | |
| Less: Specialty insurance premium receivable | 1 | | | 1 | |
| Financial guaranty insurance premiums receivable | 1,371 | | | 1,371 | |
| Gross written premiums on new business, net of commissions | 61 | | | 84 | |
| Gross premiums received, net of commissions | (83) | | | (103) | |
| Adjustments: | | | |
| Changes in the expected term | 8 | | | 2 | |
| Accretion of discount, net of commissions on assumed business | 6 | | | 4 | |
| Foreign exchange gain (loss) on remeasurement | (29) | | | — | |
| Financial guaranty insurance premium receivable | 1,334 | | | 1,358 | |
| Specialty insurance premium receivable | 1 | | | 1 | |
| March 31, | $ | 1,335 | | | $ | 1,359 | |
|
| | | | | | | |
| | Nine Months |
| | 2017 | | 2016 |
| | (in millions) |
| December 31, | $ | 576 |
| | $ | 693 |
|
| FG activity | | | |
| Premiums receivable from acquisitions (see Note 2) | 270 |
| | 18 |
|
| Gross written premiums on new business, net of commissions on assumed business | 225 |
| | 111 |
|
| Gross premiums received, net of commissions on assumed business | (216 | ) | | (155 | ) |
| Adjustments: | | | |
| Changes in the expected term | 0 |
| | (39 | ) |
| Accretion of discount, net of commissions on assumed business | 13 |
| | 5 |
|
| Foreign exchange translation | 54 |
| | (25 | ) |
| Subtotal (1) | 922 |
| | 608 |
|
| Other | 0 |
| | 0 |
|
| September 30, | $ | 922 |
|
| $ | 608 |
|
____________________
| |
(1) | Excludes $10 million and $11 million as of September 30, 2017 and September 30, 2016, respectively, related to consolidated FG VIEs. |
Foreign exchange translation relates to installmentApproximately 77% and 78% of gross premiums receivable, denominated in currencies other than the U.S. dollar . Approximately 71%, 50%net of commissions payable at March 31, 2022 and 52% of installment premiums at September 30, 2017, December 31, 2016 and September 30, 2016,2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the europound sterling and pound sterling.euro.
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 tablestable below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, andrestructurings, changes in expected lives.lives and new business.
Expected Collections of
Financial Guaranty Insurance Gross Premiums Receivable,
Expected Future Premium Collections and Earnings
| | | | | | | | | | | |
| | As of March 31, 2022 |
| Future Premiums
to be Collected (1) | | Future Net Premiums
to be Earned (2) |
| | (in millions) |
| 2022 (April 1 - June 30) | $ | 42 | | | $ | 76 | |
| 2022 (July 1 - September 30) | 39 | | | 75 | |
| 2022 (October 1 - December 31) | 33 | | | 73 | |
| Subtotal 2022 | 114 | | | 224 | |
| 2023 | 108 | | | 279 | |
| 2024 | 99 | | | 257 | |
| 2025 | 88 | | | 233 | |
| 2026 | 84 | | | 217 | |
| 2027-2031 | 352 | | | 892 | |
| 2032-2036 | 246 | | | 617 | |
| 2037-2041 | 162 | | | 366 | |
| After 2041 | 339 | | | 505 | |
| Total | $ | 1,592 | | | 3,590 | |
| Future accretion | | | 259 | |
| Total future net earned premiums | | | $ | 3,849 | |
____________________
(1) Net of Commissions on Assumed Businessassumed commissions payable.
(Undiscounted)(2) Net of reinsurance.
|
| | | |
| | As of
September 30, 2017 |
| | (in millions) |
| 2017 (October 1 – December 31) | $ | 32 |
|
| 2018 | 95 |
|
| 2019 | 82 |
|
| 2020 | 80 |
|
| 2021 | 78 |
|
| 2022-2026 | 306 |
|
| 2027-2031 | 212 |
|
| 2032-2036 | 120 |
|
| After 2036 | 120 |
|
| Total(1) | $ | 1,125 |
|
____________________
| |
(1) | Excludes expected cash collections on FG VIEs of $13 million. |
Assured Guaranty Ltd.
ScheduledNotes to Condensed Consolidated Financial Guaranty Insurance Net Earned PremiumsStatements (Unaudited), Continued
|
| | | |
| | As of
September 30, 2017 |
| | (in millions) |
| 2017 (October 1 – December 31) | $ | 92 |
|
| 2018 | 348 |
|
| 2019 | 300 |
|
| 2020 | 271 |
|
| 2021 | 249 |
|
| 2022-2026 | 963 |
|
| 2027-2031 | 620 |
|
| 2032-2036 | 373 |
|
| After 2036 | 317 |
|
| Net deferred premium revenue(1) | 3,533 |
|
| Future accretion | 197 |
|
| Total future net earned premiums | $ | 3,730 |
|
____________________
| |
(1) | Excludes scheduled net earned premiums on consolidated FG VIEs of $79 million. |
Selected Information for Financial Guaranty Insurance Policies
Policieswith Premiums Paid in Installments
| | | | | | | | | | | |
| As of |
| | March 31, 2022 | | December 31, 2021 |
| | (dollars in millions) |
| Premiums receivable, net of commissions payable | $ | 1,334 | | $ | 1,371 |
| Deferred premium revenue | 1,639 | | 1,663 |
| Weighted-average risk-free rate used to discount premiums | 1.6% | | 1.6% |
| Weighted-average period of premiums receivable (in years) | 12.6 | | 12.7 |
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (dollars in millions) |
| Premiums receivable, net of commission payable | $ | 922 |
| | $ | 576 |
|
| Gross deferred premium revenue | 1,241 |
| | 1,041 |
|
| Weighted-average risk-free rate used to discount premiums | 2.4 | % | | 3.0 | % |
| Weighted-average period of premiums receivable (in years) | 9.3 |
| | 9.1 |
|
Financial Guaranty Insurance Losses
Insurance Contracts' Loss Information
The following table provides information on loss and LAE reserves and salvage and subrogation recoverable, net of reinsurance. The Company usedare discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0%0.00% to 2.94%2.61% with a weighted average of 2.27%2.26% as of September 30, 2017March 31, 2022 and 0.0%0.00% to 3.23%1.98% with a weighted average of 2.74%1.02% as of December 31, 2016.2021.
LossThe following tables provide information on net reserve (salvage), which includes loss and LAE Reservereserves and Salvagesalvage and Subrogation Recoverablesubrogation recoverable, both net of reinsurance.
Net of ReinsuranceReserve (Salvage) by Sector
Insurance Contracts | | | | | | | | | | | | | | |
| | As of |
| Sector | | March 31, 2022 | | December 31, 2021 |
| | | (in millions) |
| Public finance: | | | | |
| U.S. public finance | | $ | 127 | | | $ | 60 | |
| Non-U.S. public finance | | 1 | | | 1 | |
| Public finance | | 128 | | | 61 | |
| Structured finance: | | | | |
| U.S. RMBS | | 18 | | | (24) | |
| Other structured finance | | 42 | | | 42 | |
| Structured finance | | 60 | | | 18 | |
| Total | | $ | 188 | | | $ | 79 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Loss and LAE Reserve, net | | Salvage and Subrogation Recoverable, net | | Net Reserve (Recoverable) | | Loss and LAE Reserve, net | | Salvage and Subrogation Recoverable, net | | Net Reserve (Recoverable) |
| | (in millions) |
| Public finance: | | | | | | | | | | | |
| U.S. public finance | $ | 984 |
| | $ | 196 |
| | $ | 788 |
| | $ | 711 |
| | $ | 86 |
| | $ | 625 |
|
| Non-U.S. public finance | 21 |
| | — |
| | 21 |
| | 21 |
| | — |
| | 21 |
|
| Public finance | 1,005 |
| | 196 |
| | 809 |
| | 732 |
| | 86 |
| | 646 |
|
| Structured finance: | | | | | | | | | | | |
| U.S. RMBS | 269 |
| | 252 |
| | 17 |
| | 283 |
| | 262 |
| | 21 |
|
| Triple-X life insurance transactions | 15 |
| | 28 |
| | (13 | ) | | 36 |
| | — |
| | 36 |
|
| Other structured finance | 52 |
| | — |
| | 52 |
| | 60 |
| | — |
| | 60 |
|
| Structured finance | 336 |
| | 280 |
| | 56 |
| | 379 |
| | 262 |
| | 117 |
|
| Subtotal | 1,341 |
| | 476 |
| | 865 |
| | 1,111 |
| | 348 |
| | 763 |
|
| Other recoverable (payable) | — |
| | 3 |
| | (3 | ) | | — |
| | (1 | ) | | 1 |
|
| Subtotal | 1,341 |
| | 479 |
| | 862 |
| | 1,111 |
| | 347 |
| | 764 |
|
| Elimination of losses attributable to FG VIEs | (54 | ) | | — |
| | (54 | ) | | (64 | ) | | — |
| | (64 | ) |
| Total (1) | $ | 1,287 |
| | $ | 479 |
| | $ | 808 |
| | $ | 1,047 |
| | $ | 347 |
| | $ | 700 |
|
____________________
| |
(1) | See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components. |
Components of Net ReservesReserve (Salvage)
| | | | | | | | As of |
| | As of
September 30, 2017 | | As of
December 31, 2016 | | March 31, 2022 | | December 31, 2021 |
| | (in millions) | | (in millions) |
| Loss and LAE reserve | $ | 1,326 |
| | $ | 1,127 |
| Loss and LAE reserve | $ | 718 | | | $ | 869 | |
Reinsurance recoverable on unpaid losses | (39 | ) | | (80 | ) | (3) | | | (5) | |
| Loss and LAE reserve, net | 1,287 |
| | 1,047 |
| Loss and LAE reserve, net | 715 | | | 864 | |
| Salvage and subrogation recoverable | (497 | ) | | (365 | ) | Salvage and subrogation recoverable | (529) | | | (801) | |
| Salvage and subrogation payable(1) | 21 |
| | 17 |
| |
| Other payable (recoverable) | (3 | ) | | 1 |
| |
| Salvage and subrogation recoverable, net, and other recoverable | (479 | ) | | (347 | ) | |
| Net reserves (salvage) | $ | 808 |
| | $ | 700 |
| |
| Salvage and subrogation reinsurance payable (2) | | Salvage and subrogation reinsurance payable (2) | 2 | | | 16 | |
| Salvage and subrogation recoverable, net | | Salvage and subrogation recoverable, net | (527) | | | (785) | |
| Net reserve (salvage) | | Net reserve (salvage) | $ | 188 | | | $ | 79 | |
____________________
| |
(1) | Recorded as a component of reinsurance balances payable. |
(1) Reported in “other assets” on the condensed consolidated balance sheets.
(2) Reported in “other liabilities” on the condensed 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 representrepresents the claim payments made and recoveries received that have not yet been recognized in the statementstatements 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 (having the effect
Assured Guaranty Ltd.
Notes to be paid by the amount of the previously paid claim Condensed Consolidated Financial Statements (Unaudited), Continued
(and the expected recovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offsettherefore recognized in income in future periods)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 and(Recovered)
to Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
|
| | | |
| | As of
September 30, 2017 |
| | (in millions) |
| Net expected loss to be paid - financial guaranty insurance (1) | $ | 1,205 |
|
| Contra-paid, net | 51 |
|
| Salvage and subrogation recoverable, net of reinsurance | 476 |
|
| Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance | (1,286 | ) |
| Other recoverable (payable) | 3 |
|
| Net expected loss to be expensed (present value) (2) | $ | 449 |
|
____________________
| | | | | |
(1) | See "Net Expected LossAs of March 31, 2022 |
| (in millions) |
Net expected loss to be Paid (Recovered) by Accounting Model" table in Note 5, Expected Loss to be Paid.paid (recovered) - financial guaranty insurance |
| $ | 383 | |
(2)Contra-paid, net | Excludes $55 million as21 | |
| Salvage and subrogation recoverable | 527 | |
Loss and LAE reserve - financial guaranty insurance contracts, net of September 30, 2017, relatedreinsurance | (710) | |
Net expected loss to consolidated FG VIEs.be expensed (present value) | $ | 221 | |
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 March 31, 2022 |
| | (in millions) |
| 2022 (April 1 - June 30) | $ | 5 | |
| 2022 (July 1 - September 30) | 5 | |
| 2022 (October 1 - December 31) | 5 | |
| Subtotal 2022 | 15 | |
| 2023 | 19 | |
| 2024 | 18 | |
| 2025 | 17 | |
| 2026 | 20 | |
| 2027-2031 | 73 | |
| 2032-2036 | 47 | |
| 2037-2041 | 9 | |
| After 2041 | 3 | |
| Net expected loss to be expensed | 221 | |
| Future accretion | 167 | |
| Total expected future loss and LAE | $ | 388 | |
|
| | | |
| | As of
September 30, 2017 |
| | (in millions) |
| 2017 (October 1 – December 31) | $ | 9 |
|
| Subtotal 2017 | 9 |
|
| 2018 | 40 |
|
| 2019 | 37 |
|
| 2020 | 38 |
|
| 2021 | 34 |
|
| 2022-2026 | 143 |
|
| 2027-2031 | 86 |
|
| 2032-2036 | 46 |
|
| After 2036 | 16 |
|
| Net expected loss to be expensed | 449 |
|
| Future accretion | 205 |
|
| Total expected future loss and LAE | $ | 654 |
|
The following table presents the loss and LAE recordedreported in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Loss and LAE
Reported on the
Consolidated Statements of Operations by Sector
| | | | | | | | | | | | | First Quarter |
| | Third Quarter | | Nine Months | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| Sector | | Sector | | 2022 | | 2021 |
| | (in millions) | | | (in millions) |
| Public finance: | | | | | | | | Public finance: | |
| U.S. public finance | $ | 233 |
| | $ | 20 |
| | $ | 424 |
| | $ | 233 |
| U.S. public finance | | $ | 55 | | | $ | 26 | |
| Non-U.S. public finance | 0 |
| | — |
| | (3 | ) | | (1 | ) | Non-U.S. public finance | | — | | | (8) | |
| Public finance | 233 |
| | 20 |
| | 421 |
| | 232 |
| Public finance | | 55 | | | 18 | |
| Structured finance: | | | | | | | | Structured finance: | | | | |
| U.S. RMBS | (4 | ) | | (2 | ) | | (14 | ) | | (3 | ) | U.S. RMBS | | $ | 3 | | | $ | 12 | |
| Triple-X life insurance transactions | (2 | ) | | (24 | ) | | (48 | ) | | (22 | ) | |
| Other structured finance | (3 | ) | | (3 | ) | | 0 |
| | (20 | ) | Other structured finance | | (1) | | | — | |
| Structured finance | (9 | ) | | (29 | ) | | (62 | ) | | (45 | ) | Structured finance | | 2 | | | 12 | |
| Loss and LAE on insurance contracts before FG VIE consolidation | 224 |
| | (9 | ) | | 359 |
| | 187 |
| |
| Gain (loss) related to FG VIE consolidation | (1 | ) | | 0 |
| | (5 | ) | | (4 | ) | |
| Loss and LAE | $ | 223 |
| | $ | (9 | ) | | $ | 354 |
| | $ | 183 |
| Loss and LAE | | $ | 57 | | | $ | 30 | |
In each of the years presented, the primary component of U.S. public finance loss and LAE was Puerto Rico exposures. Loss expense is a function of economic loss development, as well as the amortization of unearned premium reserve. In First Quarter 2022, the largest component of loss expense was from the public finance sector, which had loss expense of $55 million primarily attributable to Puerto Rico exposures. The public finance sector also had an economic benefit of $50 million, which was also primarily attributable to Puerto Rico exposures. The difference between public finance loss expense and economic benefit was primarily attributable to the release of unearned premium reserve associated with extinguished Puerto Rico policies that previously had expected losses.
The following table providestables provide information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of September 30, 2017March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross | | Net Total BIG |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
| Number of risks (1) | 108 | | | 20 | | | 127 | | | 255 | | | 255 | |
| Remaining weighted-average period (in years) | 7.6 | | 7.9 | | 8.3 | | 8.1 | | 8.1 |
| | | | | | | | | |
| Outstanding exposure: | | | | | | | | | |
| Par | $ | 2,035 | | | $ | 225 | | | $ | 3,347 | | | $ | 5,607 | | | $ | 5,579 | |
| Interest | 867 | | | 41 | | | 1,173 | | | 2,081 | | | 2,077 | |
| Total (2) | $ | 2,902 | | | $ | 266 | | | $ | 4,520 | | | $ | 7,688 | | | $ | 7,656 | |
| | | | | | | | | |
| Expected cash outflows (inflows) | $ | 72 | | | $ | 68 | | | $ | 3,326 | | | $ | 3,466 | | | $ | 3,453 | |
| Potential recoveries (3) | (394) | | | (48) | | | (2,473) | | | (2,915) | | | (2,903) | |
| Subtotal | (322) | | | 20 | | | 853 | | | 551 | | | 550 | |
| Discount | 24 | | | (3) | | | (189) | | | (168) | | | (167) | |
| Expected losses to be paid (recovered) | $ | (298) | | | $ | 17 | | | $ | 664 | | | $ | 383 | | | $ | 383 | |
| | | | | | | | | |
| Deferred premium revenue | $ | 71 | | | $ | 9 | | | $ | 235 | | | $ | 315 | | | $ | 313 | |
| Reserves (salvage) | $ | (317) | | | $ | 15 | | | $ | 484 | | | $ | 182 | | | $ | 183 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | 150 |
| | (22 | ) | | 48 |
| | (3 | ) | | 151 |
| | (44 | ) | | 349 |
| | — |
| | 349 |
|
| Remaining weighted-average contract period (in years) | 8.7 |
| | 7.1 |
| | 14.1 |
| | 2.9 |
| | 9.6 |
| | 9.3 |
| | 9.8 |
| | — |
| | 9.8 |
|
| Outstanding exposure: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Principal | $ | 4,727 |
| | $ | (99 | ) | | $ | 1,390 |
| | $ | (8 | ) | | $ | 6,715 |
| | $ | (195 | ) | | $ | 12,530 |
| | $ | — |
| | $ | 12,530 |
|
| Interest | 2,239 |
| | (42 | ) | | 1,051 |
| | (1 | ) | | 3,218 |
| | (89 | ) | | 6,376 |
| | — |
| | 6,376 |
|
| Total(2) | $ | 6,966 |
| | $ | (141 | ) | | $ | 2,441 |
| | $ | (9 | ) | | $ | 9,933 |
| | $ | (284 | ) | | $ | 18,906 |
| | $ | — |
| | $ | 18,906 |
|
| Expected cash outflows (inflows) | $ | 192 |
| | $ | (5 | ) | | $ | 418 |
| | $ | (1 | ) | | $ | 3,174 |
| | $ | (83 | ) | | $ | 3,695 |
| | $ | (309 | ) | | $ | 3,386 |
|
| Potential recoveries(3) | (494 | ) | | 20 |
| | (80 | ) | | 0 |
| | (1,662 | ) | | 46 |
| | (2,170 | ) | | 194 |
| | (1,976 | ) |
| Subtotal | (302 | ) | | 15 |
| | 338 |
| | (1 | ) | | 1,512 |
| | (37 | ) | | 1,525 |
| | (115 | ) | | 1,410 |
|
| Discount | 62 |
| | (4 | ) | | (96 | ) | | 0 |
| | (192 | ) | | 2 |
| | (228 | ) | | 23 |
| | (205 | ) |
| Present value of expected cash flows | $ | (240 | ) | | $ | 11 |
| | $ | 242 |
| | $ | (1 | ) | | $ | 1,320 |
| | $ | (35 | ) | | $ | 1,297 |
| | $ | (92 | ) | | $ | 1,205 |
|
| Deferred premium revenue | $ | 116 |
| | $ | (5 | ) | | $ | 135 |
| | $ | 0 |
| | $ | 573 |
| | $ | (6 | ) | | $ | 813 |
| | $ | (77 | ) | | $ | 736 |
|
| Reserves (salvage) | $ | (284 | ) | | $ | 12 |
| | $ | 188 |
| | $ | 0 |
| | $ | 975 |
| | $ | (30 | ) | | $ | 861 |
| | $ | (54 | ) | | $ | 807 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 20162021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 for 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.
6. Contracts Accounted for as Credit Derivatives
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 FG VIEs. Amounts presented in this note relate only to contracts accounted for as derivatives. See Note 5, Contracts Accounted for as Insurance for amounts that relate to insurance and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as FG VIEs. The Company’s credit derivatives (financial guaranty contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps.
Credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 13.4 years and 13.2 years as of March 31, 2022 and December 31, 2021, respectively.
Credit Derivatives (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 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 | | $ | 1,487 | | | $ | (81) | | | $ | 1,705 | | | $ | (72) | |
| Non-U.S. public finance | | 1,586 | | | (46) | | | 1,800 | | | (48) | |
| U.S. structured finance | | 370 | | | (27) | | | 400 | | | (32) | |
| Non-U.S. structured finance | | 131 | | | (2) | | | 135 | | | (2) | |
| Total | | $ | 3,574 | | | $ | (156) | | | $ | 4,040 | | | $ | (154) | |
____________________
(1) Expected loss to be paid was $6 million as of March 31, 2022 and $5 million as of December 31, 2021.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2022 | | As of December 31, 2021 |
| Rating Category | | Net Par
Outstanding | | % of Total | | Net Par
Outstanding | | % of Total |
| | | (dollars in millions) |
| AAA | | $ | 1,359 | | | 38.0 | % | | $ | 1,503 | | | 37.2 | % |
| AA | | 1,217 | | | 34.1 | | | 1,283 | | | 31.8 | |
| A | | 407 | | | 11.4 | | | 514 | | | 12.7 | |
| BBB | | 531 | | | 14.8 | | | 677 | | | 16.7 | |
BIG | | 60 | | | 1.7 | | | 63 | | | 1.6 | |
| Credit derivative net par outstanding | | $ | 3,574 | | | 100.0 | % | | $ | 4,040 | | | 100.0 | % |
Fair Value Gains (Losses) on Credit Derivatives
| | | | | | | | | | | |
| First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Realized gains (losses) and other settlements | $ | (1) | | | $ | 1 | |
| Net unrealized gains (losses) | (2) | | | (20) | |
| Fair value gains (losses) on credit derivatives | $ | (3) | | | $ | (19) | |
During First Quarter 2022 unrealized fair value losses were generated primarily as a result of increases in the credit spread of underlying reference obligations, offset in part by the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased 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, increased, the implied spreads that the Company would expect to receive on these transactions, all else being held equal, decreased.
During First Quarter 2021, unrealized fair value losses were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC’s credit protection decreased during the period.
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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | 165 |
| | (35 | ) | | 79 |
| | (11 | ) | | 148 |
| | (49 | ) | | 392 |
| | — |
| | 392 |
|
| Remaining weighted-average contract period (in years) | 8.6 |
| | 7.0 |
| | 13.2 |
| | 10.5 |
| | 8.1 |
| | 6.0 |
| | 10.1 |
| | — |
| | 10.1 |
|
| Outstanding exposure: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Principal | $ | 4,187 |
| | $ | (326 | ) | | $ | 4,273 |
| | $ | (416 | ) | | $ | 4,703 |
| | $ | (320 | ) | | $ | 12,101 |
| | $ | — |
| | $ | 12,101 |
|
| Interest | 1,932 |
| | (140 | ) | | 2,926 |
| | (219 | ) | | 1,867 |
| | (87 | ) | | 6,279 |
| | — |
| | 6,279 |
|
| Total(2) | $ | 6,119 |
| | $ | (466 | ) | | $ | 7,199 |
| | $ | (635 | ) | | $ | 6,570 |
| | $ | (407 | ) | | $ | 18,380 |
| | $ | — |
| | $ | 18,380 |
|
| Expected cash outflows (inflows) | $ | 172 |
| | $ | (19 | ) | | $ | 1,404 |
| | $ | (86 | ) | | $ | 1,435 |
| | $ | (65 | ) | | $ | 2,841 |
| | $ | (326 | ) | | $ | 2,515 |
|
| Potential recoveries(3) | (440 | ) | | 23 |
| | (146 | ) | | 4 |
| | (743 | ) | | 45 |
| | (1,257 | ) | | 198 |
| | (1,059 | ) |
| Subtotal | (268 | ) | | 4 |
| | 1,258 |
| | (82 | ) | | 692 |
| | (20 | ) | | 1,584 |
| | (128 | ) | | 1,456 |
|
| Discount | 61 |
| | (4 | ) | | (355 | ) | | 19 |
| | (114 | ) | | (4 | ) | | (397 | ) | | 24 |
| | (373 | ) |
| Present value of expected cash flows | $ | (207 | ) | | $ | 0 |
| | $ | 903 |
| | $ | (63 | ) | | $ | 578 |
| | $ | (24 | ) | | $ | 1,187 |
| | $ | (104 | ) | | $ | 1,083 |
|
| Deferred premium revenue | $ | 131 |
| | $ | (5 | ) | | $ | 246 |
| | $ | (6 | ) | | $ | 476 |
| | $ | (30 | ) | | $ | 812 |
| | $ | (86 | ) | | $ | 726 |
|
| Reserves (salvage) | $ | (255 | ) | | $ | 5 |
| | $ | 738 |
| | $ | (58 | ) | | $ | 343 |
| | $ | (10 | ) | | $ | 763 |
| | $ | (64 | ) | | $ | 699 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of December 31, 2021 | | As of March 31, 2021 | | As of December 31, 2020 |
| Five-year CDS spread | 71 | | 49 | | 97 | | 132 |
| One-year CDS spread | 26 | | 16 | | 19 | | 36 |
Fair Value of Credit Derivative Assets (Liabilities)
and Effect of AGC Credit Spread
| | | | | | | | | | | |
| As of |
| | March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Fair value of credit derivatives before effect of AGC credit spread | $ | (229) | | | $ | (225) | |
| Plus: Effect of AGC credit spread | 73 | | | 71 | |
| Net fair value of credit derivatives | $ | (156) | | | $ | (154) | |
The fair value of CDS contracts as of March 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
Investment Portfolio
The investment portfolio consists of both externally and internally managed portfolios. The majority of the investment portfolio is managed by 3 outside managers and AssuredIM, for which the Company has established investment guidelines 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) securities acquired for loss mitigation purposes; (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 March 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 $96 million as of March 31, 2022 related to certain of the Company’s alternative investments.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Investment Portfolio
Carrying Value
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Fixed-maturity securities, available-for-sale (1): | | | |
| Externally managed | $ | 6,316 | | | $ | 6,843 | |
| Loss mitigation securities and other | 789 | | | 818 | |
| AssuredIM managed | 537 | | | 541 | |
| Fixed-maturity securities - Puerto Rico (2) | 514 | | | — | |
| Fixed-maturity securities - Puerto Rico, trading (3) | 174 | | | — | |
| Short-term investments (4) | 585 | | | 1,225 | |
| Other invested assets: | | | |
| Equity method investments | 145 | | | 169 | |
| Other | 7 | | | 12 | |
| Total | $ | 9,067 | | | $ | 9,608 | |
____________________
| |
(1) | A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure. |
| |
(2) | Includes BIG amounts related to FG VIEs. |
| |
(3) | Includes excess spread and R&W receivables and payables. |
(1) 7.3% and 7.5% of fixed-maturity securities were rated BIG as of March 31, 2022 and December 31, 2021, respectively, consisting primarily of loss mitigation securities. 7.2% and 0.9% were not rated, as of March 31, 2022 and December 31, 2021, respectively.
(2) Represents new recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions. These securities are not rated.
(3) Represents CVIs received in connection with the consummation of the March Puerto Rico Resolutions. These securities are not rated.
(4) Weighted average credit rating of AAA as of both March 31, 2022 and December 31, 2021, based on the lower of the Moody’s and S&P Global Ratings, Impact ona division of Standard & Poor's Financial Guaranty BusinessServices LLC (S&P) classifications.
A downgradeThe U.S. Insurance Subsidiaries, through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million in AssuredIM Funds. As of March 31, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $702 million, of which $473 million represented net invested capital and $229 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, healthcare structured capital and municipal bonds. As of March 31, 2022 and December 31, 2021, the fair value of AGAS’ interest in AssuredIM Funds was $559 million and $543 million, respectively.
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 condensed 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 non-controlling interests. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Accrued investment income, which is recorded in “other assets,” was $77 million as of March 31, 2022 and $69 million as of December 31, 2021. In First Quarter 2022 and First Quarter 2021, the Company did not write off any accrued investment income.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Available-for-Sale Fixed-Maturity Securities by Security Type
As of March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Security Type | | Percent
of
Total (1) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | AOCI (5) Pre-tax Gain (Loss) on Securities with Credit Loss | | Weighted Average Credit Rating (2) |
| | | (dollars in millions) |
| Obligations of state and political subdivisions | | 47 | % | | $ | 3,893 | | | $ | (13) | | | $ | 115 | | | $ | (54) | | | $ | 3,941 | | | $ | (3) | | | A |
| U.S. government and agencies | | 2 | | | 122 | | | — | | | 5 | | | (5) | | | 122 | | | — | | | AA+ |
| Corporate securities (3) | | 30 | | | 2,469 | | | (5) | | | 26 | | | (102) | | | 2,388 | | | (44) | | | A |
| Mortgage-backed securities (4): | | | | | | | | | | | | | | | | |
| RMBS | | 5 | | | 437 | | | (18) | | | 10 | | | (29) | | | 400 | | | (28) | | | BBB+ |
| Commercial mortgage-backed securities (CMBS) | | 4 | | | 321 | | | — | | | 2 | | | (1) | | | 322 | | | — | | | AAA |
| Asset-backed securities: | | | | | | | | | | | | | | | | |
| CLOs | | 5 | | | 440 | | | — | | | — | | | (3) | | | 437 | | | — | | | A+ |
| Other | | 5 | | | 422 | | | (11) | | | 22 | | | (3) | | | 430 | | | (2) | | | CCC+ |
| Non-U.S. government securities | | 2 | | | 123 | | | — | | | — | | | (7) | | | 116 | | | (1) | | | AA- |
| Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 8,227 | | | $ | (47) | | | $ | 180 | | | $ | (204) | | | $ | 8,156 | | | $ | (78) | | | A- |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), 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 | | AOCI
Pre-tax Gain
(Loss) on
Securities
with Credit Loss | | 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 | | | (4) | | | A |
| Mortgage-backed securities (4): | | | | | | | | | | | | | | | | |
| RMBS | | 6 | | | 454 | | | (17) | | | 24 | | | (24) | | | 437 | | | (24) | | | BBB+ |
| CMBS | | 4 | | | 332 | | | — | | | 14 | | | — | | | 346 | | | — | | | AAA |
| Asset-backed securities: | | | | | | | | | | | | | | | | |
| CLOs | | 6 | | | 457 | | | — | | | 1 | | | — | | | 458 | | | — | | | AA- |
| Other | | 5 | | | 420 | | | (12) | | | 26 | | | (2) | | | 432 | | | (2) | | | 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 | | | $ | (30) | | | A+ |
____________________
(1)Based on amortized cost.
(2)Ratings represent the lower of the Moody’s and S&P classifications, except for loss mitigation 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 March 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 March 31, 2022 and 31% as of December 31, 2021 based on fair value.
(5)Accumulated other comprehensive income (AOCI).
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), 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 March 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 | $ | 849 | | | $ | (47) | | | $ | 28 | | | $ | (4) | | | $ | 877 | | | $ | (51) | |
| U.S. government and agencies | 26 | | | (1) | | | 32 | | | (4) | | | 58 | | | (5) | |
| Corporate securities | 825 | | | (50) | | | 49 | | | (8) | | | 874 | | | (58) | |
| Mortgage-backed securities: | | | | | | | | | | | |
| RMBS | 74 | | | (1) | | | — | | | — | | | 74 | | | (1) | |
| CMBS | 100 | | | (1) | | | — | | | — | | | 100 | | | (1) | |
| Asset-backed securities: | | | | | | | | | | | |
| CLOs | 327 | | | (3) | | | 54 | | | — | | | 381 | | | (3) | |
| Other | 17 | | | (1) | | | — | | | — | | | 17 | | | (1) | |
| Non-U.S. government securities | 82 | | | (4) | | | 12 | | | (2) | | | 94 | | | (6) | |
| Total | $ | 2,300 | | | $ | (108) | | | $ | 175 | | | $ | (18) | | | $ | 2,475 | | | $ | (126) | |
| Number of securities (1) | | | 740 | | | | | 81 | | | | | 814 | |
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 March 31, 2022 and December 31, 2021 were not related to credit quality, and in the case of First Quarter 2022, primarily attributable to rising interest rates. In addition, as of March 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 March 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 187 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2021, 23 securities had unrealized
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $56 million as of March 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 March 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 March 31, 2022
| | | | | | | | | | | |
| | Amortized
Cost | | Estimated
Fair Value |
| | (in millions) |
| Due within one year | $ | 202 | | | $ | 203 | |
| Due after one year through five years | 1,956 | | | 1,948 | |
| Due after five years through 10 years | 1,869 | | | 1,853 | |
| Due after 10 years | 3,442 | | | 3,430 | |
| Mortgage-backed securities: | | | |
| RMBS | 437 | | | 400 | |
| CMBS | 321 | | | 322 | |
| Total | $ | 8,227 | | | $ | 8,156 | |
Based on fair value, investments and other 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 $229 million as of March 31, 2022 and $243 million as of December 31, 2021. 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 amounts of $1,160 million and $1,231 million, based on fair value as of March 31, 2022 and December 31, 2021, respectively.
Income from Investment Portfolio
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.
Income from Investment Portfolio
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| (in millions) |
| Investment income: | | | |
| Externally managed | $ | 48 | | | $ | 51 | |
| Loss mitigation securities and other | 11 | | | 16 | |
| Managed by AssuredIM (1) | 4 | | | 4 | |
| Investment income | 63 | | | 71 | |
| Investment expenses | (1) | | | (1) | |
| Net investment income | $ | 62 | | | $ | 70 | |
| | | |
| Unrealized gain (loss) on trading securities (2) | $ | (4) | | | $ | — | |
| Equity in earnings (losses) of investees (3) | $ | (11) | | | $ | 9 | |
____________________
(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.
(2) Reported in “other income (loss)”. First Quarter 2022 amount relates to securities still held as of March 31, 2022.
(3) First Quarter 2022 includes $3 million related to fair value gains on investments where the fair value option was elected utilizing the net asset value (NAV), as a practical expedient. In addition, the Company received $5 million in dividends related to the same investment. Fair value losses in First Quarter 2021 were de minimis.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses). Realized gains and losses on sales of investments are determined using the specific identification method.
Net Realized Investment Gains (Losses)
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Gross realized gains on sales available-for-sale securities | $ | — | | | $ | 1 | |
| Gross realized losses on sales available-for-sale securities | (2) | | | (2) | |
| Net foreign currency gains (losses) | — | | | 1 | |
| Change in credit impairment and intent to sell | (5) | | | (4) | |
| Other net realized gains (losses) (1) | 10 | | | 1 | |
| Net realized investment gains (losses) | $ | 3 | | | $ | (3) | |
____________________
(1) Net realized gains in First Quarter 2022 related primarily to the sale of one of AGL’sthe Company’s alternative investments.
The following table presents the roll forward of the credit losses on available-for-sale fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2022 and 2021.
Roll Forward of Credit Losses for Available-for-Sale Fixed-Maturity Securities
| | | | | | | | | | | | | | |
| | | First Quarter |
| | | 2022 | | 2021 |
| | | (in millions) |
| Balance, beginning of period | | $ | 42 | | | $ | 78 | |
| Additions for securities for which credit impairments were not previously recognized | | 4 | | | 1 | |
| Additions (reductions) for credit losses on securities for which credit impairments were previously recognized | | 1 | | | 2 | |
| Balance, end of period | | $ | 47 | | | $ | 81 | |
The Company recorded credit loss expenses of $5 million in First Quarter 2022 and $3 million in First Quarter 2021. The Company did not purchase any securities with credit deterioration during the periods presented. Most of the Company’s securities with credit deterioration are loss mitigation securities.
8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
FG VIEs
Structured Finance and Other FG VIEs
The insurance subsidiaries may result in increased claims underprovide 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 Company if counterparties exercise contractualVIEs. 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 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 downgrade againstoccurrence 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 obligors,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 no longer to 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 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.
The Company has elected the fair value option for all assets and all liabilities of the structured finance and other FG VIEs. The change in fair value of all structured finance and other FG VIEs assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIE liabilities, which is reported in other comprehensive income (OCI). As of March 31, 2022 and December 31, 2021, the Company consolidated 26 and 25 structured finance and other FG VIEs, respectively.
Puerto Rico Trusts
In First Quarter 2022, the Company consolidated 9 custodial trusts established as part of the GO/PBA Plan (Puerto Rico Trusts) discussed in Note 3, Outstanding Exposure, Exposures to Puerto Rico. With respect to certain insured securities covered by the GO/PBA Plan, 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 CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan. 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 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 and certain trust certificates as available-for-sale securities ($45 million fair value, $48 million amortized cost as of March 31, 2022), and CVIs as trading securities ($8 million fair value as of March 31, 2022, de minimis unrealized gains on trading securities for the First Quarter 2022). The new recovery bonds, CVIs, and trust certificates have maturity dates ranging from 2022 to 2046. For the measurement of liabilities of the Puerto Rico Trusts, the Company elected the fair value option in order to simplify the accounting for these instruments.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Investment income on the new recovery bonds and trust certificates, unrealized gains and losses on the CVIs and the change in fair value of the Puerto Rico Trusts’ liabilities, which are all with recourse, are all reported in “fair value gains (losses) on FG VIEs” on the condensed consolidated statement of operations. Unrealized gains and losses on the new recovery bonds and trust certificates are reported in OCI. During First Quarter 2022, the consolidation of the 9 Puerto Rico Trusts resulted in a $4 million loss on consolidation, which was also reported in “fair value gains (losses) on FG VIEs.”
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 contract. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered).
The table below shows the carrying value of all of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated balance sheets, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities.
Consolidated FG VIEs by Type of Collateral
| | | | | | | | | | | |
| As of |
| | March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| FG VIEs’ assets: | | | |
| U.S. RMBS first lien | $ | 204 | | | $ | 221 | |
| U.S. RMBS second lien | 35 | | | 39 | |
| Puerto Rico securities | 53 | | | — | |
| Other | 15 | | | — | |
| Total FG VIEs’ assets | $ | 307 | | | $ | 260 | |
| | | |
| FG VIEs’ liabilities with recourse: | | | |
| U.S. RMBS first lien | $ | 209 | | | $ | 227 | |
| U.S. RMBS second lien | 36 | | | 42 | |
| Puerto Rico Trust liabilities | 56 | | | — | |
| Other | 15 | | | — | |
| Total FG VIEs’ liabilities with recourse | $ | 316 | | | $ | 269 | |
| | | |
| FG VIEs’ liabilities without recourse: | | | |
| U.S. RMBS first lien | $ | 19 | | | $ | 20 | |
| Total FG VIEs’ liabilities without recourse | $ | 19 | | | $ | 20 | |
The change in the ISCR of the FG VIEs’ assets for which the Company elected the fair value option (FG VIE assets at FVO) held as of March 31, 2022 that was reported in the condensed consolidated statements of operations for First Quarter 2022 was a loss of $5 million. The change in the ISCR of the FG VIEs’ assets at FVO held as of March 31, 2021 was a loss of $3 million for First Quarter 2021. 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 fair value option) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. In general, if the insurance subsidiaries’ CDS spread tightens, more value will be assigned to insurance subsidiaries’ credit; however, if the insurance subsidiaries’ CDS spread widens, less value is assigned to the insurance subsidiaries’ credit.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Selected Information for FG VIEs Assets and Liabilities
Measured under the Fair Value Option
| | | | | | | | | | | |
| As of |
| | March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Excess of unpaid principal over fair value of: | | | |
| FG VIEs’ assets | $ | 260 | | | $ | 255 | |
| FG VIEs’ liabilities with recourse | 17 | | | 12 | |
| FG VIEs’ liabilities without recourse | 15 | | | 15 | |
| Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 47 | | | 52 | |
Unpaid principal for FG VIEs’ liabilities with recourse (1) | 333 | | | 281 | |
____________________
(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2022 through 2038.
CIVs
CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses in which the Company is the primary beneficiary. The table below summarizes the number of consolidated CIVs by type as of March 31, 2022 and December 31, 2021. As of both dates, the Company consolidated 1 CIV that meets the criteria for a voting interest entity, because the Company possesses substantially all of the economics and all of the decision-making of that CIV.
The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities.
The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates.
Number of Consolidated CIVs by Type
| | | | | | | | | | | | | | |
| | | As of |
| CIV Type | | March 31, 2022 | | December 31, 2021 |
| Funds | | 8 | | | 8 | |
| CLOs | | 9 | | | 9 | |
| CLO warehouses | | 3 | | | 3 | |
| Total number of consolidated CIVs | | 20 | | | 20 | |
The table below summarizes the change in the number of consolidated CIVs during each of the periods. During 2022, no consolidated CLO warehouses became CLOs. During 2021, 1 consolidated CLO warehouse became a CLO.
Roll Forward of Number of Consolidated CIVs
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| Beginning of year | 20 | | | 11 | |
| Consolidated | — | | | 2 | |
| Deconsolidated | — | | | (1) | |
| March 31, | 20 | | | 12 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Assets and Liabilities of CIVs | | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Assets: | | | |
| Fund assets: | | | |
| Cash and cash equivalents | $ | 68 | | | $ | 64 | |
| Fund investments, at fair value | | | |
| Equity securities and warrants (1) | 255 | | | 252 | |
| Obligations of state and political subdivisions | 126 | | | 101 | |
| Corporate securities | 85 | | | 98 | |
| Structured products (2) | 74 | | | 62 | |
| Due from brokers and counterparties | 16 | | | 49 | |
| Other | 1 | | | 1 | |
| CLO and CLO warehouse assets: | | | |
| Cash | 90 | | | 156 | |
| CLO investments: | | | |
| Loans in CLOs, fair value option | 3,865 | | | 3,913 | |
| Loans in CLO warehouses, fair value option | 834 | | | 331 | |
| Short-term investments, at fair value | 165 | | | 145 | |
| Due from brokers and counterparties | 121 | | | 99 | |
| Total assets (3) | $ | 5,700 | | | $ | 5,271 | |
| Liabilities: | | | |
CLO obligations, fair value option (4) | 3,598 | | | 3,665 | |
| Warehouse financing debt, fair value option (5) | 339 | | | 126 | |
| Securities sold short, at fair value | 36 | | | 41 | |
| Due to brokers and counterparties | 844 | | | 570 | |
| Other liabilities | 37 | | | 34 | |
| Total liabilities | $ | 4,854 | | | $ | 4,436 | |
____________________
(1) Includes investments in AssuredIM Funds and other affiliated entities of $200 million and $198 million as of March 31, 2022 and December 31, 2021, respectively.
(2) Includes investments in affiliated entities of $23 million and $25 million as of March 31, 2022 and December 31, 2021, respectively.
(3) Includes assets of a voting interest entity as of March 31, 2022 and December 31, 2021 of $17 million and $12 million, respectively.
(4) The weighted average maturity of CLO obligations was 6.7 years as of March 31, 2022 and 6.6 years as of December 31, 2021. The weighted average interest rate of CLO obligations was 1.9% as of March 31, 2022 and 1.8% as of December 31, 2021. CLO obligations have stated final maturity dates from 2034 to 2035.
(5) The weighted average maturity of warehouse financing debt of CLO warehouses was 0.6 years as of March 31, 2022 and 1.8 years as of December 31, 2021. The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.3% as of March 31, 2022 and 1.1% as of December 31, 2021. Warehouse financing debt will mature at various dates from 2022 to 2023.
Noncontrolling Interests in CIVs
Noncontrolling interest in CIVs represents the proportion of the consolidated funds not owned by the Company, including 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Redeemable Noncontrolling Interests in CIVs
| | | | | | | | | | | |
| First Quarter |
| | 2022 | | 2021 |
| (in millions) |
| Beginning balance | $ | 22 | | | $ | 21 | |
| Net income (loss) attributable to the redeemable noncontrolling interest | (1) | | | — | |
| March 31, | $ | 21 | | | $ | 21 | |
As of March 31, 2022 the CIVs had commitments to invest $345 million.
As of March 31, 2022 and December 31, 2021, the CIVs included derivative contracts with notional amounts totaling $68 million and $49 million, respectively, and average notional amounts of $59 million and $34 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $4 million and $2 million in First Quarter 2022 and First Quarter 2021, respectively.
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 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 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 March 31, 2022, these credit facilities had varying maturities ranging from April 28, 2022 to September 15, 2023 with the aggregate principal amount not exceeding $1.0 billion. The available commitment was based on the amount of equity contributed to the warehouse which was $591 million. As of March 31, 2022, $310 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 100 basis points (bps) to 3-month LIBOR plus 100 bps (with a floor on the Euribor/LIBOR rates of zero). The CLO warehouses were in compliance with all financial covenants as of March 31, 2022.
As of March 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 $80 million jointly and $48 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributed to the funds. As of March 31, 2022, $15 million was drawn down 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 March 31, 2022.
Other Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the original insured obligorsfinancial guaranty insurance or 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 $92 million and liabilities of $12 million as of March 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 condensed 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 16 thousand policies monitored as of March 31, 2022, approximately 14 thousand policies are unablenot within the scope of FASB ASC 810 because these financial guaranties relate to pay. Therethe 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 March 31, 2022 and December 31, 2021, the Company identified 63 and 69 policies, respectively, that contain provisions and experienced events that may trigger consolidation. Based on management’s
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
assessment of these potential triggers or events, the Company consolidated 26 and 25 structured finance and other FG VIEs as of March 31, 2022 and December 31, 2021, respectively. In addition, as of March 31, 2022 the Company consolidated 9 Puerto Rico Trusts. The Company’s exposure through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Exposure.
The Company manages funds and CLOs that have been no material changesdetermined 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 condensed consolidated balance sheets. The maximum exposure to loss is limited to the Company's potential claims under interest rate swaps, variable rate demand obligations or guaranteedCompany’s investment contracts since the filing with the SECin equity interests (which is less than $1 million as of AGL’s Annual Report on Form 10-K for the year endedboth March 31, 2022 and December 31, 2016.2021) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs.
9. Fair Value Measurement
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third-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 Nine Months 2017,First Quarter 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 condensed consolidated balance sheets or statements of operations and comprehensive income.
The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a 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 is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
Transfers between Levels 1, 2 and 3 are recognized at the end
Assured Guaranty Ltd.
Notes to determine whether a transfer is necessary. During the periodsCondensed Consolidated Financial Statements (Unaudited), Continued
presented, there were no transfers between Level 1 and Level 2. There were no transfers from or into Level 3 during Third Quarter 2017. There was a transfer of a fixed-maturity security from Level 2 into Level 3 during Nine Month 2017 because starting in the second quarter of 2017 the price of the security includes a significant unobservable assumption. There were transfers of fixed-maturity securities from Level 2 into Level 3 during Third Quarter 2016 and Nine Months 2016 because of a lack of observability relating to the valuation inputs and collateral pricing.periods presented.
Measured and Carried at Fair Value
Fixed-Maturity Securities and Short-Term Investments
The fair value of bonds in the investment portfoliofixed-maturity securities is generally based on prices received from third partythird-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value measurements using their pricing models, which include available relevant market information,take into account: benchmark curves, benchmarking of likeyields, 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. The market inputs used in the pricing evaluation include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events.
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. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, theThe valuation of fixed-maturity investmentssecurities is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.market-based inputs.
Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and 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.
Annually, the Company reviews each pricing service’s procedures, controls and models used in the valuations of the Company’s investment portfolio, as well as the competency of the pricing service’s key personnel. In addition, on a quarterly basis, the Company holds a meeting of the internal valuation committee (comprised of individuals within the Company with market, valuation, accounting, and/or finance experience) that reviews and approves prices and assumptions used by the pricing services.
For Level 1 and 2 securities, the Company, on a quarterly basis, reviews internally developed analytic packages that highlight, at a CUSIP level, price changes from the previous quarter to the current quarter. Where unexpected price movements are noted for a specific CUSIP, the Company formally challenges the price provided, and reviews all key inputs utilized in the third party’s pricing model, and compares such information to management’s own market information.
For Level 3 securities, the Company, on a quarterly basis:
reviews methodologies, any model updates and inputs and compares such information to management’s own market information and, where applicable, the internal models,
reviews internally developed analytic packages that highlight, at a CUSIP level, price changes from the previous quarter to the current quarter, and evaluates, documents, and resolves any significant pricing differences with the assistance of the third party pricing source, and
compares prices received from different third party pricing sources, and evaluates, documents the rationale for, and resolves any significant pricing differences.
As of September 30, 2017,March 31, 2022, the Company used models to price 91 fixed-maturity190 securities, (primarilyincluding securities that were purchased or obtained for loss mitigation, or other risk management purposes), which were 11% or $1,266 millionwith a Level 3 fair value of the Company’s fixed-maturity securities and short-term investments at fair value. Most$1.1 billion. 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 bondsecurity 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 changechanged 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 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.
Other Invested Assets
As of September 30, 2017 and December 31, 2016, otherOther invested assets include investmentsthat are carried and measured at fair value on a recurring basis of $50 million and $52 million, respectively, and include primarily an investmentinclude: (i) equity securities traded in active markets that are classified within Level 1 in the global property catastrophe risk market and an investment in a fund that invests primarily in senior loans and bonds. Fair values for the majority of these investments arefair value hierarchy as their value is based on their respective net assetquoted market prices; and (ii) equity method investments for which the Company elected the fair value (NAV) per share or equivalent.option using NAV, as a practical expedient, which are excluded from the fair value hierarchy.
Other Assets
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with 4 separate custodial trusts allowing each of AGC and AGM to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.
The fair value of committed capital securities (CCS),CCS, which is recordedreported in "other assets"other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s CCS (the AGC 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 (please refer to Note 15, Long Term Debt and Credit Facilities).security. The change in fair value of the AGC CCS and AGM CPS are carried at fairreported in “fair value with changes in fair value recordedgains (losses) on committed capital securities” in the condensed consolidated statementstatements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, London Interbank Offered Rate (LIBOR) LIBOR
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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.
Supplemental Executive Retirement Plans
The Company classifies 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 aforementioned plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVNAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist primarily of insured CDS contracts, and also include interest rate swaps that fallqualify as derivatives under derivative accounting standards requiringGAAP, which require fair value accounting through the statement of operations. The following is a description ofmeasurement with changes in the fair value methodology applied to the Company's insured CDS that are accounted for as credit derivatives, which constitute the vast majority of the net credit derivative liabilityreported in the condensed consolidated balance sheets.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 are generally terminated for an amount that approximates the present value of future premiums or for a negotiated amount, rather than at fair value.
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of itsthe 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 to derive an estimate of the fair value of the Company's contracts in its principal markets (see "Assumptions and Inputs").inputs. There is no established market where financial guaranty insured credit derivatives are actively traded,traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s transactions to establish historical price points in the hypothetical market that are used in the fair value calculation. These contracts are classified as Level 3 in the fair value hierarchy sinceas there is reliance on at least oneare multiple unobservable inputinputs 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 Company’s models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely and relevant market information.
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 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. 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 September 30, 2017March 31, 2022 were such that market prices of the Company’s CDS contracts were not available.
Management considers factors such as current prices charged for similar agreements, when available, performance of underlying assets, life of the instrument, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.
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:
•Gross spread.
•The the gross spread, the allocation of gross spread among:
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◦ | among the bank profit, net spread and hedge cost, and the profit the originator, usually an investment bank, realizes for structuring and funding the transaction (bank profit); |
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◦ | premiums paid to the Company for the Company’s credit protection provided (net spread); and
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◦ | the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company (hedge cost). |
•The weighted average life which is based on debt service schedules.
The rates used to discount future expected premium cash flows ranged from 1.36% to 2.53% at September 30, 2017 and 1.00% to 2.55% at December 31, 2016.
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 trustees or obtained from market sources. If observable market credit spreads are not available or reliableThe 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 underlying reference obligations, then market indices are usedCompany’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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. It is assumed that most closely resemble the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. These indices are adjusteda bank would be willing to reflect the non-standard terms of the Company’s CDS contracts. 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. ManagementThe Company 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-publishedunpublished spread quotes from market participants or market traders who are not trustees. ManagementThe Company obtains this information as the result of direct communication with these sources as part of the valuation process.
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. In the current market, it is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.
The following spread hierarchy is utilized in determining which source of gross spread to use, with the rule being to use CDS spreads where available. If not available, CDS spreads are either interpolated or extrapolated based on similar transactions or market indices.use.
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating. No transactions closed during the periods presented.
•Credit spreads interpolated based upon market indices.
Credit spreads provided byindices adjusted to reflect the counterpartynon-standard terms of the CDS.Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
Information by Credit Spread Type (1)
|
| | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| Based on actual collateral specific spreads | 12 | % | | 7 | % |
| Based on market indices | 53 | % | | 77 | % |
| Provided by the CDS counterparty | 35 | % | | 16 | % |
| Total | 100 | % | | 100 | % |
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(1) Based on par.
Over time the data inputs can change as new sources become available or existing sources are discontinued or are no longer considered to be the most appropriate. It is the Company’s objective to move to higher levels on the hierarchy whenever possible, but it is sometimes necessary to move to lower priority inputs because of discontinued data sources or management’s assessment that the higher priority inputs are no longer considered to be representative of market spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.
The Company interpolates a curve based on the historical relationship between therates used to discount future expected premium the Company receives when a credit derivative is closedcash flows ranged from 0.45% to the daily closing price of the market index related2.93% at March 31, 2022 and 0.11% to the specific asset class and rating of the transaction. This curve indicates expected credit spreads1.78% at each indicative level on the related market index. For transactions with unique terms or characteristics where no price quotes are available, management extrapolates credit spreads based on a similar transaction for which the Company has received a spread quote from one of the first three sources within the Company’s spread hierarchy. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transaction's current spread. Counterparties 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. These quotes are validated by cross-referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness.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 or AGM. ForAGC. Due 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 and AGM from market data sources published by third parties. The cost to acquire CDS protection referencing AGC or AGM 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 or AGM increases, the amount of premium the Company retains on a transaction generally decreases. As the cost to acquire CDS protection referencing AGC or AGM decreases, the amount of premium the Company retains on a transaction generally increases.
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 the current market conditions and the Company’s own credit spreads, approximately 46%, 34% and 26% based on numberAs of transactions, of the Company's CDS contracts are fair valued using this minimum premium as of September 30, 2017, June 30, 2017March 31, 2022 and December 31, 2016, respectively.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 AGM's and AGC'sAGC’s credit spreads. In general, when AGM's and AGC'sAGC’s credit spreads narrow, the cost to hedge AGM's and AGC'sAGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGM's and AGC'sAGC’s credit spreads widen, the cost to hedge AGM's and AGC'sAGC’s name increases causing more transactions to price at previously established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC and AGM hedged by its counterparties, with independent third parties each reporting period.periodically. The currentimplied credit risk of AGC, indicated by the trading level of AGC’s and AGM’s own credit spread, has resultedis 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 a significant portion of its exposure to AGC and AGM. This reducescosts reduce the amount of contractual cash flows AGC and AGM can capture as premium for selling its protection.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 fair value resulting in a credit derivative assetliability on protection sold is the result of contractual cash inflows on in-force transactions in excess ofthat 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
and there was a viable exchange market), it would be able to realize a gainloss representing the difference between the higherlower 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 LIBOR overto the weighted average remaining life of the contract.
Example
The following is an example of how changes in gross spreads, the Company’s own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. The assumptions used in these examples are hypothetical amounts. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.
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| | | | | | | | | | | |
| | Scenario 1 | | Scenario 2 |
| | bps | | % of Total | | bps | | % of Total |
| Original gross spread/cash bond price (in bps) | 185 |
| | |
| | 500 |
| | |
|
| Bank profit (in bps) | 115 |
| | 62 | % | | 50 |
| | 10 | % |
| Hedge cost (in bps) | 30 |
| | 16 | % | | 440 |
| | 88 | % |
| The premium the Company receives per annum (in bps) | 40 |
| | 22 | % | | 10 |
| | 2 | % |
In Scenario 1, the gross spread is 185 basis points. The bank or transaction originator captures 115 basis points of the original gross spread and hedges 10% of its exposure to AGC, when the CDS spread on AGC was 300 basis points (300 basis points × 10% = 30 basis points). Under this scenario the Company receives premium of 40 basis points, or 22% of the gross spread.
In Scenario 2, the gross spread is 500 basis points. The bank or transaction originator captures 50 basis points of the original gross spread and hedges 25% of its exposure to AGC, when the CDS spread on AGC was 1,760 basis points (1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread. Due to the increased cost to hedge AGC’s name, the amount of profit the bank would expect to receive, and the premium the Company would expect to receive decline significantly.
In this example, the contractual cash flows (the Company premium received per annum above) exceed the amount a market participant would require the Company to pay in today’s market to accept its obligations under the CDS contract, thus resulting in an asset.
Strengths and WeaknessesOther Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of Model
The Company’sa loss mitigation negotiated settlement that results in the termination of the original insured financial guaranty insurance or credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
The primary strengths of the Company’s CDS modeling techniques are:
The model takes into account the transaction structure and the key drivers of market value. The transaction structure includes par insured, weighted average life, level of subordination and composition of collateral.
The model maximizes the use of market-driven inputs whenever they are available. The key inputs to the model are market-based spreads for the collateral, and the credit rating of referenced entities. These are viewed bycontract, the Company to beclassifies the key parametersassets and liabilities of that affect fair value ofVIE in the transaction.
The model is a consistent approach to valuing positions. The Company has developed a hierarchy for market-based spread inputsline items that helps mitigate the degree of subjectivity during periods of high illiquidity.
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 notmost accurately reflect the same prices observed in an actively traded marketnature of credit derivatives that do not contain termssuch assets and conditions similarliabilities, as opposed to those observed in the financial guaranty market.
These contracts were classified as Level 3 in the fair value hierarchy because there is a reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company's estimate of the value of non-standard terms and conditions of its credit derivative contracts and amount of protection purchased on AGC or AGM's name.
Fair Value Option on FG VIEs’ Assets and Liabilities
The Company elected the fair value option for all thewithin FG VIEs’ assets and FG VIEs’ liabilities. Please referThe largest of these VIEs had assets of $92 million and liabilities of $12 million as of March 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 condensed 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 16 thousand policies monitored as of March 31, 2022, approximately 14 thousand policies are not within the scope of FASB 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 March 31, 2022 and December 31, 2021, the Company identified 63 and 69 policies, respectively, that contain provisions and experienced events that may trigger consolidation. Based on management’s
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
assessment of these potential triggers or events, the Company consolidated 26 and 25 structured finance and other FG VIEs as of March 31, 2022 and December 31, 2021, respectively. In addition, as of March 31, 2022 the Company consolidated 9 Puerto Rico Trusts. The Company’s exposure through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 9, Consolidated Variable Interest Entities.3, Outstanding Exposure.
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 condensed 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 March 31, 2022 and December 31, 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.
9. Fair Value Measurement
The FG VIEs issued securities collateralized by first lien and second lien RMBS as well as loans and receivables. The lowest level input that isCompany carries a significant to the fair value measurementportion of theseits assets and liabilities wasat fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a Level 3 inputliability in an orderly transaction between market participants at the measurement date (i.e., unobservable), therefore management classified them as Level 3exit 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 hierarchy. Prices are generally determinedis 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 First Quarter 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 condensed consolidated balance sheets or statements of operations and comprehensive income.
The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a 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’s or liability’s categorization is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 March 31, 2022, the Company used models to price 190 securities, including securities that were purchased or obtained for loss mitigation, with a Level 3 fair value of $1.1 billion. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach.
approach using the third party’s proprietary pricing models. The models to price the FG VIEs’ liabilities used, where appropriate,use inputs such as estimatedprojected prepayment speeds; market values of the assets that collateralize the securities;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); yields implied by market prices for similar securities; househome price depreciation/appreciationappreciation/depreciation rates based on macroeconomic forecasts 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’s own credit risk.recent trading activity. The third-party also utilizes an internal model to determine an appropriate yield at whichused to discount the projected cash flows is determined by reviewing various attributes of the security by factoringincluding collateral type, weighted average life, sensitivity to losses, vintage, and convexity, 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 aggregateconjunction with market color, received by the third-party,data on comparable bonds.
The fair value of the Company’s FG VIE 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 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 market value of the FG VIE’s assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIE asset 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 VIE assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets.
The fair value of the Company’s FG VIE liabilities is generally sensitive to the various model inputs described above. In addition, the Company’s FG VIE liabilities with recourse are also sensitive to changes in the Company’s implied credit worthiness.securities. Significant changes to any of these inputs could have materially changechanged the expected timing of expected lossescash flows within the insured transactionthese securities 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 VIE 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 thefair value of the Company’s insurance and a decreasesecurities.
Short-Term Investments
Short-term investments that are traded in active markets are classified within Level 1 in the fair value of the Company’s FG VIE liabilities with recourse, while ahierarchy 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.
shortening of the timing of expected loss payments by the Company typically leads to an increaseOther Invested Assets
Other invested assets that are carried at fair value primarily include: (i) equity securities traded in the value of the Company’s insurance and an increaseactive markets that are classified within Level 1 in the fair value of the Company’s FG VIE liabilities with recourse.
Not Carried at Fair Value
Financial Guaranty Insurance Contracts
For financial guaranty insurance contracts that are acquired in a business combination, the Company measures each contract at fair value on the date of acquisition, and then follows insurance accounting guidance on a recurring basis thereafter. On a quarterly basis, the Company also discloses the fair value of its outstanding financial guaranty insurance contracts. In both cases, fairhierarchy as their value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquirequoted market prices; and (ii) equity method investments for which 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 inCompany elected 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 includes adjustments to the carrying value of unearned premium reserve for stressed losses, ceding commissions and return on capital. The significant inputs were not readily observable. The Company accordingly classified this fair value measurementoption using NAV, as Level 3.
Long-Term Debt
The Company’s long-term debt, excluding notes payable, is valued by broker-dealers using third party independent pricing sources and standard market conventions. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. The fair value measurement was classified as Level 2 inpractical expedient, which are excluded from the fair value hierarchy.
Other Assets
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with 4 separate custodial trusts allowing each of AGC and AGM to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.
The fair value of CCS, which is reported in other assets on the notes payable was determined by calculatingcondensed 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 expected cash flows.estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value measurement wasof the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the condensed consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, LIBOR
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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.
Other Invested AssetsSupplemental Executive Retirement Plans
As of December 31, 2016, other investedThe Company classifies assets not carried at fair value consisted primarily of an investmentincluded in a guaranteed investment contract.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 guaranteed investment contract approximated its carryingobservable 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 due to its short term natureis 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 condensed 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 was classifiedalso include interest rate swaps that qualify as Level 2derivatives under GAAP, which require fair value measurement with changes in the fair value hierarchy.
Other Assets and Other Liabilities
The Company’s other assets and other liabilities consist predominantly of accrued interest, receivables for securities sold and payables for securities purchased, the carrying values of which approximate fair value.
Financial Instruments Carried at Fair Value
Amounts recorded at fair valuereported in the Company’s financialcondensed consolidated statements are presented in the tables below.
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of September 30, 2017
|
| | | | | | | | | | | | | | | |
| | | | 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 | $ | 5,705 |
| | $ | — |
| | $ | 5,623 |
| | $ | 82 |
|
| U.S. government and agencies | 270 |
| | — |
| | 270 |
| | — |
|
| Corporate securities | 1,976 |
| | — |
| | 1,910 |
| | 66 |
|
| Mortgage-backed securities: | |
| | | | | | |
| RMBS | 881 |
| | — |
| | 535 |
| | 346 |
|
| Commercial mortgage-backed securities (CMBS) | 562 |
| | — |
| | 562 |
| | — |
|
| Asset-backed securities | 852 |
| | — |
| | 80 |
| | 772 |
|
| Foreign government securities | 300 |
| | — |
| | 300 |
| | — |
|
| Total fixed-maturity securities | 10,546 |
|
| — |
| | 9,280 |
| | 1,266 |
|
| Short-term investments | 949 |
| | 629 |
| | 320 |
| | — |
|
| Other invested assets (1) | 7 |
| | — |
| | 0 |
| | 7 |
|
| Credit derivative assets | 3 |
| | — |
| | — |
| | 3 |
|
| FG VIEs’ assets, at fair value | 707 |
| | — |
| | — |
| | 707 |
|
| Other assets | 117 |
| | 24 |
| | 35 |
| | 58 |
|
| Total assets carried at fair value | $ | 12,329 |
| | $ | 653 |
| | $ | 9,635 |
| | $ | 2,041 |
|
| Liabilities: | |
| | | | | | |
| Credit derivative liabilities | $ | 305 |
| | $ | — |
| | $ | — |
| | $ | 305 |
|
| FG VIEs’ liabilities with recourse, at fair value | 657 |
| | — |
| | — |
| | 657 |
|
| FG VIEs’ liabilities without recourse, at fair value | 111 |
| | — |
| | — |
| | 111 |
|
| Total liabilities carried at fair value | $ | 1,073 |
| | $ | — |
| | $ | — |
| | $ | 1,073 |
|
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2016
|
| | | | | | | | | | | | | | | |
| | | | 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 | $ | 5,432 |
| | $ | — |
| | $ | 5,393 |
| | $ | 39 |
|
| U.S. government and agencies | 440 |
| | — |
| | 440 |
| | — |
|
| Corporate securities | 1,613 |
| | — |
| | 1,553 |
| | 60 |
|
| Mortgage-backed securities: | |
| | |
| | |
| | |
|
| RMBS | 987 |
| | — |
| | 622 |
| | 365 |
|
| CMBS | 583 |
| | — |
| | 583 |
| | — |
|
| Asset-backed securities | 945 |
| | — |
| | 140 |
| | 805 |
|
| Foreign government securities | 233 |
| | — |
| | 233 |
| | — |
|
| Total fixed-maturity securities | 10,233 |
| | — |
| | 8,964 |
| | 1,269 |
|
| Short-term investments | 590 |
| | 319 |
| | 271 |
| | — |
|
| Other invested assets (1) | 8 |
| | — |
| | 0 |
| | 8 |
|
| Credit derivative assets | 13 |
| | — |
| | — |
| | 13 |
|
| FG VIEs’ assets, at fair value | 876 |
| | — |
| | — |
| | 876 |
|
| Other assets | 114 |
| | 24 |
| | 28 |
| | 62 |
|
| Total assets carried at fair value | $ | 11,834 |
| | $ | 343 |
| | $ | 9,263 |
| | $ | 2,228 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Credit derivative liabilities | $ | 402 |
| | $ | — |
| | $ | — |
| | $ | 402 |
|
| FG VIEs’ liabilities with recourse, at fair value | 807 |
| | — |
| | — |
| | 807 |
|
| FG VIEs’ liabilities without recourse, at fair value | 151 |
| | — |
| | — |
| | 151 |
|
| Total liabilities carried at fair value | $ | 1,360 |
| | $ | — |
| | $ | — |
| | $ | 1,360 |
|
____________________
| |
(1) | Excluded from the table above are investment funds of $47 million and $48 million as of September 30, 2017 and December 31, 2016, respectively, measured using NAV per share. Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. |
Changes in Level 3 Fair Value Measurements
The table below presents a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Third Quarter 2017 and 2016 and Nine Months 2017 and 2016.
Fair Value Level 3 Rollforward
Recurring Basis
Third Quarter 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed-Maturity Securities | | | | | | | | | | | |
| | 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) | | FG VIEs' Liabilities
with
Recourse,
at Fair Value | | FG VIEs’ Liabilities
without
Recourse,
at Fair
Value | |
| | (in millions) |
Fair value as of
June 30, 2017 | $ | 91 |
| | $ | 63 |
| | $ | 357 |
| | $ | 656 |
| |
| $ | 757 |
| |
| $ | 65 |
| |
| $ | (361 | ) | | $ | (689 | ) | | $ | (131 | ) | |
| Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
| Net income (loss) | (8 | ) | (2 | ) | 1 |
| (2 | ) | 5 |
| (2 | ) | 15 |
| (2 | ) | 4 |
| (3 | ) | (4 | ) | (4 | ) | 58 |
| (6 | ) | (3 | ) | (3 | ) | (1 | ) | (3 | ) |
| Other comprehensive income (loss) | (1 | ) | | 2 |
| | (1 | ) | | 2 |
| |
| — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Purchases | — |
| | — |
| | 13 |
| | 106 |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Settlements | — |
| | — |
| | (28 | ) | | (7 | ) | | (36 | ) | | — |
| |
| 1 |
| |
| 35 |
| |
| 3 |
| |
|
FV VIE deconsolidations | — |
| | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | 0 |
| | 18 |
| |
| Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of
September 30, 2017 | $ | 82 |
| | $ | 66 |
| | $ | 346 |
| | $ | 772 |
| |
| $ | 707 |
| |
| $ | 61 |
| |
| $ | (302 | ) | | $ | (657 | ) | | $ | (111 | ) | |
| Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2017 | $ | (1 | ) | | $ | 2 |
| | $ | 0 |
| | $ | 2 |
| | $ | 10 |
| (3 | ) | $ | (4 | ) | (4 | ) | $ | 51 |
| (6 | ) | $ | (3 | ) | (3 | ) | $ | (1 | ) | (3 | ) |
Fair Value Level 3 Rollforward
Recurring Basis
Third Quarter 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed-Maturity Securities | | | | | | | | | | | |
| | 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) | | FG VIEs' Liabilities
with
Recourse,
at Fair
Value | | FG VIEs’ Liabilities
without
Recourse,
at Fair Value | |
| | (in millions) |
Fair value as of
June 30, 2016 | $ | 41 |
| | $ | 58 |
| | $ | 349 |
| | $ | 564 |
| | $ | 814 |
| |
| $ | 38 |
| |
| $ | (396 | ) | | $ | (790 | ) | | $ | (115 | ) | |
| CIFG Acquisition | 1 |
| | — |
| | 20 |
| | 36 |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| |
| Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
| Net income (loss) | 1 |
| (2 | ) | 0 |
| (2 | ) | 3 |
| (2 | ) | 9 |
| (2 | ) | 20 |
| (3 | ) | (23 | ) | (4 | ) | 21 |
| (6 | ) | (21 | ) | (3 | ) | (18 | ) | (3 | ) |
| Other comprehensive income (loss) | 0 |
| | 0 |
| | 2 |
| | 47 |
| | — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Purchases | — |
| | — |
| | 24 |
| | 53 |
| | — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Settlements | 0 |
| | — |
| | (15 | ) | | (40 | ) | | (34 | ) | | — |
| |
| (39 | ) | |
| 33 |
| |
| 3 |
| |
|
| FG VIE consolidations | — |
| | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | (54 | ) | | (43 | ) | |
FG VIE deconsolidations | — |
| | — |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | 20 |
| |
| Transfers into Level 3 | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of
September 30, 2016 | $ | 43 |
| | $ | 58 |
| | $ | 383 |
| | $ | 691 |
| | $ | 877 |
| | $ | 15 |
| | $ | (481 | ) | | $ | (832 | ) | | $ | (153 | ) | |
| Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2016 | $ | 0 |
| | $ | 0 |
| | $ | 1 |
| | $ | 47 |
| | $ | 29 |
| (3 | ) | $ | (23 | ) | (4 | ) | $ | (5 | ) | (6 | ) | $ | (18 | ) | (3 | ) | $ | (17 | ) | (3 | ) |
Fair Value Level 3 Rollforward
Recurring Basis
Nine Months 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed-Maturity Securities | | | | | | | | | | | |
| | 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) | | FG VIEs' Liabilities
with
Recourse,
at Fair
Value | | FG VIEs’ Liabilities
without
Recourse,
at Fair
Value | |
| | (in millions) |
Fair value as of
December 31, 2016 | $ | 39 |
| | $ | 60 |
| | $ | 365 |
| | $ | 805 |
| | $ | 876 |
| | $ | 65 |
| | $ | (389 | ) | | $ | (807 | ) | | $ | (151 | ) | |
| MBIA UK Acquisition | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
| Net income (loss) | (6 | ) | (2 | ) | 4 |
| (2 | ) | 23 |
| (2 | ) | 100 |
| (2 | ) | 32 |
| (3 | ) | (4 | ) | (4 | ) | 106 |
| (6 | ) | (14 | ) | (3 | ) | (4 | ) | (3 | ) |
| Other comprehensive income (loss) | (4 | ) | | 2 |
| | 25 |
| | 60 |
| |
| — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Purchases | — |
| | — |
| | 42 |
| | 162 |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Settlements | (2 | ) | | — |
| | (109 | ) | | (362 | ) | | (117 | ) | | — |
| |
| (19 | ) | |
| 113 |
| |
| 11 |
| |
|
| FG VIE consolidations | — |
| | — |
| | — |
| | — |
| |
| 21 |
| |
| — |
| |
| — |
| |
| 0 |
| | (21 | ) | |
|
FG VIE deconsolidations | — |
| | — |
| | — |
| | — |
| | (105 | ) | | — |
| | — |
| | 51 |
| | 54 |
| |
| Transfers into Level 3 | 55 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of
September 30, 2017 | $ | 82 |
| | $ | 66 |
| | $ | 346 |
| | $ | 772 |
| |
| $ | 707 |
| |
| $ | 61 |
| |
| $ | (302 | ) | | $ | (657 | ) | | $ | (111 | ) | |
| Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2017 | $ | (4 | ) | | $ | 2 |
| | $ | 25 |
| | $ | 126 |
| | $ | 50 |
| (3 | ) | $ | (4 | ) | (4 | ) | $ | 63 |
| (6 | ) | $ | (12 | ) | (3 | ) | $ | (4 | ) | (3 | ) |
Fair Value Level 3 Rollforward
Recurring Basis
Nine Months 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed-Maturity Securities | | | | | | | | | | | | | |
| | Obligations
of State and
Political
Subdivisions | | Corporate Securities | | RMBS | | Asset-
Backed
Securities | | Short-Term Investments | | FG VIEs’
Assets at
Fair
Value | | Other (7) | | Credit
Derivative
Asset
(Liability),
net (5) | | FG VIEs' Liabilities
with
Recourse,
at Fair
Value | | FG VIEs’ Liabilities
without
Recourse,
at Fair
Value | |
| | (in millions) |
Fair value as of
December 31, 2015 | $ | 8 |
| | $ | 71 |
| | $ | 348 |
| | $ | 657 |
| | $ | 60 |
| | $ | 1,261 |
| | $ | 65 |
| | $ | (365 | ) | | $ | (1,225 | ) | | $ | (124 | ) | |
| CIFG Acquisition | 1 |
| | — |
| | 20 |
| | 36 |
| | 0 |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| |
| Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
| Net income (loss) | 1 |
| (2 | ) | 4 |
| (2 | ) | 5 |
| (2 | ) | 20 |
| (2 | ) | 0 |
| (2 | ) | 129 |
| (3 | ) | (50 | ) | (4 | ) | 24 |
| (6 | ) | (112 | ) | (3 | ) | (14 | ) | (3 | ) |
| Other comprehensive income (loss) | 1 |
| | (17 | ) | | 0 |
| | 37 |
| | 0 |
| | — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Purchases | 33 |
| | — |
| | 64 |
| | 53 |
| | — |
| | — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
| Settlements | (1 | ) | | — |
| | (54 | ) | | (134 | ) | | (60 | ) | | (590 | ) | | — |
| |
| (73 | ) | |
| 559 |
| |
| 8 |
| |
|
| FG VIE consolidations | — |
| | — |
| | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | (54 | ) | | (43 | ) | |
| FG VIE deconsolidations | — |
| | — |
| | 0 |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | 20 |
| |
| Transfers into Level 3 | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of
September 30, 2016 | $ | 43 |
| | $ | 58 |
| | $ | 383 |
| | $ | 691 |
| | $ | 0 |
| | $ | 877 |
| | $ | 15 |
| | $ | (481 | ) | | $ | (832 | ) | | $ | (153 | ) | |
| Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2016 | $ | 1 |
| | $ | (17 | ) | | $ | (1 | ) | | $ | 37 |
| | $ | 0 |
| | $ | 44 |
| (3 | ) | $ | (50 | ) | (4 | ) | $ | (104 | ) | (6 | ) | $ | 1 |
| (3 | ) | $ | (14 | ) | (3 | ) |
____________________
| |
(1) | Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3. |
| |
(2) | Included in net realized investment gains (losses) and net investment income. |
| |
(3) | Included in fair value gains (losses) on FG VIEs. |
| |
(4) | Recorded in fair value gains (losses) on CCS, net realized investment gains (losses), net investment income and other income. |
| |
(5) | Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure. |
| |
(6) | Reported in net change in fair value of credit derivatives and other income. |
| |
(7) | Includes CCS and other invested assets. |
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
At September 30, 2017
|
| | | | | | | | | | | | | |
| Financial Instrument Description (1) | | Fair Value at
September 30, 2017
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average as a Percentage of Current Par Outstanding |
| Assets (2): | | |
| | | | | | |
| Fixed-maturity securities: | | |
| | | | | | | | |
| Obligations of state and political subdivisions | | $ | 82 |
| | Yield | | 4.3 | % | - | 39.0% | | 15.9% |
| | | | | | | | | | | |
| Corporate securities | | 66 |
| | Yield | | 20.8% | | |
| | | | | | | | | | | |
| RMBS | | 346 |
| | CPR | | 1.2 | % | - | 17.4% | | 6.0% |
| | | CDR | | 2.0 | % | - | 8.5% | | 6.1% |
| | | Loss severity | | 40.0 | % | - | 100.0% | | 78.5% |
| | | Yield | | 3.8 | % | - | 9.0% | | 5.7% |
| Asset-backed securities: | | | | | | | | | | |
| Triple-X life insurance transactions | | 609 |
| | Yield | | 6.1 | % | - | 6.4% | | 6.3% |
| | | | | | | | | | | |
| Collateralized loan obligations (CLO) /TruPS | | 104 |
| | Yield | | 2.5 | % | - | 4.5% | | 3.3% |
| | | | | | | | | | | |
| Others | | 59 |
| | Yield | | 10.7% | | |
| | | | | | | | | | | |
| FG VIEs’ assets, at fair value | | 707 |
| | CPR | | 3.5 | % | - | 13.0% | | 9.3% |
| | | CDR | | 1.6 | % | - | 22.2% | | 4.3% |
| | | Loss severity | | 55.0 | % | - | 100.0% | | 78.4% |
| | | Yield | | 3.6 | % | - | 14.9% | | 6.5% |
| | | | | | | | | | | |
| Other assets | | 58 |
| | Implied Yield | | 4.8 | % | - | 5.5% | | 5.1% |
| | | Term (years) | | 10 years | | |
| Liabilities: | | |
| | | | | | | | |
| Credit derivative liabilities, net | | (302 | ) | | Year 1 loss estimates | | 0.0 | % | - | 59.0% | | 3.4% |
| | | Hedge cost (in bps) | | 20.3 |
| - | 142.5 | | 54.0 |
| | | Bank profit (in bps) | | 3.8 |
| - | 825.0 | | 102.9 |
| | | Internal floor (in bps) | | 7.0 |
| - | 100.0 | | 24.9 |
| | | Internal credit rating | | AAA |
| - | CCC | | AA- |
| | | | | | | | | | | |
| FG VIEs’ liabilities, at fair value | | (768 | ) | | CPR | | 3.5 | % | - | 13.0% | | 9.3% |
| | | CDR | | 1.6 | % | - | 22.2% | | 4.3% |
| | | Loss severity | | 55.0 | % | - | 100.0% | | 78.4% |
| | | Yield | | 3.1 | % | - | 14.9% | | 4.9% |
___________________
| |
(1) | Discounted cash flow is used as valuation technique for all financial instruments. |
| |
(2) | Excludes several investments recorded in other invested assets with fair value of $7 million. |
Quantitative Information About Level 3 Fair Value Inputs
At December 31, 2016
|
| | | | | | | | | | | | | |
| Financial Instrument Description (1) | | Fair Value at
December 31, 2016
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average as a Percentage of Current Par Outstanding |
| Assets (2): | | |
| | | | | | | | |
| Fixed-maturity securities: | | |
| | | | | | | | |
| Obligations of state and political subdivisions | | $ | 39 |
| | Yield | | 4.3 | % | - | 22.8% | | 11.1% |
| | | | | | | | | | | |
| Corporate securities | | 60 |
| | Yield | | 20.1% | | |
| | | | | | | | | | | |
| RMBS | | 365 |
| | CPR | | 1.6 | % | - | 17.0% | | 4.6% |
| | | CDR | | 1.5 | % | - | 10.1% | | 6.7% |
| | | Loss severity | | 30.0 | % | - | 100.0% | | 77.8% |
| | | Yield | | 3.3 | % | - | 9.7% | | 6.0% |
| Asset-backed securities: | | | | | | | | | | |
| Triple-X life insurance transactions | | 425 |
| | Yield | | 5.7 | % | - | 6.0% | | 5.8% |
| | | | | | | | | | | |
| Collateralized debt obligations (CDO) | | 332 |
| | Yield | | 10.0% | | |
| | | | | | | | | | | |
| CLO/TruPS | | 19 |
| | Yield | | 1.5 | % | - | 4.8% | | 3.1% |
| | | | | | | | | | | |
| Others | | 29 |
| | Yield | | 7.2% | | |
| | | | | | | | | | | |
| FG VIEs’ assets, at fair value | | 876 |
| | CPR | | 3.5 | % | - | 12.0% | | 7.8% |
| | | CDR | | 2.5 | % | - | 21.6% | | 5.7% |
| | | Loss severity | | 35.0 | % | - | 100.0% | | 78.6% |
| | | Yield | | 2.9 | % | - | 20.0% | | 6.5% |
| | | | | | | | | | | |
| Other assets | | 62 |
| | Implied Yield | | 4.5 | % | - | 5.1% | | 4.8% |
| | | Term (years) | | 10 years | | |
| Liabilities: | | |
| | | | | | | | |
| Credit derivative liabilities, net | | (389 | ) | | Year 1 loss estimates | | 0.0 | % | - | 38.0% | | 1.3% |
| | | Hedge cost (in bps) | | 7.2 |
| - | 118.1 | | 24.5 |
| | | Bank profit (in bps) | | 3.8 |
| - | 825.0 | | 61.8 |
| | | Internal floor (in bps) | | 7.0 |
| - | 100.0 | | 13.9 |
| | | Internal credit rating | | AAA |
| - | CCC | | AA+ |
| | | | | | | | | | | |
| FG VIEs’ liabilities, at fair value | | (958 | ) | | CPR | | 3.5 | % | - | 12.0% | | 7.8% |
| | | CDR | | 2.5 | % | - | 21.6% | | 5.7% |
| | | Loss severity | | 35.0 | % | - | 100.0% | | 78.6% |
| | | Yield | | 2.4 | % | - | 20.0% | | 5.0% |
____________________
| |
(1) | Discounted cash flow is used as valuation technique for all financial instruments. |
| |
(2) | Excludes several investments recorded in other invested assets with fair value of $8 million. |
The carrying amount and estimated fair value of the Company’s financial instruments are presented in the following table.
Fair Value of Financial Instruments
|
| | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| | (in millions) |
| Assets: | |
| | |
| | |
| | |
|
| Fixed-maturity securities | $ | 10,546 |
| | $ | 10,546 |
| | $ | 10,233 |
| | $ | 10,233 |
|
| Short-term investments | 949 |
| | 949 |
| | 590 |
| | 590 |
|
| Other invested assets | 62 |
| | 64 |
| | 146 |
| | 147 |
|
| Credit derivative assets | 3 |
| | 3 |
| | 13 |
| | 13 |
|
| FG VIEs’ assets, at fair value | 707 |
| | 707 |
| | 876 |
| | 876 |
|
| Other assets | 291 |
| | 291 |
| | 205 |
| | 205 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Financial guaranty insurance contracts (1) | 3,402 |
| | 8,311 |
| | 3,483 |
| | 8,738 |
|
| Long-term debt | 1,292 |
| | 1,636 |
| | 1,306 |
| | 1,546 |
|
| Credit derivative liabilities | 305 |
| | 305 |
| | 402 |
| | 402 |
|
| FG VIEs’ liabilities with recourse, at fair value | 657 |
| | 657 |
| | 807 |
| | 807 |
|
| FG VIEs’ liabilities without recourse, at fair value | 111 |
| | 111 |
| | 151 |
| | 151 |
|
| Other liabilities | 220 |
| | 220 |
| | 12 |
| | 12 |
|
____________________
| |
(1) | Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance. |
| |
8. | Contracts Accounted for as Credit Derivatives |
operations. The Company has a portfolio of financial guarantydid not enter into CDS contracts that meetwith the definition of a derivative in accordance with GAAP (primarily CDS). The credit derivative portfolio also includes interest rate swaps.
Credit derivative transactions are governed by ISDA documentationintent to trade these contracts and have different characteristics from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract;contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions are generally terminated for an amount that approximates the present value of future premiums or for a negotiated amount, rather than at fair value.
Credit Derivative Net Par OutstandingThe terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by Sector
companies outside the financial guaranty industry. The estimated remaining weighted average lifenon-standard terms generally include the absence of creditcollateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives was 10.2 years at September 30, 2017 and 5.3 years at December 31, 2016. The componentsit sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative net par outstanding are presented below.
Credit Derivatives
|
| | | | | | | | | | | | |
| | | As of September 30, 2017 | | As of December 31, 2016 |
| Asset Type | | Net Par Outstanding | | Weighted Average Credit Rating | | Net Par Outstanding | | Weighted Average Credit Rating |
| | | (dollars in millions) |
| Pooled corporate obligations: | | |
| | | | |
| | |
| CLO/collateralized bond obligations | | $ | 199 |
| | AAA | | $ | 2,022 |
| | AAA |
| Synthetic investment grade pooled corporate | | 547 |
| | AAA | | 7,224 |
| | AAA |
| TruPS CDOs | | 898 |
| | A- | | 1,179 |
| | BBB+ |
| Total pooled corporate obligations | | 1,644 |
| | AA | | 10,425 |
| | AAA |
| U.S. RMBS | | 1,003 |
| | AA | | 1,142 |
| | AA- |
| Pooled infrastructure | | 1,553 |
| | AAA | | 1,513 |
| | AAA |
| Infrastructure finance | | 847 |
| | BBB+ | | 1,021 |
| | BBB+ |
| Other(1) | | 2,488 |
| | A- | | 2,896 |
| | A |
| Total | | $ | 7,535 |
| | AA- | | $ | 16,997 |
| | AA+ |
____________________
| |
(1) | This comprises numerous transactions across various asset classes, such as commercial receivables, international RMBS, regulated utilities and consumer receivables. |
Except for TruPS CDOs,contracts in determining the Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and industries. Most pooled corporate transactions are structured to limit exposure to any given obligor and industry. A large portion of the Company’s pooled corporate exposure consists of CLO or synthetic pooled corporate obligations. Most of these CLOs have an average obligor size of less than 1% of the total transaction and typically restrict the maximum exposure to any one industry to approximately 10%. The Company’s exposure also benefits from embedded credit enhancement in the transactions which allows a transaction to sustain a certain level of losses in the underlying collateral, further insulating the Company from industry specific concentrations of credit risk on these transactions.
The Company’s TruPS CDO asset pools are generally less diversified by obligors and industries than the typical CLO asset pool. Also, the underlying collateral in TruPS CDOs consists primarily of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts and other real estate related issuers while CLOs typically contain primarily senior secured obligations. However, to mitigate these risks TruPS CDOs were typically structured with higher levels of embedded credit enhancement than typical CLOs.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
|
| | | | | | | | | | | | | | |
| | | As of September 30, 2017 | | As of December 31, 2016 |
| Ratings | | Net Par Outstanding | | % of Total | | Net Par Outstanding | | % of Total |
| | | (dollars in millions) |
| AAA | | $ | 2,956 |
| | 39.3 | % | | $ | 10,967 |
| | 64.6 | % |
| AA | | 1,247 |
| | 16.5 |
| | 2,167 |
| | 12.7 |
|
| A | | 1,628 |
| | 21.6 |
| | 1,499 |
| | 8.8 |
|
| BBB | | 1,008 |
| | 13.4 |
| | 1,391 |
| | 8.2 |
|
| BIG | | 696 |
| | 9.2 |
| | 973 |
| | 5.7 |
|
| Credit derivative net par outstanding | | $ | 7,535 |
| | 100.0 | % | | $ | 16,997 |
| | 100.0 | % |
Fair Value of Credit Derivatives
Net Change in Fair Value of Credit Derivative Gain (Loss)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Realized gains on credit derivatives | $ | 4 |
| | $ | 11 |
| | $ | 15 |
| | $ | 39 |
|
| Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (5 | ) | | 4 |
| | 4 |
| | 8 |
|
| Realized gains (losses) and other settlements | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
| Net unrealized gains (losses): | | | | | | | |
| Pooled corporate obligations | 35 |
| | 3 |
| | 41 |
| | (37 | ) |
| U.S. RMBS | 11 |
| | (12 | ) | | 24 |
| | 0 |
|
| Pooled infrastructure | (1 | ) | | 4 |
| | 4 |
| | 10 |
|
| Infrastructure finance | 0 |
| | 1 |
| | 2 |
| | 0 |
|
| Other | 14 |
| | 10 |
| | 16 |
| | 4 |
|
| Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
| Net change in fair value of credit derivatives | $ | 58 |
| | $ | 21 |
| | $ | 106 |
| | $ | 24 |
|
Terminations and Settlements
of Direct Credit Derivative Contracts
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Net par of terminated credit derivative contracts | $ | 40 |
| | $ | 1,071 |
| | $ | 273 |
| | $ | 3,507 |
|
| Realized gains on credit derivatives | 0 |
| | 3 |
| | 0 |
| | 11 |
|
| Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (3 | ) | | — |
| | (15 | ) | | — |
|
| Net unrealized gains (losses) on credit derivatives | 8 |
| | 11 |
| | 24 |
| | 81 |
|
During Third Quarter 2017, unrealized fair value gains were generated primarily as a result of CDS terminations in the Other sector, run-off of net par outstanding, and tighter implied net spreads. The tighter implied net spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased 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 and AGM, which management refers to as the CDS spread on AGC and AGM, increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Nine Months 2017, unrealized fair value gains were generated primarily as a result of CDS terminations, run-off of net par outstanding, and tighter implied net spreads. The tighter implied spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased 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 and AGM increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Third Quarter 2016, unrealized fair value gains were generated primarily as a result of CDS terminations in the pooled corporate and other sectors and price improvements on the underlying collateral of the Company’s CDS. This was the primary driver of the unrealized fair value gains in the pooled corporate CLO, and other sectors. The unrealized fair value gains were partially offset by unrealized losses resulting from wider implied net spreads across all sectors. The wider implied net
spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased significantly 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 and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.
During Nine Months 2016, unrealized fair value losses were generated primarily in the trust preferred sector, due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year and five year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased. The unrealized fair value losses were partially offset by unrealized fair value gains which resulted from the terminations of several CDS transactions during the period. The majority of the CDS transactions were terminated as a result of settlement agreements with the relevant CDS counterparties.
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. Thethese 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 also reflectsprimarily 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 changeexit 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 cost based onspread affects the price to purchase credit protection on AGC and AGM. The Company determinespricing of its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date.transactions.
CDS Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
|
| | | | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of June 30, 2017 | | As of
December 31, 2016 | | As of September 30, 2016 | | As of
June 30, 2016 | | As of
December 31, 2015 |
| Five-year CDS spread: | | | | | | | | | | | |
| AGC | 190 |
| | 136 |
| | 158 |
| | 170 |
| | 265 |
| | 376 |
|
| AGM | 190 |
| | 140 |
| | 158 |
| | 170 |
| | 265 |
| | 366 |
|
| One-year CDS spread | | |
|
| | | |
|
| | | | |
| AGC | 81 |
| | 15 |
| | 35 |
| | 31 |
| | 45 |
| | 139 |
|
| AGM | 81 |
| | 15 |
| | 29 |
| | 31 |
| | 47 |
| | 131 |
|
Fair Value of Credit Derivatives Assets (Liabilities)
and Effect of AGC and AGM
Credit Spreads
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (in millions) |
| Fair value of credit derivatives before effect of AGC and AGM credit spreads | $ | (630 | ) | | $ | (811 | ) |
| Plus: Effect of AGC and AGM credit spreads | 328 |
| | 422 |
|
| Net fair value of credit derivatives | $ | (302 | ) | | $ | (389 | ) |
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 March 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 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. It is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.
Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from trading desks for the specific asset in question. The Company 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 unpublished spread quotes from market participants or market traders who are not trustees. The Company obtains this information as the result of direct communication with these sources as part of the valuation process. The following spread hierarchy is utilized in determining which source of gross spread to use.
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
The rates used to discount future expected premium cash flows ranged from 0.45% to 2.93% at September 30, 2017, before consideringMarch 31, 2022 and 0.11% to 1.78% at December 31, 2021.
The premium the implicationsCompany 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 AGC’sits 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 a direct resultnot permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of continued wide credit spreads inmitigating the fixed income security markets and ratings downgrades. The asset classesamount of unrealized gains that remain most affected are TruPS and pooled corporate securities as well as 2005-2007 vintagesrecognized on certain CDS contracts. As of Alt-A, Option ARM and subprime RMBS transactions. The mark to market benefit between September 30, 2017March 31, 2022 and December 31, 2016, resulted primarily from several CDS terminations and2021, the use of the minimum premium did not have a narrowingsignificant 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 relatednarrow, 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 Company's TruPS and U.S. RMBS obligations.
Management believes thatcost 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 and AGM’sown credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads overwiden, the past several years has beenhedging 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 correlation between AGC’s and AGM’s risk profilefact 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 profileas of the broader financial markets. Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security markets. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high yield CDO, TruPS CDO, and CLO markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.
The following table presents the fair value and the present value of expected claim payments or recoveries (i.e. net expected loss to be paid as described in Note 5) for contracts accounted for as derivatives.
Net Fair Value and Expected Losses
of Credit Derivatives
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (in millions) |
| Fair value of credit derivative asset (liability), net | $ | (302 | ) | | $ | (389 | ) |
| Expected loss to be (paid) recovered | 6 |
| | (10 | ) |
Collateral Posting for Certain Credit Derivative Contracts
The transaction documentation for $502 million of the CDS insured by AGC requires AGC to post collateral, in some cases subject to a 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. The table below summarizes AGC’s CDS collateral posting requirements as of September 30, 2017 and December 31, 2016.
AGC Insured CDS Collateral Posting Requirements
|
| | | | | | | | |
| | | As of
September 30, 2017 | | As of
December 31, 2016 |
| | | (in millions) |
| Gross par of CDS with collateral posting requirement | | $ | 502 |
| | $ | 690 |
|
| Maximum posting requirement | | 469 |
| | 674 |
|
| Collateral posted | | 18 |
| | 116 |
|
The reduction in the collateral posting requirement is primarily attributable to the termination in February 2017 byreporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it hadis entitled and the current market premiums for a posting requirement; the CDS contracts related to approximately $183 million in gross par and $73 million of collateral posted as of December 31, 2016.
Sensitivity to Changes in Credit Spread
The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both assume.
Effect of Changes in Credit Spread
A of September 30, 2017
|
| | | | | | | | |
| Credit Spreads(1) | | Estimated Net Fair Value (Pre-Tax) | | Estimated Change in Gain/(Loss) (Pre-Tax) |
| | | (in millions) |
| 100% widening in spreads | | $ | (531 | ) | | $ | (229 | ) |
| 50% widening in spreads | | (417 | ) | | (115 | ) |
| 25% widening in spreads | | (359 | ) | | (57 | ) |
| 10% widening in spreads | | (325 | ) | | (23 | ) |
| Base Scenario | | (302 | ) | | — |
|
| 10% narrowing in spreads | | (279 | ) | | 23 |
|
| 25% narrowing in spreads | | (245 | ) | | 57 |
|
| 50% narrowing in spreads | | (188 | ) | | 114 |
|
____________________
| |
(1) | Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread. |
| |
9. | Consolidated Variable Interest Entities |
Consolidated FG VIEs
similar contract. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Assured Guaranty does not act as the servicer or collateral manager for any VIE obligations insured by its companies. 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 financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose entities, including 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 special purpose entities, including VIEs, generate interest income that are in excess of the interest payments on the debt issued by the special purpose entity. 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 special purpose entities, including VIEs (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.
Assured Guaranty is not primarily liable for the debt obligations issued by the VIEs it insures and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its Subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on VIE liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero at maturity of the VIE debt, except for net premiums received and net claims paid by Assured Guaranty under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 5, Expected Loss to be Paid.
As part of the terms of its financial guaranty contracts, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically
increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The Company obtains protective rights under its insurance contracts that give the Company additional controls over a VIE if there is either deterioration of deal performance or in the financial health of the deal servicer. The Company is deemed to be the control party for certain VIEs under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. If the protective rights that could make the Company the control party have not been triggered, then the VIE is not consolidated. If the Company is deemed no longer to have those protective rights, the transaction is deconsolidated.
Number of FG VIEs Consolidated
|
| | | | | |
| | Nine Months |
| | 2017 | | 2016 |
| | |
| Beginning of the period, December 31 | 32 |
| | 34 |
|
| Consolidated | 1 |
| | 1 |
|
| Deconsolidated | (2 | ) | | (2 | ) |
| Matured | — |
| | (1 | ) |
| End of the period, September 30 | 31 |
| | 32 |
|
The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately $102 million at September 30, 2017 and $137 million at December 31, 2016. The aggregate unpaid principal of the FG VIEs’ assets was approximately $369 million greater than the aggregate fair value at September 30, 2017. The aggregate unpaid principal of the FG VIEs’ assets was approximately $432 million greater than the aggregate fair value at December 31, 2016.
The change in the instrument-specific credit risk of the FG VIEs’ assets held as of September 30, 2017 that was recorded in the consolidated statements of operations for Third Quarter 2017 and Nine Months 2017 were gains of $8 million and gains of $32 million, respectively. The change in the instrument-specific credit risk of the FG VIEs’ assets held as of September 30, 2016 that was recorded in the consolidated statements of operations for Third Quarter 2016 and Nine Months 2016 were gains of $1 million and gains of $36 million, respectively. To calculate the instrument specific credit risk, the changes indetermines the fair value of its CDS contracts by applying the FG VIE assets are allocateddifference between changes that are duethe current net spread and the contractual net spread for the remaining duration of each contract to the instrument specific credit risknotional value of such contract and changes duediscounting such amounts using the LIBOR corresponding to other factors, including interest rates. The instrument specific credit risk amount is determined by using expected contractual cash flows versus current expected cash flows discounted at original contractual rate. The net present value is calculated by discounting the expected cash flowsweighted average remaining life of the underlying security, at the relevant effective interest rate.contract.
The unpaid principal for FG VIE liabilities with recourse, which represent obligations insured by AGC or AGM, was $705 million and $871 million as of September 30, 2017 and December 31, 2016, respectively. FG VIE liabilities with recourse will mature at various dates ranging from 2025 to 2038. The aggregate unpaid principal balance of the FG VIE liabilities with and without recourse was approximately $75 million greater than the aggregate fair value of the FG VIEs’ liabilities as of September 30, 2017. The aggregate unpaid principal balance was approximately $109 million greater than the aggregate fair value of the FG VIEs' liabilities as of December 31, 2016.
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 their respective debt obligations for FG VIE liabilities with recourse.
Consolidated FG VIEs
By Type of Collateral
|
| | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| | (in millions) |
| With recourse: | |
| | |
| | |
| | |
|
| U.S. RMBS first lien | $ | 378 |
| | $ | 400 |
| | $ | 473 |
| | $ | 509 |
|
| U.S. RMBS second lien | 150 |
| | 188 |
| | 178 |
| | 223 |
|
| Manufactured housing | 68 |
| | 69 |
| | 74 |
| | 75 |
|
| Total with recourse | 596 |
| | 657 |
| | 725 |
| | 807 |
|
| Without recourse | 111 |
| | 111 |
| | 151 |
| | 151 |
|
| Total | $ | 707 |
| | $ | 768 |
| | $ | 876 |
| | $ | 958 |
|
The consolidation of FG VIEs affects net income and shareholders' equity due to (i) changes in fair value gains (losses) on FG VIE assets and liabilities, (ii) the elimination of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse and (iii) the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE 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.
Effect of Consolidating FG VIEs on Net Income (Loss),
Cash Flows From Operating Activities and Shareholders' Equity
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Net earned premiums | $ | (3 | ) | | $ | (4 | ) | | $ | (11 | ) | | $ | (12 | ) |
| Net investment income | (2 | ) | | (1 | ) | | (4 | ) | | (8 | ) |
| Net realized investment gains (losses) | 0 |
| | 0 |
| | 0 |
| | 1 |
|
| Fair value gains (losses) on FG VIEs | 3 |
| | (11 | ) | | 25 |
| | 11 |
|
| Loss and LAE | 1 |
| | (1 | ) | | 5 |
| | 3 |
|
| Effect on income before tax | (1 | ) | | (17 | ) | | 15 |
| | (5 | ) |
| Less: tax provision (benefit) | 0 |
| | (6 | ) | | 5 |
| | (2 | ) |
| Effect on net income (loss) | $ | (1 | ) | | $ | (11 | ) | | $ | 10 |
| | $ | (3 | ) |
| | | | | | | | |
| Effect on cash flows from operating activities | $ | 6 |
| | $ | 11 |
| | $ | 16 |
|
| $ | 16 |
|
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (in millions) |
| Effect on shareholders' equity (decrease) increase | $ | 1 |
| | $ | (9 | ) |
Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. During Third Quarter 2017 and Nine Months 2017, the Company recorded pre-tax net fair value gains on consolidated FG VIEs of $3 million and $25 million, respectively. During Third Quarter 2017, the primary driver of the gain was price depreciation on the FG VIE recourse liabilities during the quarter resulting from the Company's credit risk. During the Nine Months 2017, the primary driver of the gain is price appreciation on the FG VIE assets resulting from improvements in the underlying collateral.
During Third Quarter 2016, the Company recorded a pre-tax net fair value loss on consolidated FG VIEs of $11 million and during Nine Months 2016, the Company recorded a gain of $11 million. The primary drivers of the loss during Third Quarter 2016 were the net mark-to-market losses due to price depreciation on the FG VIE assets, resulting from declines in value in the underlying collateral, and the price appreciation on the FG VIE recourse liabilities during the quarter, resulting from the Company's credit risk. The primary driver of the Nine Months 2016 gain in fair value of FG VIEs assets and liabilities was net mark-to-market gains due to price appreciation on the FG VIE assets during the nine months period resulting from improvements in the underlying collateral.
Other Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement agreement that results in the termination of the original insured financial guaranty insurance or credit derivative contract, the Company classifies the assets and liabilities of those 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 VIEVIEs’ assets and FG VIEVIEs’ liabilities. The largest of these VIEs had assets of $92 million and liabilities of $12 million as of March 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 condensed 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 16 thousand policies monitored as of September 30, 2017March 31, 2022, approximately 14 thousand policies are not within the scope of FASB 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 March 31, 2022 and December 31, 2016,2021, the Company had financial guaranty contracts outstanding for approximately 520identified 63 and 600 VIEs,69 policies, respectively, that it did not consolidate basedcontain provisions and experienced events that may trigger consolidation. Based on management’s
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
assessment of these potential triggers or events, the Company’s analyses which indicate that it is notCompany consolidated 26 and 25 structured finance and other FG VIEs as of March 31, 2022 and December 31, 2021, respectively. In addition, as of March 31, 2022 the primary beneficiary of any other VIEs.Company consolidated 9 Puerto Rico Trusts. The Company’s exposure provided through its financial guaranties with respect to debt obligations of special purpose entitiesFG VIEs is included within net par outstanding in Note 4,3, Outstanding Exposure.
Net Investment IncomeThe Company manages funds and Realized Gains (Losses)
Net investment income is a function of the yieldCLOs that have been determined to be VIEs, in which the Company earnsconcluded 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 invested assetsthe condensed 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 March 31, 2022 and the size of the portfolio. The investment yield is a function of market interest rates at the time of investmentDecember 31, 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.
9. Fair Value Measurement
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the type, credit qualityprice 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 invested assets. Accrued investment income, which isinstrument 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 in Other Assets, was $102 millionat fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and $91 million asconstraints 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 First Quarter 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 condensed consolidated balance sheets or statements of September 30, 2017operations and December 31, 2016, respectively.comprehensive income.
Net Investment IncomeThe Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a 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’s or liability’s categorization is based on the lowest level of significant input to its valuation. |
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Income from fixed-maturity securities managed by third parties | $ | 74 |
| | $ | 75 |
| | $ | 224 |
| | $ | 231 |
|
| Income from internally managed securities: | | | | | | | |
| Fixed maturities (1) | 27 |
| | 19 |
| | 100 |
| | 58 |
|
| Other | 1 |
| | 2 |
| | 5 |
| | 8 |
|
| Gross investment income | 102 |
| | 96 |
| | 329 |
| | 297 |
|
| Investment expenses | (3 | ) | | (2 | ) | | (7 | ) | | (6 | ) |
| Net investment income | $ | 99 |
| | $ | 94 |
| | $ | 322 |
| | $ | 291 |
|
____________________
(1) Nine Months 2017 includes accretion on Zohar II Notes.
Net Realized Investment Gains (Losses)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. |
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
Gross realized gains on available-for-sale securities (1) | $ | 23 |
| | $ | 4 |
| | $ | 92 |
| | $ | 24 |
|
| Gross realized losses on available-for-sale securities | (3 | ) | | (1 | ) | | (9 | ) | | (3 | ) |
| Net realized gains (losses) on other invested assets | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Other-than-temporary impairment | (13 | ) | | (5 | ) | | (29 | ) | | (26 | ) |
| Net realized investment gains (losses) | $ | 7 |
| | $ | (2 | ) | | $ | 54 |
| | $ | (5 | ) |
____________________
| |
(1) | Nine Months 2017 includes a gain on Zohar II Notes used as consideration for the MBIA UK Acquisition. Please refer to Note 2, Acquisitions. |
The following table presents the roll-forward of the credit losses of fixed-maturity securitiesLevel 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 Company has recognized an other-than-temporary-impairment and where the portiondetermination of the fair value adjustment relatedrequires significant management judgment or estimation.
Assured Guaranty Ltd.
Notes to other factors was recognized in OCI.Condensed Consolidated Financial Statements (Unaudited), Continued
There were no transfers from or into Level 3 during the periods presented.
Roll Forward of Credit Losses
in the Investment Portfolio
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Balance, beginning of period | $ | 145 |
| | $ | 108 |
| | $ | 134 |
| | $ | 108 |
|
| Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized | 3 |
| | 1 |
| | 6 |
| | 3 |
|
| Reductions for securities sold and other settlements | 0 |
| | — |
| | (4 | ) | | (4 | ) |
| Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized | 5 |
| | 1 |
| | 17 |
| | 3 |
|
| Balance, end of period | $ | 153 |
| | $ | 110 |
| | $ | 153 |
| | $ | 110 |
|
Investment Portfolio
Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Category | | Percent of Total(1) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | AOCI(2) Gain (Loss) on Securities with Other-Than-Temporary Impairment | | Weighted Average Credit Rating (3) |
| | | (dollars in millions) |
| Fixed-maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Obligations of state and political subdivisions | | 49 | % | | $ | 5,445 |
| | $ | 277 |
| | $ | (17 | ) | | $ | 5,705 |
| | $ | 21 |
| | AA- |
| U.S. government and agencies | | 2 |
| | 256 |
| | 14 |
| | 0 |
| | 270 |
| | 0 |
| | AA+ |
| Corporate securities | | 18 |
| | 1,932 |
| | 62 |
| | (18 | ) | | 1,976 |
| | (6 | ) | | A+ |
| Mortgage-backed securities(4): | | 0 |
| | | | | | |
| | | | |
| | |
| RMBS | | 8 |
| | 866 |
| | 27 |
| | (12 | ) | | 881 |
| | 2 |
| | BBB+ |
| CMBS | | 5 |
| | 551 |
| | 15 |
| | (4 | ) | | 562 |
| | — |
| | AAA |
| Asset-backed securities | | 6 |
| | 682 |
| | 170 |
| | 0 |
| | 852 |
| | 143 |
| | B |
| Foreign government securities | | 3 |
| | 313 |
| | 6 |
| | (19 | ) | | 300 |
| | — |
| | AA |
| Total fixed-maturity securities | | 91 |
| | 10,045 |
| | 571 |
| | (70 | ) | | 10,546 |
| | 160 |
| | A+ |
| Short-term investments | | 9 |
| | 948 |
| | 1 |
| | 0 |
| | 949 |
| | — |
| | AAA |
| Total investment portfolio | | 100 | % | | $ | 10,993 |
| | $ | 572 |
| | $ | (70 | ) | | $ | 11,495 |
| | $ | 160 |
| | A+ |
Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Category | | Percent of Total(1) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | AOCI Gain (Loss) on Securities with Other-Than-Temporary Impairment | | Weighted Average Credit Rating (3) |
| | | (dollars in millions) |
| Fixed-maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Obligations of state and political subdivisions | | 50 | % | | $ | 5,269 |
| | $ | 202 |
| | $ | (39 | ) | | $ | 5,432 |
| | $ | 13 |
| �� | AA |
| U.S. government and agencies | | 4 |
| | 424 |
| | 17 |
| | (1 | ) | | 440 |
| | — |
| | AA+ |
| Corporate securities | | 15 |
| | 1,612 |
| | 32 |
| | (31 | ) | | 1,613 |
| | (8 | ) | | A- |
| Mortgage-backed securities(4): | | |
| | |
| | |
| | |
| | |
| | |
| | |
| RMBS | | 9 |
| | 998 |
| | 27 |
| | (38 | ) | | 987 |
| | (21 | ) | | A- |
| CMBS | | 5 |
| | 575 |
| | 13 |
| | (5 | ) | | 583 |
| | — |
| | AAA |
| Asset-backed securities | | 8 |
| | 835 |
| | 110 |
| | 0 |
| | 945 |
| | 33 |
| | B |
| Foreign government securities | | 3 |
| | 261 |
| | 4 |
| | (32 | ) | | 233 |
| | — |
| | AA |
| Total fixed-maturity securities | | 94 |
| | 9,974 |
| | 405 |
| | (146 | ) | | 10,233 |
| | 17 |
| | A+ |
| Short-term investments | | 6 |
| | 590 |
| | 0 |
| | 0 |
| | 590 |
| | — |
| | AAA |
| Total investment portfolio | | 100 | % | | $ | 10,564 |
| | $ | 405 |
| | $ | (146 | ) | | $ | 10,823 |
| | $ | 17 |
| | A+ |
____________________
| |
(1) | Based on amortized cost. |
| |
(2) | Accumulated OCI (AOCI). See also Note 17, Shareholders' Equity for additional information as applicable. |
| |
(3) | Ratings in the tables above represent the lower of the Moody’s and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-quality, liquid instruments. |
| |
(4) | Government-agency obligations were approximately 39% of mortgage backed securities as of September 30, 2017 and 42% as of December 31, 2016 based on fair value. |
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 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.Carried at Fair Value
Fixed-Maturity Securities
Gross Unrealized Loss by Length
The fair value of Timefixed-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.
As
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 September 30, 2017the 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 March 31, 2022, the Company used models to price 190 securities, including securities that were purchased or obtained for loss mitigation, with a Level 3 fair value of $1.1 billion. 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. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 445 |
| | $ | (10 | ) | | $ | 253 |
| | $ | (7 | ) | | $ | 698 |
| | $ | (17 | ) |
| U.S. government and agencies | 114 |
| | 0 |
| | 4 |
| | 0 |
| | 118 |
| | 0 |
|
| Corporate securities | 136 |
| | (1 | ) | | 252 |
| | (17 | ) | | 388 |
| | (18 | ) |
| Mortgage-backed securities: | | | | | | | |
| |
|
| |
|
|
| RMBS | 107 |
| | (1 | ) | | 170 |
| | (11 | ) | | 277 |
| | (12 | ) |
| CMBS | 50 |
| | 0 |
| | 76 |
| | (4 | ) | | 126 |
| | (4 | ) |
| Asset-backed securities | 66 |
| | 0 |
| | 3 |
| | 0 |
| | 69 |
| | 0 |
|
| Foreign government securities | 35 |
| | (1 | ) | | 147 |
| | (18 | ) | | 182 |
| | (19 | ) |
| Total | $ | 953 |
| | $ | (13 | ) | | $ | 905 |
| | $ | (57 | ) | | $ | 1,858 |
| | $ | (70 | ) |
| Number of securities (1) | |
| | 292 |
| | |
| | 230 |
| | |
| | 513 |
|
| Number of securities with other-than-temporary impairment | |
| | 9 |
| | |
| | 14 |
| | |
| | 23 |
|
Short-Term Investments
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.
Fixed-Maturity Securities
Gross Unrealized Loss by Length of TimeOther Invested Assets
As of December 31, 2016
Other invested assets that are carried at fair value primarily include: (i) equity securities traded in active markets that are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices; and (ii) equity method investments for which the Company elected the fair value option using NAV, as a practical expedient, which are excluded from the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 1,110 |
| | $ | (38 | ) | | $ | 6 |
| | $ | (1 | ) | | $ | 1,116 |
| | $ | (39 | ) |
| U.S. government and agencies | 87 |
| | (1 | ) | | — |
| | — |
| | 87 |
| | (1 | ) |
| Corporate securities | 492 |
| | (11 | ) | | 118 |
| | (20 | ) | | 610 |
| | (31 | ) |
| Mortgage-backed securities: | |
| | |
| | |
| | |
| |
|
| |
|
|
| RMBS | 391 |
| | (23 | ) | | 94 |
| | (15 | ) | | 485 |
| | (38 | ) |
| CMBS | 165 |
| | (5 | ) | | — |
| | — |
| | 165 |
| | (5 | ) |
| Asset-backed securities | 36 |
| | 0 |
| | 0 |
| | 0 |
| | 36 |
| | 0 |
|
| Foreign government securities | 44 |
| | (5 | ) | | 114 |
| | (27 | ) | | 158 |
| | (32 | ) |
| Total | $ | 2,325 |
| | $ | (83 | ) | | $ | 332 |
| | $ | (63 | ) | | $ | 2,657 |
| | $ | (146 | ) |
| Number of securities (1) | |
| | 622 |
| | |
| | 60 |
| | |
| | 676 |
|
| Number of securities with other-than-temporary impairment | |
| | 8 |
| | |
| | 9 |
| | |
| | 17 |
|
___________________
| |
(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.
|
Other Assets
OfCommitted Capital Securities
Each of AGC and AGM have entered into put agreements with 4 separate custodial trusts allowing each of AGC and AGM to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.
The fair value of CCS, which is reported in other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value of the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the condensed consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, LIBOR
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 an unrealized loss position for 12 monthsthe fair value hierarchy.
Supplemental Executive Retirement Plans
The Company classifies assets included in the Company’s various supplemental executive retirement plans as either Level 1 or more asLevel 2. The fair value of September 30, 2017, 28 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2017 was $26 million. As of December 31, 2016,assets is based on the observable published daily values of the securitiesunderlying mutual funds included in an unrealized loss positionthe 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 condensed consolidated statements of operations.
Contracts Accounted for 12 months or more, 41 securities had unrealized losses greater than 10%as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of bookinsured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with an unrealized losschanges in the fair value reported in the condensed consolidated statements of $59 million.operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions are generally terminated for an amount that approximates the present value of future premiums or for a negotiated amount, rather than at fair value.
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative contracts in determining the fair value of these contracts.
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the unrealized losses recordedexit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as of September 30, 2017 were yield-related and notLevel 3 in the result of other-than-temporary-impairment.
The amortized cost and estimated fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of available-for-sale fixed maturity securities by contractual maturity asthe value of September 30, 2017 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.non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
Distribution of Fixed-Maturity Securities
by Contractual Maturity
As of September 30, 2017
|
| | | | | | | |
| | Amortized Cost | | Estimated Fair Value |
| | (in millions) |
| Due within one year | $ | 249 |
| | $ | 250 |
|
| Due after one year through five years | 1,518 |
| | 1,552 |
|
| Due after five years through 10 years | 2,280 |
| | 2,365 |
|
| Due after 10 years | 4,581 |
| | 4,936 |
|
| Mortgage-backed securities: | |
| | |
|
| RMBS | 866 |
| | 881 |
|
| CMBS | 551 |
| | 562 |
|
| Total | $ | 10,045 |
| | $ | 10,546 |
|
Based on fair value, investments and restricted cash 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 restricted total $286 million and $285 million, as of September 30, 2017 and December 31, 2016, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,676 million and $1,420 million, based on fair value as of September 30, 2017 and December 31, 2016, respectively.
The fair value of the Company’s pledged securitiescredit derivative contracts represents the difference between the present value of remaining premiums the Company expects to secure its obligations under its CDS exposure totaled $18 millionreceive and $116 million asthe estimated present value of September 30, 2017 and December 31, 2016, respectively. Please refer to Note 8. Contracts Accountedpremiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for as Credit Derivatives, for more information.
No material investmentsthe same protection. The fair value of the Company were non-income producing for Nine Months 2017 and Nine Months 2016, respectively.
Externally Managed Portfolio
The majorityCompany’s credit derivatives depends on a number of factors, including notional amount of the investment portfoliocontract, 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 March 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 managed by five outside managers.based on debt service schedules. The Company has established detailed guidelines regardingobtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit quality,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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a particular sector and exposure to a particular obligor within a sector. The Company's investment guidelines generally do not permit its outside managers to purchase securities rated lower than A- by S&P or A3 by Moody’s, excluding a 5%higher allocation to corporate securities not ratedthe cost of credit rather than the bank profit component. It is assumed that a bank would be willing to accept a lower than BBBprofit on distressed transactions in order to remove these transactions from its financial statements.
Market sources determine credit spreads by S&P or Baa2 by Moody’s.
Internally Managed Portfolio
The investment portfolio tables shown above include both assets managed externallyreviewing new issuance pricing for specific asset classes and internally. In the table below, more detailed information is providedreceiving price quotes from trading desks for the component of the total investment portfolio that is internally managed (excluding short-term investments).specific asset in question. The internally managed portfolio, as defined below, represents approximately 11% and 15% of the investment portfolio, on a fair value basis as of September 30, 2017 and December 31, 2016, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an attractive investment opportunity.
One of the Company's strategies for mitigating losses has beenvalidates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to purchase securities it has insured that have expected losses (loss mitigation securities), at discounted prices.ensure reasonableness. In addition, the Company holds other invested assets that werecompares 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 unpublished spread quotes from market participants or purchasedmarket traders who are not trustees. The Company obtains this information as the result of direct communication with these sources as part of negotiated settlementsthe valuation process. The following spread hierarchy is utilized in determining which source of gross spread to use.
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
The rates used to discount future expected premium cash flows ranged from 0.45% to 2.93% at March 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 March 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 counterpartiesand 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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.
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
The Company elected the fair value option for the structured finance and other FG VIEs’ assets and liabilities and classifies them as Level 3 in the fair value hierarchy. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach.
For the assets in the Puerto Rico Trusts, new recovery bonds are classified as available-for-sale as Level 2 on the fair value hierarchy, CVIs are classified as trading securities as Level 2 on the fair value hierarchy, and trust certificates are classified as available-for-sale as Level 3 on the fair value hierarchy. The liabilities of the Puerto Rico Trusts are measured under the termsfair value option as Level 3 on the fair value hierarchy. See “ - Fixed Maturity Securities” above for a description of our financial guarantiesthe fair value methodology for the recovery bonds and CVIs in the Puerto Rico Trusts, which represent the majority of the assets in the Puerto Rico Trusts.
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 market value of the FG VIEs’ assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets.
The third party utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds.
The models used to price the FG VIEs’ liabilities (other risk management assets). During 2016,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, establishedthe benefit of the Company’s insurance policy guaranteeing the timely payment of debt service is also taken into account. The liabilities of
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 the insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an alternativeincrease in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse.
The net change in the fair value of FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on financial guaranty variable interest entities” in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in ISCR which is separately presented in other comprehensive income (OCI), and the change in fair value of available-for-sale securities, which is reported as a component of the change in unrealized gains (losses) on investments groupin OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on financial guaranty variable interest entities”. The FG VIEs issued securities that are typically collateralized by first lien and second lien residential mortgage loans, or, in the case of the Puerto Rico Trusts, the Plan Consideration received under the GO/PBA Plan.
Assets and Liabilities of CIVs
The consolidated CLOs are collateralized financing entities (CFEs), and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured under the fair value option 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 focusthe individual financial liabilities (other than 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 fair value option 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 deployinga 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 fair value option), 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of March 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 | $ | — | | | $ | 3,871 | | | $ | 70 | | | $ | 3,941 | |
| U.S. government and agencies | — | | | 122 | | | — | | | 122 | |
| Corporate securities | — | | | 2,388 | | | — | | | 2,388 | |
| Mortgage-backed securities: | | | | | | | |
| RMBS | — | | | 200 | | | 200 | | | 400 | |
| CMBS | — | | | 322 | | | — | | | 322 | |
| Asset-backed securities | — | | | 25 | | | 842 | | | 867 | |
| Non-U.S. government securities | — | | | 116 | | | — | | | 116 | |
| Total fixed-maturity securities, available-for-sale | — | | | 7,044 | | | 1,112 | | | 8,156 | |
| Fixed-maturity securities, trading | — | | | 174 | | | — | | | 174 | |
| Short-term investments | 568 | | | 17 | | | — | | | 585 | |
| Other invested assets (1) | 2 | | | — | | | 5 | | | 7 | |
| FG VIEs’ assets | — | | | 40 | | | 267 | | | 307 | |
| Assets of CIVs (2): | | | | | | | |
| Fund investments: | | | | | | | |
| Equity securities and warrants | — | | | 6 | | | 243 | | | 249 | |
| Obligations of state and political subdivisions | — | | | 126 | | | — | | | 126 | |
| Corporate securities | — | | | 2 | | | 83 | | | 85 | |
| Structured products | — | | | 74 | | | — | | | 74 | |
| CLOs and CLO warehouse assets: | | | | | | | |
| Loans | — | | | 4,699 | | | — | | | 4,699 | |
| Short-term investments | 165 | | | — | | | — | | | 165 | |
| Total assets of CIVs | 165 | | | 4,907 | | | 326 | | | 5,398 | |
| Other assets | 55 | | | 51 | | | 26 | | | 132 | |
| Total assets carried at fair value | $ | 790 | | | $ | 12,233 | | | $ | 1,736 | | | $ | 14,759 | |
| Liabilities: | | | | | | | |
| Credit derivative liabilities | $ | — | | | $ | — | | | $ | 157 | | | $ | 157 | |
| FG VIEs’ liabilities (3) | — | | | — | | | 335 | | | 335 | |
| Liabilities of CIVs: | | | | | | | |
| CLO obligations of CFEs | — | | | — | | | 3,598 | | | 3,598 | |
| Warehouse financing debt | — | | | 308 | | | 31 | | | 339 | |
| Securities sold short | — | | | 36 | | | — | | | 36 | |
| Securitized borrowing | — | | | — | | | 21 | | | 21 | |
| Total liabilities of CIVs | — | | | 344 | | | 3,650 | | | 3,994 | |
| Other liabilities | — | | | 3 | | | — | | | 3 | |
| Total liabilities carried at fair value | $ | — | | | $ | 347 | | | $ | 4,142 | | | $ | 4,489 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), 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 $17 million and $19 million of equity method investments measured at fair value under the fair value option using the NAV as a practical expedient as of March 31, 2022 and December 31, 2021, respectively.
(2) Excludes $6 million as of both March 31, 2022 and December 31, 2021 in investments in AssuredIM Funds for which the Company records a 100% noncontrolling interest. The consolidation of these funds results in a gross up of assets and noncontrolling interest on the consolidated financial statements; however, it results in no economic equity or net income attributable to AGL.
(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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 First Quarter 2022 and First Quarter 2021.
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
First Quarter 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 | | 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) | — | | | 4 | | (1) | | 3 | | (1) | | (3) | | (2) | | 10 | | (4) | | (1) | | (4) | | 1 | | (3) | |
| Other comprehensive income (loss) | (5) | | | (8) | | | (7) | | | (1) | | | — | | | — | | | — | | |
| Purchases | 4 | | | — | | | 25 | | | — | | | — | | | 1 | | | — | | |
| Sales | — | | | — | | | (3) | | | — | | | (6) | | | (8) | | | — | | |
| Settlements | (1) | | | (12) | | | (39) | | | (18) | | | — | | | — | | | — | | |
| Consolidations | — | | | — | | | — | | | 29 | | | — | | | — | | | — | | |
| Fair value as of March 31, 2022 | $ | 70 | | | $ | 200 | | | $ | 842 | | | $ | 267 | | | $ | 243 | | | $ | 83 | | | $ | 28 | | |
| Change in unrealized gains (losses) related to financial instruments held as of March 31, 2022 included in: | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | (3) | | (2) | | $ | 8 | | (4) | | $ | (2) | | (4) | | $ | 1 | | (3) | |
| OCI | $ | (5) | | | $ | (7) | | | $ | (7) | | | $ | (1) | | | | | | | $ | — | | |
Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis
First Quarter 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) | (3) | | (6) | | 15 | | (2) | | 64 | | (4) | |
| Other comprehensive income (loss) | — | | | — | | | — | | |
| Issuances | — | | | — | | | (381) | | |
| Settlements | 1 | | | 41 | | | 372 | | |
| Consolidations | — | | | (102) | | | — | | |
| Fair value as of March 31, 2022 | $ | (156) | | | $ | (335) | | | $ | (3,650) | | |
| Change in unrealized gains (losses) related to financial instruments held as of March 31, 2022 included in: | | | | | | |
| Earnings | $ | (3) | | (6) | | $ | 38 | | (2) | | $ | 41 | | (4) | |
| OCI | | | $ | — | | | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
First Quarter 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities, Available-for-Sale | | | | | | |
| | Obligations
of State and
Political
Subdivisions | | Corporate Securities | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Assets of CIVs - Equity 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) | 1 | | (1) | | 2 | | (1) | | 2 | | (1) | | 6 | | (1) | | (1) | | (2) | | 2 | | (4) | | (18) | | (3) | |
| Other comprehensive income (loss) | 2 | | | (4) | | | — | | | 5 | | | — | | | — | | | 1 | | |
| Purchases | — | | | — | | | — | | | 94 | | | — | | | 8 | | | — | | |
| Sales | — | | | — | | | — | | | (42) | | | — | | | (11) | | | — | | |
| Settlements | (1) | | | — | | | (11) | | | (62) | | | (14) | | | — | | | — | | |
| Fair value as of March 31, 2021 | $ | 103 | | | $ | 28 | | | $ | 246 | | | $ | 941 | | | $ | 281 | | | $ | 1 | | | $ | 37 | | |
| Change in unrealized gains (losses) related to financial instruments held as of March 31, 2021 included in: | | | | | | | | | | | | | | |
| Earnings | | | | | | | | | $ | — | | (2) | | $ | 3�� | | (4) | | $ | (19) | | (3) | |
| OCI | $ | 2 | | | $ | (4) | | | $ | — | | | $ | 5 | | | | | | | $ | 1 | | |
Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis
First Quarter 2021
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
Asset (Liability),
net (5) | | FG VIEs’ (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) | (19) | | (6) | | 3 | | (2) | | 6 | | (4) | |
| Other comprehensive income (loss) | — | | | (1) | | | — | | |
| Issuances | — | | | — | | | (752) | | |
| Settlements | (1) | | | 13 | | | — | | |
| Fair value as of March 31, 2021 | $ | (120) | | | $ | (318) | | | $ | (1,973) | | |
| Change in unrealized gains (losses) related to financial instruments held as of March 31, 2021 included in: | | | | | | |
| Earnings | $ | (20) | | (6) | | $ | 5 | | (2) | | $ | 6 | | (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”.
(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 condensed 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
As of March 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instrument Description | | Fair Value
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Assets (2): | | | | | | | | |
| Fixed-maturity securities available-for-sale (1): | | | | | | | | | | |
| Obligations of state and political subdivisions | | $ | 70 | | | Yield | | 2.6 | % | - | 27.1% | | 6.7% |
| RMBS | | 200 | | | CPR | | 0.0 | % | - | 22.5% | | 11.0% |
| | CDR | | 1.6 | % | - | 12.0% | | 5.8% |
| | Loss severity | | 50.0 | % | - | 125.0% | | 85.0% |
| | Yield | | 4.8 | % | - | 6.4% | | 5.6% |
| Asset-backed securities: | | | | | | | | | | |
| Life insurance transactions | | 370 | | | Yield | | 6.0% | | |
| CLOs | | 437 | | | Discount margin | | 1.0 | % | - | 3.1% | | 2.1% |
| Others | | 35 | | | Yield | | 5.0 | % | - | 10.3% | | 10.2% |
| FG VIEs’ assets (1) | | 267 | | | CPR | | 0.9 | % | - | 25.5% | | 13.2% |
| | CDR | | 1.0 | % | - | 26.9% | | 7.2% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 77.1% |
| | Yield | | 1.7 | % | - | 8.6% | | 5.4% |
| Assets of CIVs (3): | | | | | | | | | | |
| Equity securities and warrants | | 243 | | | Yield | | 8.0% | | |
| | | | Discount rate | | 13.0 | % | - | 24.2% | | 21.8% |
| | | | Cost | | 1.00x | | |
| | | | Market multiple-enterprise value/revenue | | 1.10x | | |
| | | | Market multiple-enterprise value/EBITDA (6) | | 3.00x | - | 10.50x | | 9.21x |
| | | | Market multiple-price to book | | 1.85x | | |
| | | | Exit multiple-EBITDA | | 8.00x | - | 12.00x | | 10.43x |
| | | | Exit multiple-price to book | | 1.30x | | |
| | | | Exit multiple | | 11.00x | | |
| | | | Exit cap rate | | 12.0% | | |
| | | | Terminal growth rate | | 4.0% | | |
| Corporate securities | | 83 | | | Discount rate | | 21.4 | % | - | 23.7% | | 22.3% |
| | | | Yield | | 17.2% | | |
| | | | Cost | | 1.00x | | |
| | | | Market multiple-enterprise value/EBITDA | | 3.00x | | |
| | | | Exit multiple-EBITDA | | 8.00x | | |
| Other assets (1) | | 25 | | | Implied Yield | | 3.1 | % | - | 3.7% | | 3.4% |
| | Term (years) | | 10 years | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instrument Description | | Fair Value
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Liabilities (1): | | | | | | | | | | |
| Credit derivative liabilities, net | | $ | (156) | | | Year 1 loss estimates | | 0.0 | % | - | 87.0% | | 1.9% |
| | Hedge cost (in bps) | | 11.9 | - | 53.2 | | 21.8 |
| | Bank profit (in bps) | | 0.0 | - | 211.3 | | 72.2 |
| | Internal floor (in bps) | | 8.8 | | |
| | Internal credit rating | | AAA | - | CCC | | AA |
| FG VIEs’ liabilities | | (335) | | | CPR | | 0.9 | % | - | 25.5% | | 12.3% |
| | CDR | | 1.0 | % | - | 26.9% | | 6.7% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 72.0% |
| | Yield | | 0.6 | % | - | 7.8% | | 4.4% |
| Liabilities of CIVs: | | | | | | | | | | |
| CLO obligations of CFEs (5) | | (3,598) | | | Yield | | 1.6 | % | - | 14.2% | | 2.2% |
| Warehouse financing debt | | (31) | | | Yield | | 16.2 | % | - | 27.7% | | 23.7% |
| Securitized borrowing | | (21) | | | Discount rate | | 24.2% | | |
___________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments recorded in “other invested assets” with a fair value of $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).
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instrument Description | | Fair Value (in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Assets (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 | | |
| Liabilities (1): | | | | | | | | |
| Credit derivative liabilities, net | | (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 | | (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: | | | | | | | | | | |
| 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), 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 represent balances on a net-by counterparty basis on the condensed 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 $36 million and $37 million as of March 31, 2022 and December 31, 2021, respectively, for 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.
Fair Value of Financial Instruments Not Carried at Fair Value
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 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) | $ | 176 | | | $ | 176 | | | $ | 171 | | | $ | 171 | |
| Other assets (including other invested assets) (2) | 98 | | | 99 | | | 134 | | | 135 | |
| Financial guaranty insurance contracts (3) | (2,422) | | | (1,677) | | | (2,394) | | | (2,315) | |
| Long-term debt | (1,673) | | | (1,677) | | | (1,673) | | | (1,832) | |
| Liabilities of CIVs (4) | (859) | | | (859) | | | (586) | | | (586) | |
| Other liabilities (5) | (61) | | | (61) | | | (45) | | | (45) | |
____________________
(1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2) Includes accrued interest, receivable for an unsettled sale of a portion of the Company's excess capitalPuerto 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 pursue acquisitions and develop new business opportunities that complement the Company's financial guaranty business, are in line with its risk profileinsurance contract premiums, losses, and benefit from its core competencies. The alternative investments group has been investigating a numbersalvage and subrogation and other recoverables net of such opportunities, including, among others, both controllingreinsurance.
(4) Includes due to brokers and non-controlling investments in investment managers.counterparties and fund’s loan payable. Carrying value approximates fair value.
(5) Includes accrued interest, repurchase agreement liability and payables for securities purchased for which carrying value approximates fair value.
Internally Managed Portfolio
Carrying Value
10. Asset Management Fees |
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (in millions) |
| Assets purchased for loss mitigation and other risk management purposes: | | | |
| Fixed-maturity securities, at fair value | $ | 1,220 |
| | $ | 1,492 |
|
| Other invested assets | 20 |
| | 107 |
|
| Other | 76 |
| | 55 |
|
| Total | $ | 1,316 |
| | $ | 1,654 |
|
Cash and Restricted Cash
The following table providespresents the sources of asset management fees and performance fees on a reconciliation ofconsolidated basis.
Asset Management Fees
| | | | | | | | | | | |
| First Quarter |
| 2022 | | 2021 |
| | (in millions) |
| Management fees: | | | |
CLOs (1) | $ | 9 | | | $ | 11 | |
| Opportunity funds and liquid strategies | 4 | | | 4 | |
| Wind-down funds | 1 | | | 3 | |
| Total management fees | 14 | | | 18 | |
| Performance fees | 14 | | | 1 | |
| Reimbursable fund expenses | 6 | | | 5 | |
| Total asset management fees | $ | 34 | | | $ | 24 | |
_____________________
(1) To the cash reportedextent 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 $9 million and $14 million for First Quarter 2022 and First Quarter 2021, respectively.
The Company had management and performance fees receivable, which are included in other assets on the condensed consolidated balance sheets, of $7 million as of March 31, 2022 and $8 million as of December 31, 2021. Performance fees in First Quarter 2022 were attributable to the cashhealthcare and restricted cash reported in the statements of cash flows.asset-based funds.
Cash and Restricted Cash
|
| | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 | | As of September 30, 2016 | | As of December 31, 2015 |
| | (in millions) |
| Cash | $ | 72 |
| | $ | 118 |
| | $ | 98 |
| | $ | 166 |
|
| Restricted cash (1) | 0 |
| | 9 |
| | 1 |
| | 0 |
|
| Total cash and restricted cash | $ | 72 |
| | $ | 127 |
| | $ | 99 |
| | $ | 166 |
|
____________________
| |
(1) | Amounts relate to cash held in trust accounts and are reported in other assets in consolidated balance sheets. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
| |
11. | Insurance Company Regulatory Requirements |
11. Credit Facilities
Dividend Restrictions
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 Capital Requirements
Under New York insurance law, AGMup to $150 million for up to six months. The Company borrowed $400 million under the thirty days portion of this facility on March 14, 2022, and MAC may only pay dividends out of "earned surplus," which isrepaid it in full, with interest, on March 16, 2022. The Company did not borrow any amounts under the six months portion of the company's surplus that representsfacility. The one month component bore interest at 1.10% per annum and the net earnings, gains or profits (after deductionsix months component would have borne a floating interest rate equal to the forward-looking term Secured Overnight Financing Rate for a tenor of all losses) that have not been distributed to shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permittedone month provided by law, but does not include unrealized appreciation of assets. AGM and MAC may each pay dividends without the prior approvalCME Group Benchmark Administration Limited, plus 1.10% per annum. The ability of the New York Superintendent of Financial Services (New York Superintendent) that, together with all dividends declared or distributed by it duringCompany to borrow under 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.facility has expired.
The maximum amount available during 2017 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $196 million. Of such $196 million, approximately $54 million is available for distribution in the fourth quarter of 2017. Through August 25, 2017, MAC paid $36 million in dividends based on dividend capacity at that point. After the $250 million share repurchase on September 25, 2017, as discussed below, MAC has no additional dividend capacity for the remainder of 2017.
12. Income Taxes
Under Maryland's insurance law, AGC may, with prior notice to the Maryland Insurance Commissioner, pay an ordinary dividend 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. The maximum amount available during 2017 for AGC to distribute as ordinary dividends is approximately $107 million. Of such $107 million, approximately $41 million is available for distribution in the fourth quarter of 2017.
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 Bermuda Monetary Authority (Authority). Separately, dividends are paid out of an insurer's statutory surplus and cannot exceed that surplus. Further, annual dividends cannot exceed 25% of total statutory capital and surplus as set out in its previous year's financial statements, which is $314 million, without AG Re certifying to the Authority that it will continue to meet required margins. As of December 31, 2016, the Authority now 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, are U.S. GAAP), subject to certain adjustments. As a result of this new requirement, certain assets previously non-admitted by AG Re are now admitted, resulting in an increase to AG Re’s statutory capital and surplus limitation. Based on the foregoing limitations, in 2017 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 $314 million as of September 30, 2017. Such dividend capacity is further limited by the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements. As of September 30, 2017, AG Re had unencumbered assets of approximately $572 million.
U.K. company law prohibits each of AGE, AGLN and AGUK 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 Prudential Regulation Authority's capital requirements may in practice act as a restriction on dividends. In addition, AGLN currently must confirm that the Prudential Regulation Authority does not object to the payment of any dividend to its parent company before AGLN makes any dividend payment.
Dividends and Repayments
By Insurance Company Subsidiaries
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Dividends paid by AGC to AGUS | $ | 15 |
| | $ | 15 |
| | $ | 66 |
| | $ | 38 |
|
| Dividends paid by AGM to AGMH | 63 |
| | 65 |
| | 142 |
| | 192 |
|
| Dividends paid by AG Re to AGL | 45 |
| | 35 |
| | 125 |
| | 85 |
|
| Dividends paid by MAC to MAC Holdings (1) | 12 |
| | — |
| | 36 |
| | — |
|
| Repayment of surplus note by MAC to AGM | — |
| | — |
| | — |
| | 100 |
|
| Repayment of surplus note by MAC to MAC Holdings (1) | — |
| | — |
| | — |
| | 300 |
|
| Redemption of common stock by MAC to MAC Holdings (1) | 250 |
| | — |
| | 250 |
| | — |
|
____________________
| |
(1) | MAC Holdings distributed nearly the entire amounts to AGM and AGC, in proportion to their ownership percentages. |
Stock Redemption by MAC
On August 17, 2017, the New York Superintendent approved MAC's request to repurchase 64,322 of its shares of
common stock from its direct parent, MAC Holdings, for approximately $250 million. MAC implemented the stock
redemption plan on September 25, 2017, transferring approximately $104 million in cash and $146 million in marketable
securities to MAC Holdings, which then distributed such assets to its shareholders, AGM and AGC, in proportion to their
respective 61% and 39% ownership interests, such that AGM received approximately $152 million ($6 million in cash and
$146 million in securities) and AGC received approximately $98 million (all in cash). Each share repurchased by MAC was
retired and ceased to be an authorized share. Pursuant to MAC's Amended and Restated Charter, the par value of MAC's
remaining shares of common stock issued and outstanding increased automatically in order to maintain MAC's total paid-in
capital at $15 million.
Overview
AGL and its "Bermuda Subsidiaries," which consist ofBermuda 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'sAGL’s U.S., U.K. and U.K.French subsidiaries are subject to income taxes imposed by U.S., U.K. and U.K.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 (the Code) to be taxed as a U.S. domestic corporation.
In November 2013, AGL becameis 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. 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 main rate of corporation tax is 19% beginning April 1, 2017.
AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. AGE, the Company’s U.K. subsidiary, had previously elected under Section 953(d) of the Code to be taxed as a U.S. company. In January 2017, AGE filed
a request with the U.S. Internal Revenue Service (IRS) to revoke the election, which was approved in May 2017. As a result of the revocation of the Section 953(d) election, AGE will no longer be 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 continues to file its tax returns in the U.K. as a separate entity. For additional information on the MBIA UK Acquisition, please refer to Note 2, Acquisitions. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO and AG Intermediary Inc. file their own consolidated federal income tax return.
Tax Assets (Liabilities)
Deferred and Current Tax Assets (Liabilities) (1)
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
| (in millions) |
| Net deferred tax assets (liabilities) | $ | 42 | | | $ | (33) | |
| Net current tax assets (liabilities) | (61) | | | (43) | |
____________________
(1) Included in “other assets” or “other liabilities” on the condensed consolidated balance sheets.
Valuation Allowance
As of March 31, 2022, and December 31, 2021, the Company had $24 million of foreign tax credit (FTC) due to the 2017 Tax Cuts and Jobs Act (TCJA) for use against regular tax in future years. FTCs will expire in 2027. In analyzing the future realizability of FTCs, the Company notes limitations on future foreign source income due to overall foreign losses as negative evidence. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC of $24 million will not be utilized, and therefore maintained the valuation allowance from December 31, 2021 with respect to this tax attribute.
The Company came to the conclusion that it is more likely than not that the remaining deferred tax assets will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years, and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with the remaining deferred tax assets. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Provision for Income Taxes
The Company'sCompany’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pretaxpre-tax income for the full year 2017.2021. A discrete calculation of the provision is calculated for each interim period.
The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%21%, U.K. subsidiaries taxed at the U.K. blended marginal corporate tax rate of 19.25% unless19%, the French subsidiary taxed as a U.S. controlled foreign corporation,at the French marginal corporate tax rate of 25.0% in 2022 and 27.5% in 2021, and no taxes for the Company’s Bermuda Subsidiaries unless subject to U.S. tax by election. For periods subsequent to April 1, 2017, the U.K. corporation tax rate has been reduced to 19%. 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
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Expected tax provision (benefit) | $ | 14 | | | $ | (1) | |
| Tax-exempt interest | (3) | | | (4) | |
| State taxes | 4 | | | 3 | |
| Foreign taxes | 1 | | | 2 | |
| Stock based compensation | 2 | | | — | |
| Total provision (benefit) for income taxes | $ | 18 | | | $ | — | |
| Effective tax rate | 20.0 | % | | (0.9) | % |
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 |
| 2016 |
| | (in millions) |
| Expected tax provision (benefit) at statutory rates in taxable jurisdictions | $ | 116 |
| | $ | 150 |
| | $ | 245 |
| | $ | 234 |
|
| Tax-exempt interest | (12 | ) | | (12 | ) | | (36 | ) | | (38 | ) |
| Gain on bargain purchase | — |
| | (125 | ) | | (20 | ) | | (125 | ) |
| State taxes | 1 |
| | 0 |
| | 7 |
| | 1 |
|
| Change in liability for uncertain tax positions | 8 |
| | 8 |
| | (27 | ) | | 10 |
|
| Effect of provision to tax return filing adjustments | (8 | ) | | (16 | ) | | (8 | ) | | (16 | ) |
| Other | 0 |
| | (4 | ) | | (4 | ) | | (4 | ) |
| Total provision (benefit) for income taxes | $ | 105 |
| | $ | 1 |
| | $ | 157 |
| | $ | 62 |
|
| Effective tax rate | 33.6 | % | | 0.3 | % | | 18.8 | % | | 8.3 | % |
The change in liability for uncertain tax positions for Nine Months 2017 is driven by the closure of the 2009 – 2012 IRS Audit, see "Audits" below for further discussion.
The expected tax provision at statutory rates in taxable jurisdictions(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. Pretax income of the Company’s subsidiaries which are not U.S. or U.K. domiciled but are subject to U.S. or U.K. tax by election, establishment of tax residency or as controlled foreign corporations, are included at the U.S. or U.K. statutory tax rate. 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.
The following table presents pretaxtables present pre-tax income and revenue by jurisdiction.
PretaxPre-tax Income (Loss) by Tax Jurisdiction
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| U.S. | $ | 84 | | | $ | (4) | |
| Bermuda | 27 | | | 20 | |
| U.K. | (14) | | | 1 | |
| Other | (4) | | | (2) | |
| Total | $ | 93 | | | $ | 15 | |
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| United States | $ | 337 |
| | $ | 432 |
| | $ | 713 |
| | $ | 681 |
|
| Bermuda | (18 | ) | | 56 |
| | 143 |
| | 88 |
|
| U.K. | (6 | ) | | (8 | ) | | (21 | ) | | (23 | ) |
| Total | $ | 313 |
| | $ | 480 |
| | $ | 835 |
| | $ | 746 |
|
Revenue by Tax Jurisdiction
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| U.S. | $ | 269 | | | $ | 134 | |
| Bermuda | 33 | | | 30 | |
| U.K. | — | | | 13 | |
| Other | (2) | | | — | |
| Total | $ | 300 | | | $ | 177 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| United States | $ | 566 |
| | $ | 499 |
| | $ | 1,305 |
| | $ | 1,041 |
|
| Bermuda | 61 |
| | 69 |
| | 165 |
| | 170 |
|
| U.K. | (4 | ) | | (2 | ) | | (12 | ) | | (4 | ) |
| Total | $ | 623 |
| | $ | 566 |
| | $ | 1,458 |
| | $ | 1,207 |
|
Pretax Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.
Valuation Allowance
As part of the Radian Asset Acquisition, the Company acquired $19 million of foreign tax credits (FTC) which will expire in 2020. In addition, AGE had $1 million of FTC prior to revoking its election to be taxed as a U.S. company in 2017. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC will not be utilized, and therefore recorded a valuation allowance with respect to this tax attribute.
The Company came to the conclusion that it is more likely than not that the remaining net deferred tax asset 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 this deferred tax asset. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.
Audits
As of September 30, 2017,March 31, 2022, AGUS and Assured Guaranty Overseas US Holdings Inc. had open tax years with the IRSU.S. Internal Revenue Service (IRS) for 2013 to present. In December 2016,2018 forward and AGUS is currently under audit for the IRS issued a Revenue Agent Report (RAR) which did not identify any material adjustments that were not already accounted for in the prior periods. In April 2017, the Company received a final letter from the IRS to close the audit with no additional findings or changes,2018 and as a result the Company released previously recorded uncertain2019 tax position reserves and accrued interest of approximately $37 million in the second quarter of 2017. Assured Guaranty Oversees US Holdings Inc. has open tax years of 2014 forward.years. The Company'sCompany’s U.K. subsidiaries are not currently under examination and have open tax years of 20152020 forward. CIFGNA, which was acquired by AGC during 2016,The Company’s French subsidiary is not currently under examination and has open tax years of 2014 to present. The Company's French subsidiary, CIFGE, is not currently under examination and has open years of 2014 to present.2019 forward.
Uncertain Tax Positions
The Company's policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued $1.2 million for Nine Months 2017 and $2 million for the full year 2016. As of September 30, 2017 and December 31, 2016, the Company has accrued $2 million and $7 million of interest, respectively.
The total amount of reserves for unrecognized tax positions, including accrued interest, as of September 30, 2017 and December 31, 2016 that would affect the effective tax rate, if recognized, was $30 million and $57 million, respectively. The reduction in reserves is driven by the closure of the 2009- 2012 IRS Audit.
| |
| 13. | Reinsurance and Other Monoline Exposures |
The Company assumes exposure (Assumed Business) and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of ceding commissions. Substantially all of the Company’s Assumed Business and Ceded Business relates to financial guaranty insurance, except for a modest amount that relates to non-financial guaranty business assumed by AGRO. 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.
The following table presents the components of premiums and losses reported in the consolidated statements of operations and the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and non-financial guaranty).
Effect of Reinsurance on Statement of Operations
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Premiums Written: | | | | | | | |
| Direct | $ | 46 |
| | $ | 17 |
| | $ | 227 |
| | $ | 80 |
|
| Assumed (1) | (1 | ) | | (1 | ) | | 8 |
| | (9 | ) |
| Ceded (2) | 27 |
| | 0 |
| | 37 |
| | (17 | ) |
| Net | $ | 72 |
| | $ | 16 |
| | $ | 272 |
| | $ | 54 |
|
| Premiums Earned: | | | | | | | |
| Direct | $ | 186 |
| | $ | 237 |
| | $ | 516 |
| | $ | 647 |
|
| Assumed | 6 |
| | 6 |
| | 20 |
| | 19 |
|
| Ceded | (6 | ) | | (12 | ) | | (24 | ) | | (38 | ) |
| Net | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
| Loss and LAE: | | | | | | | |
| Direct | $ | 231 |
| | $ | 7 |
| | $ | 377 |
| | $ | 217 |
|
| Assumed | (1 | ) | | (1 | ) | | (1 | ) | | (4 | ) |
| Ceded | (7 | ) | | (15 | ) | | (22 | ) | | (30 | ) |
| Net | $ | 223 |
| | $ | (9 | ) | | $ | 354 |
| | $ | 183 |
|
____________________
| |
(1) | Negative assumed premiums written were due to changes in expected debt service schedules. |
(2) Positive ceded premiums written were due to commutations and changes in expected debt service schedules.
In addition to the items presented in the table above, the Company records in the consolidated statements of operations, the effect of assumed and ceded credit derivative exposures. These amounts were losses of $0.2 million in Third Quarter 2017, $25 million in Third Quarter 2016, $0.8 million for Nine Months 2017 and $26 million for Nine Months 2016.
Amounts Due (To) From All Reinsurers
As of September 30, 2017
|
| | | | | | | | | | | | | | | |
| | Assumed
Premium, net
of Commissions | | Ceded
Premium, net
of Commissions | | Assumed
Expected
Loss to be Paid | | Ceded
Expected
Loss to be Paid |
| | (in millions) |
| Reinsurers rated investment grade | $ | 5 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| Reinsurers rated BIG or not rated: | | | | | | | |
| American Overseas Reinsurance Company Limited | — |
| | (4 | ) | | — |
| | 36 |
|
| Syncora | 13 |
| | (18 | ) | | — |
| | (11 | ) |
| Ambac | 31 |
| | — |
| | 1 |
| | — |
|
| MBIA | 0 |
| | — |
| | (3 | ) | | — |
|
| Financial Guaranty Insurance Company and FGIC UK Limited | 3 |
| | — |
| | (16 | ) | | — |
|
| Ambac Assurance Corp. Segregated Account | 6 |
| | — |
| | (46 | ) | | — |
|
| Subtotal | 53 |
| | (22 | ) | | (64 | ) | | 25 |
|
| Other | 0 |
| | (3 | ) | | — |
| | — |
|
| Total | $ | 58 |
| | $ | (25 | ) | | $ | (63 | ) | | $ | 25 |
|
Assumed and Ceded Financial Guaranty Business
The Company assumes financial guaranty business (Assumed Financial Guaranty Business) from third party insurers, primarily other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a portion of the ceding company's premium for the insured risk (typically, net of a ceding commission). The Company’s facultative and treaty agreements are generally subject to termination at the option of the ceding company:
if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum financial strength rating, or
upon certain changes of control of the Company.
Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, attributable to reinsurance assumed pursuant to such agreements after which the Company would be released from liability with respect to the Assumed Financial Guaranty Business.
Upon the occurrence of the conditions set forth in the first bullet above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.
The downgrade of the financial strength ratings of AG Re or of AGC gives certain ceding companies the right to recapture business they had ceded to AG Re and AGC, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve. With respect to a significant portion of the Company's in-force Assumed Financial Guaranty Business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the third party ceding company may have the right to recapture business it had ceded to AG Re and/or AGC, and in connection therewith, to receive payment from AG Re or AGC of an amount equal to the statutory unearned premium (net of ceding commissions) and statutory loss reserves (if any) associated with that business, plus, in certain cases, an additional required payment. As of September 30, 2017, if each third party insurer ceding business to AG Re and/or AGC 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 $49 million and $16 million, respectively.
The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk. Under these relationships, the Company ceded a portion of its insured risk to the reinsurer in exchange for the reinsurer receiving a
share of the Company's premiums for the insured risk (typically, net of a ceding commission). 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. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers. The Company’s ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain triggering events, such as reinsurer downgrades.
During the first quarter of 2017, the Company entered into a commutation agreement to reassume the entire portfolio previously ceded to one of its unaffiliated reinsurers, consisting predominantly (over 97%) of U.S. public finance and international public and project finance exposures. During Third Quarter 2017, the Company entered into two commutation agreements. In one case, it reassumed the entire portfolio previously ceded to one of its unaffiliated reinsurers under quota share reinsurance, consisting predominantly of U.S. public finance and international public and project finance exposures. In the other case, it reassumed a portion of the portfolio previously ceded to one of its other unaffiliated reinsurers. The table below summarizes the effect of commutations.
Commutations of Ceded Reinsurance Contracts
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Increase (decrease) in net unearned premium reserve | $ | 62 |
| | $ | — |
| | $ | 80 |
| | $ | — |
|
| Increase (decrease) in net par outstanding | 3,455 |
| | 28 |
| | 4,628 |
| | 28 |
|
| Commutation gains (losses) | 255 |
| | 8 |
| | 328 |
| | 8 |
|
Other Exposures to Monoline Financial Guaranty Insurers
In addition to the Company’s assumed and ceded reinsurance arrangements with other monoline financial guaranty insurers, the Company may also have exposure to such companies in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by such other monoline financial guaranty insurers. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed-maturity securities that are wrapped by monolines and whose value may change based on the rating of the monoline. As of September 30, 2017, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $98 million insured by National Public Finance Guarantee Corporation (National), $69 million insured by Ambac and $8 million insured by other guarantors.
Reinsurance and Other Exposures to Monolines
|
| | | | | | | | | | | | |
| | | Par Outstanding |
| | | As of September 30, 2017 |
| Reinsurer | | Ceded Par Outstanding (1) | | Assumed Par Outstanding | | Second-to- Pay Insured Par Outstanding (2) |
| | | (in millions) |
| Reinsurers rated investment grade: | | | | | | |
| National | | $ | — |
| | $ | 3,245 |
| | $ | 2,730 |
|
| Subtotal | | — |
| | 3,245 |
| | 2,730 |
|
| Reinsurers rated BIG or not rated: | | | | | | |
| American Overseas Reinsurance Company Limited (3) | | 2,445 |
| | — |
| | — |
|
| Syncora (3) | | 1,994 |
| | 674 |
| | 1,156 |
|
| ACA Financial Guaranty Corp. | | 208 |
| | — |
| | 10 |
|
| Ambac and Ambac Assurance UK Limited | | 112 |
| | 4,902 |
| | 1,927 |
|
| MBIA | | — |
| | 137 |
| | 565 |
|
| Financial Guaranty Insurance Company and FGIC UK Limited | | — |
| | 275 |
| | 821 |
|
| Ambac Assurance Corp. Segregated Account | | — |
| | 567 |
| | 51 |
|
| Subtotal | | 4,759 |
| | 6,555 |
| | 4,530 |
|
| Other (3) | | 52 |
| | 111 |
| | 410 |
|
| Total | | $ | 4,811 |
| | $ | 9,911 |
| | $ | 7,670 |
|
____________________
| |
(1) | Of the total ceded par to reinsurers rated BIG or not rated, $305 million is rated BIG. |
| |
(2) | The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG, and/or not rated, is $774 million. |
| |
(3) | The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of September 30, 2017 was approximately $123 million.
|
Assumed and Ceded Non-Financial Guaranty Business
As described in Note 4, Outstanding Exposure, Non-Financial Guaranty Insurance, the Company, through AGRO, assumes non-financial guaranty business from third party insurers (Assumed Non-Financial Guaranty Business). It also retrocedes some of this business to third party reinsurers. The downgrade of AGRO’s financial strength rating by S&P below “A” would require AGRO to post, as of September 30, 2017, an estimated $5 million of collateral in respect of certain of its Assumed Non-Financial Guaranty Business. A further downgrade of AGRO’s S&P rating below A- would give the company ceding such business the right to recapture the business for AGRO’s collateral amount, and, if also accompanied by a downgrade of AGRO's financial strength rating by A.M. Best Company, Inc. below A-, would also require AGRO to post, as of September 30, 2017, an estimated $5 million of collateral in respect of a different portion of AGRO’s Assumed Non-Financial Guaranty Business. AGRO’s ceded contracts generally have equivalent provisions requiring the assuming reinsurer to post collateral and/or allowing AGRO to recapture the ceded business upon certain triggering events, such as reinsurer rating downgrades.
Excess of Loss Reinsurance Facility
AGC, AGM and MAC entered into a $360 million aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2016, that covers losses occurring either from January 1, 2016 through December 31, 2023, or January 1, 2017 through December 31, 2024, at the option of AGC, AGM and MAC. It terminates on January 1, 2018, unless AGC, AGM and MAC choose to extend it. The facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2015, excluding credits that were rated non-investment grade as of December 31, 2015 by Moody’s or S&P or internally by AGC, AGM or MAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The
facility attaches when AGC’s, AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed $1.25 billion in the aggregate. The facility covers a portion of the next $400 million of losses, with the reinsurers assuming pro rata in the aggregate $360 million of the $400 million of losses and AGC, AGM and MAC jointly retaining the remaining $40 million. The reinsurers are required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. AGC, AGM and MAC paid approximately $9 million of premiums in 2016 for the term January 1, 2016 through December 31, 2016 and approximately $9 million of premiums for January 1, 2017 through December 31, 2017.
14. 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 in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of the Company'sAGL’s insurance subsidiaries assert claimsare involved in legal proceedings againstlitigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company has commencedis involved in a number of legal actions in the U.S.Federal District Court for the District of 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 the "Exposure“Exposure to Puerto Rico"Rico” section of Note 4,3, Outstanding Exposure, for a description of such actions. See alsoAlso in the "Recovery Litigation" sectionordinary course of Note 5, Expected Loss to be Paid, for a descriptiontheir respective business, certain of recoveryAGL’s investment management subsidiaries are involved in litigation unrelated to Puerto Rico.with third parties regarding fees, appraisals, or portfolio companies. The amounts,impact, if any, the Company will recover inof these and other proceedings to recoveron the amount of recoveries the Company receives and losses areit pays in the future is uncertain, and recoveries, or failure to obtain recoveries, inthe 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.
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 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 alleged that AGFP improperly terminated nine(the Supreme 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 9 credit derivative transactions between LBIE and AGFP and improperly calculatedasserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination payment in connection with the terminationJuly 2008 of 28 other credit derivative transactions between LBIE and AGFP.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 has calculated that LBIE owes AGFP approximately $29$4 million for the claims which were dismissed and approximately $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. On February 3, 2012, AGFP filed a motion to dismiss certainthe claims for breach of the countsimplied covenant of good faith in theLBIE’s complaint, and on March 15, 2013, the court granted AGFP'sAGFP’s motion to dismiss in respect of the count relating to improper termination of the nine9 credit derivative transactions and denied AGFP's motion to dismiss the counts relatingnarrowed LBIE’s claim with respect to the remaining28 other credit derivative transactions. On February 22, 2016, AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP's counterclaims. Oral argument on AGFP's motion took place on July 21, 2016. 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.
Proceedings Resolved Since December 31, 2016
On December 22, 2014, Deutsche Bank National Trust Company, as indenture trustee forrisk. In addition, LBIE seeks prejudgment interest from the AAA Trust 2007-2 Re-REMIC (the Trustee),time of termination onwards. AGFP filed a “trust instructional proceeding” petitionmotion 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 California SuperiorNew York, First Judicial Department, seeking reversal of the portions of the lower court’s ruling denying AGFP’s motion for summary judgment with respect to LBIE’s sole remaining claim for breach of contract. On January 17, 2019, the Appellate Division affirmed the Supreme Court’s decision, holding that the lower court correctly determined that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. The trial was originally scheduled for March 9, 2020, but was postponed due to COVID-19. On November 3, 2020, LBIE moved to reopen its Chapter 15 case in the United States Bankruptcy Court (Probate Division, Orange County), seekingfor the court’s instruction as to how it should allocate the losses resulting from its December 2014 saleSouthern District of four RMBS owned by the AAA Trust 2007-2 Re-REMIC. This sale of approximately $70 million principal balance of RMBS was made pursuant to AGC’s liquidation direction in November 2014,New York (the Bankruptcy Court) and resulted in approximately $27 million of gross proceedsremove this action to the Re-REMIC. On December 22, 2014, AGC directed the indenture trustee to allocate to the uninsured Class A-3 Notes the losses realized from the sale. On May 4, 2015, the Superior Court rejected AGC’s allocation direction, and ordered the Trustee to allocate to the Class A-3 noteholders a pro rata share of the $27 million of gross proceeds. On May 17, 2017, the California Court of Appeal upheld the Superior Court’s rejection of AGC’s allocation direction. On June 15, 2017, the California Court of Appeal denied AGC’s petition for a rehearing, pursuant to an order that modified its initial opinion and affirmed the Superior Court’s May 4, 2015 order.
On September 25, 2013, Wells Fargo Bank, N.A., as trust administrator of the MASTR Adjustable Rate Mortgages Trust 2007-3 (Wells Fargo), filed an interpleader complaint in the U.S.United States District Court for the Southern District of New York seeking adjudication of a dispute between Wales LLC (Wales) and AGM as to whether AGM is entitled to reimbursement from certain cashflows for principal claims paid in respect of insured certificates. After the court issued an opinion on September 30, 2016, denying a motion for judgment on the pleadings filed by Wales, Wales sold its interests in the MASTR Adjustable Rate Mortgage Trust 2007-3 certificates, and on March 20, 2017, the court dismissed the case.
| |
15. | Long-Term Debt and Credit Facilities |
The principal and carrying values of the Company’s long-term debt are presented in the table below.
Principal and Carrying Amounts of Debt
|
| | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Principal |
| Carrying Value |
| Principal |
| Carrying Value |
| | (in millions) |
| AGUS: | |
|
| |
|
| |
|
| |
|
| 7% Senior Notes (1) | $ | 200 |
| | $ | 197 |
|
| $ | 200 |
| | $ | 197 |
|
| 5% Senior Notes (1) | 500 |
|
| 496 |
| | 500 |
| | 496 |
|
| Series A Enhanced Junior Subordinated Debentures (2) | 150 |
| | 150 |
|
| 150 |
| | 150 |
|
| Total AGUS | 850 |
| | 843 |
|
| 850 |
| | 843 |
|
| AGMH(3): | |
| | |
|
| |
| | |
|
| 67/8% QUIBS (1) | 100 |
| | 70 |
|
| 100 |
| | 69 |
|
| 6.25% Notes (1) | 230 |
| | 142 |
|
| 230 |
| | 141 |
|
| 5.6% Notes (1) | 100 |
| | 56 |
|
| 100 |
| | 56 |
|
| Junior Subordinated Debentures (2) | 300 |
| | 191 |
|
| 300 |
| | 187 |
|
| Total AGMH | 730 |
| | 459 |
|
| 730 |
| | 453 |
|
| AGM(3): | |
| | |
|
| |
| | |
|
| AGM Notes Payable | 8 |
| | 8 |
|
| 9 |
| | 10 |
|
| Total AGM | 8 |
| | 8 |
| | 9 |
| | 10 |
|
| Purchased debt (4) | (28 | ) | | (18 | ) | | — |
| | — |
|
| Total | $ | 1,560 |
| | $ | 1,292 |
|
| $ | 1,589 |
| | $ | 1,306 |
|
____________________
| |
(1) | AGL fully and unconditionally guarantees these obligations |
| |
(2) | Guaranteed by AGL on a junior subordinated basis. |
| |
(3) | Carrying amounts are different than principal amounts due primarily to fair value adjustments at the AGMH acquisition date, which are accreted or amortized into interest expense over the remaining terms of these obligations.
|
| |
(4) | In 2017, AGUS purchased $28 million principal amount of AGMH's outstanding Junior Subordinated Debentures. |
Intercompany Credit Facility and Intercompany Debt
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. Such commitment terminates on October 25, 2018 (the loan termination date). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable Federal short-term or mid-term interest rate, as the case may be, 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 termination date. No amounts are currently outstanding under the credit facility.
In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. During 2016, AGUS repaid $20 million in outstanding principal as well as accrued and unpaid interest, and the parties agreed to extend the maturity date of the loan from May 2017 to November 2019. As of September 30, 2017, $70 million remained outstanding.
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securitiesassignment to the trusts in exchange for cash. The custodial trusts were created forBankruptcy Court. On March 22, 2021, the primary purpose of issuing $50 million face amount of CCS, investingBankruptcy Court denied the proceeds in high-quality assetsmotion and entering into put options with AGC or AGM, as applicable. The Company does not consider itself to beremanded the primary beneficiary of the trusts and the trusts are not consolidated in Assured Guaranty's financial statements.
The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase the AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stockaction to the trusts for any purpose, includingSupreme Court. On March 29, 2021, the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subjectaction was reassigned to certain grace periods) specified events occur. Both AGCJustice Melissa A. Crane. A bench trial was held from October 18, 2021 through November 19, 2021; a decision is pending subject to post-trial briefing and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.argument.
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 basis points, and the annualized rate on the AGM CPS is one-month LIBOR plus 200 basis points.
14. Shareholders’ Equity
Please refer to Note 7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement discussion.
16. Earnings Per Share
Computation of EPS
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Basic EPS: | | | | | | | |
| Net income (loss) attributable to AGL | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
| Less: Distributed and undistributed income (loss) available to nonvested shareholders | 0 |
| | 1 |
| | 1 |
| | 1 |
|
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 208 |
| | $ | 478 |
| | $ | 677 |
| | $ | 683 |
|
| Basic shares | 118.7 |
| | 131.9 |
| | 121.8 |
| | 134.0 |
|
| Basic EPS | $ | 1.75 |
| | $ | 3.63 |
| | $ | 5.56 |
| | $ | 5.10 |
|
| | | | | | | | |
| Diluted EPS: | | | | | | | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 208 |
| | $ | 478 |
| | $ | 677 |
| | $ | 683 |
|
| Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted | $ | 208 |
| | $ | 478 |
| | $ | 677 |
| | $ | 683 |
|
| | | | | | | | |
| Basic shares | 118.7 |
| | 131.9 |
| | 121.8 |
| | 134.0 |
|
| Dilutive securities: | | | | | | | |
| Options and restricted stock awards | 2.0 |
| | 0.9 |
| | 1.7 |
| | 0.9 |
|
| Diluted shares | 120.7 |
| | 132.8 |
| | 123.5 |
| | 134.9 |
|
| Diluted EPS | $ | 1.72 |
| | $ | 3.60 |
| | $ | 5.48 |
| | $ | 5.06 |
|
| Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | — |
| | 0.0 |
| | 0.1 |
| | 0.5 |
|
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 condensed consolidated statements of operations.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
ThirdFirst Quarter 20172022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | (339) | | | (43) | | | (1) | | | (1) | | | — | | | (384) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | (1) | | | (5) | | | — | | | — | | | — | | | (6) | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Total before tax | (1) | | | (5) | | | (1) | | | — | | | — | | | (7) | |
| Tax (provision) benefit | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Total amount reclassified from AOCI, net of tax | (1) | | | (4) | | | (1) | | | — | | | — | | | (6) | |
| Other comprehensive income (loss) | (338) | | | (39) | | | — | | | (1) | | | — | | | (378) | |
| Balance, March 31, 2022 | $ | 37 | | | $ | (63) | | | $ | (21) | | | $ | (37) | | | $ | 6 | | | $ | (78) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| | (in millions) |
| Balance, June 30, 2017 | $ | 228 |
| | $ | 107 |
| | $ | (27 | ) | | $ | 7 |
| | $ | 315 |
|
| Other comprehensive income (loss) before reclassifications | 27 |
| | (15 | ) | | 3 |
| | — |
| | 15 |
|
| Amounts reclassified from AOCI to: | | | | | | | | | |
| Net realized investment gains (losses) | (24 | ) | | 17 |
| | — |
| | — |
| | (7 | ) |
| Net investment income | — |
| | — |
| | — |
| | — |
| | — |
|
| Interest expense | — |
| | — |
| | — |
| | 0 |
| | 0 |
|
| Total before tax | (24 | ) | | 17 |
| | — |
| | 0 |
| | (7 | ) |
| Tax (provision) benefit | 9 |
| | (6 | ) | | — |
| | 0 |
| | 3 |
|
| Total amount reclassified from AOCI, net of tax | (15 | ) | | 11 |
| | — |
| | 0 |
| | (4 | ) |
| Net current period other comprehensive income (loss) | 12 |
| | (4 | ) | | 3 |
| | 0 |
| | 11 |
|
| Balance, September 30, 2017 | $ | 240 |
| | $ | 103 |
| | $ | (24 | ) | | $ | 7 |
| | $ | 326 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
ThirdFirst Quarter 20162021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | (119) | | | (8) | | | (2) | | | 1 | | | — | | | (128) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | — | | | (3) | | | — | | | — | | | — | | | (3) | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Total before tax | — | | | (3) | | | (1) | | | — | | | — | | | (4) | |
| Tax (provision) benefit | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Total amount reclassified from AOCI, net of tax | — | | | (2) | | | (1) | | | — | | | — | | | (3) | |
| Other comprehensive income (loss) | (119) | | | (6) | | | (1) | | | 1 | | | — | | | (125) | |
| Balance, March 31, 2021 | $ | 458 | | | $ | (36) | | | $ | (21) | | | $ | (35) | | | $ | 7 | | | $ | 373 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| | (in millions) |
| Balance, June 30, 2016 | $ | 426 |
| | $ | (24 | ) | | $ | (26 | ) | | $ | 7 |
| | $ | 383 |
|
| Other comprehensive income (loss) before reclassifications | (33 | ) | | 13 |
| | (5 | ) | | — |
| | (25 | ) |
| Amounts reclassified from AOCI to: | | | | | | | | |
|
|
| Net realized investment gains (losses) | (3 | ) | | 4 |
| | — |
| | — |
| | 1 |
|
| Net investment income | — |
| | — |
| | — |
| | — |
| | — |
|
| Interest expense | — |
| | — |
| | — |
| | 0 |
| | 0 |
|
| Total before tax | (3 | ) | | 4 |
| | — |
| | 0 |
| | 1 |
|
| Tax (provision) benefit | 0 |
| | (1 | ) | | — |
| | 0 |
| | (1 | ) |
| Total amount reclassified from AOCI, net of tax | (3 | ) | | 3 |
| | — |
| | 0 |
| | — |
|
| Net current period other comprehensive income (loss) | (36 | ) | | 16 |
| | (5 | ) | | 0 |
| | (25 | ) |
| Balance, September 30, 2016 | $ | 390 |
| | $ | (8 | ) | | $ | (31 | ) | | $ | 7 |
| | $ | 358 |
|
Changes in Accumulated Other Comprehensive Income by Component
Nine Months 2017
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| | (in millions) |
| Balance, December 31, 2016 | $ | 171 |
| | $ | 10 |
| | $ | (39 | ) | | $ | 7 |
| | $ | 149 |
|
| Other comprehensive income (loss) before reclassifications | 133 |
| | 81 |
| | 15 |
| | — |
| | 229 |
|
| Amounts reclassified from AOCI to: | | | | | | | | | |
| Net realized investment gains (losses) | (71 | ) | | 18 |
| | — |
| | — |
| | (53 | ) |
| Net investment income | (28 | ) | | — |
| | — |
| | — |
| | (28 | ) |
| Interest expense | — |
| | — |
| | — |
| | 0 |
| | 0 |
|
| Total before tax | (99 | ) | | 18 |
| | — |
| | 0 |
| | (81 | ) |
| Tax (provision) benefit | 35 |
| | (6 | ) | | — |
| | 0 |
| | 29 |
|
| Total amount reclassified from AOCI, net of tax | (64 | ) | | 12 |
| | — |
| | 0 |
| | (52 | ) |
| Net current period other comprehensive income (loss) | 69 |
| | 93 |
| | 15 |
| | 0 |
| | 177 |
|
| Balance, September 30, 2017 | $ | 240 |
| | $ | 103 |
| | $ | (24 | ) | | $ | 7 |
| | $ | 326 |
|
Changes in Accumulated Other Comprehensive Income by Component
Nine Months 2016
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| | (in millions) |
| Balance, December 31, 2015 | $ | 260 |
| | $ | (15 | ) | | $ | (16 | ) | | $ | 8 |
| | $ | 237 |
|
| Other comprehensive income (loss) before reclassifications | 146 |
| | (10 | ) | | (15 | ) | | — |
| | 121 |
|
| Amounts reclassified from AOCI to: | | | | | | | | | |
| Net realized investment gains (losses) | (20 | ) | | 25 |
| | — |
| | — |
| | 5 |
|
| Net investment income | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Interest expense | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Total before tax | (23 | ) | | 25 |
| | — |
| | (1 | ) | | 1 |
|
| Tax (provision) benefit | 7 |
| | (8 | ) | | — |
| | 0 |
| | (1 | ) |
| Total amount reclassified from AOCI, net of tax | (16 | ) | | 17 |
| | — |
| | (1 | ) | | 0 |
|
| Net current period other comprehensive income (loss) | 130 |
| | 7 |
| | (15 | ) | | (1 | ) | | 121 |
|
| Balance, September 30, 2016 | $ | 390 |
| | $ | (8 | ) | | $ | (31 | ) | | $ | 7 |
| | $ | 358 |
|
Share Repurchase
The following table presents share repurchases since January 2016.
Share Repurchases
|
| | | | | | | | | | | |
| Period | | Number of Shares Repurchased | | Total Payments (in millions) | | Average Price Paid Per Share |
| 2016 (January 1 - March 31) | | 3,038,928 |
| | $ | 75 |
| | $ | 24.69 |
|
| 2016 (April 1 - June 30) | | 2,331,474 |
| | 60 |
| | 25.73 |
|
| 2016 (July 1 - September 30) | | 2,050,229 |
| | 55 |
| | 26.83 |
|
| 2016 (October 1 - December 31, 2016) | | 3,300,617 |
| | 116 |
| | 35.09 |
|
| Total 2016 | | 10,721,248 |
| | 306 |
| | 28.53 |
|
| 2017 (January 1 - March 31) | | 5,430,041 |
| | 216 |
| | 39.83 |
|
| 2017 (April 1 - June 30, 2017) | | 3,456,711 |
| | 135 |
| | 39.05 |
|
| 2017 (July 1 - September 30, 2017) | | 1,847,901 |
| | $ | 80 |
| | 43.29 |
|
| 2017 (October 1 - through November 2, 2017) | | 533,618 |
| | $ | 20 |
| | 37.48 |
|
| Total 2017 | | 11,268,271 |
| | 451 |
| | 40.05 |
|
| Cumulative repurchases since the beginning of 2013 | | 79,911,478 |
| | 2,166 |
| | 27.11 |
|
The Board of Directors authorized, on November 1, 2017, an additional $300 million of share repurchases. The total remaining capacity for share repurchases underOn February 23, 2022, the Board of Directors (the Board) authorized the repurchase of an additional $350 million of its common shares. Under this and previous authorizations, was $398 million as of November 2, 2017.May 5, 2022, the Company was authorized to purchase $240 million of its common shares. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company'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. It does not have an expiration date.
Share Repurchases
Deferred Compensation | | | | | | | | | | | | | | | | | | | | |
| Period | | Number of Shares Repurchased | | Total Payments
(in millions) | | Average Price Paid Per Share |
| 2021 (January 1 - March 31) | | 1,986,534 | | | $ | 77 | | | $ | 38.83 | |
| 2021 (April 1 - June 30) | | 1,887,531 | | | 88 | | | 46.63 | |
| 2021 (July 1- September 30) | | 2,918,993 | | | 140 | | | 47.76 | |
| 2021 (October 1 - December 31) | | 3,725,982 | | | 191 | | | 51.47 | |
| Total 2021 | | 10,519,040 | | | $ | 496 | | | 47.19 | |
| 2022 (January 1 - March 31) (1) | | 2,738,223 | | | 155 | | | 56.62 | |
| 2022 (April 1 - May 5) | | 1,007,045 | | | 61 | | | 59.86 | |
| Total 2022 | | 3,745,268 | | | $ | 216 | | | 57.49 | |
____________________
(1) Includes $3 million of share repurchases that was prepaid in December 2021 and settled in First Quarter 2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
15. Earnings Per Share
The Company used a portionComputation of its share repurchase program to repurchase 297,131 common shares from its Chief Executive Officer and 23,062 common shares from its General Counsel on January 6, 2017. The shares were purchased at the closing priceEarnings Per Share
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions, except per share amounts) |
| Basic Earnings Per Share (EPS): | | | |
| Net income (loss) attributable to AGL | $ | 66 | | | $ | 11 | |
| Less: Distributed and undistributed income (loss) available to nonvested shareholders | — | | | — | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 66 | | | $ | 11 | |
| Basic shares | 66.3 | | | 76.7 | |
| Basic EPS | $ | 1.00 | | | $ | 0.14 | |
| | | |
| Diluted EPS: | | | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 66 | | | $ | 11 | |
| 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 | $ | 66 | | | $ | 11 | |
| Basic shares | 66.3 | | | 76.7 | |
| Dilutive securities: | | | |
| Options and restricted stock awards | 1.1 | | | 0.8 | |
| Diluted shares | 67.4 | | | 77.5 | |
| Diluted EPS | $ | 0.98 | | | $ | 0.14 | |
| Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | 0.2 | | | 0.3 | |
Table of a common share of the Company on the New York Stock Exchange on January 6, 2017. Separately, these officers also received 297,131 and 23,062 common shares, respectively, on January 6, 2017 in settlement of 297,131 share units and 23,062 share units held by them in the employer stock fund of the Assured Guaranty Ltd. Supplemental Employee Retirement Plan (the AGL SERP). The distribution of shares occurred in January 2017 pursuant to the terms of an amendment adopted in 2011 to the AGL SERP. Such amendment was adopted to comply with requirements of Section 409A of the Code and Section 457A of the Code, which required all grandfathered amounts (within the meaning of Section 457A of the Code), including the units in the employer stock fund in the AGL SERP, to be included in the income of the applicable participant no later than 2017.Contents
| |
18. | Subsidiary Information |
The following tables present the condensed consolidating financial information for AGUS and AGMH, 100%-owned subsidiaries of AGL, which have issued publicly traded debt securities (please refer to Note 15, Long Term Debt and Credit Facilities). The information for AGL, AGUS and AGMH presents its subsidiaries on the equity method of accounting. The following tables reflect transfers of businesses between entities within the consolidated group that occurred in the current reporting period consistently for all prior periods presented.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
| ASSETS | |
| | |
| | |
| | |
| | |
| | |
|
| Total investment portfolio and cash | $ | 47 |
| | $ | 143 |
| | $ | 24 |
| | $ | 11,776 |
| | $ | (327 | ) | | $ | 11,663 |
|
| Investment in subsidiaries | 6,799 |
| | 6,257 |
| | 4,216 |
| | 208 |
| | (17,480 | ) | | — |
|
| Premiums receivable, net of commissions payable | — |
| | — |
| | — |
| | 1,076 |
| | (154 | ) | | 922 |
|
| Ceded unearned premium reserve | — |
| | — |
| | — |
| | 1,009 |
| | (901 | ) | | 108 |
|
| Deferred acquisition costs | — |
| | — |
| | — |
| | 150 |
| | (45 | ) | | 105 |
|
| Reinsurance recoverable on unpaid losses | — |
| | — |
| | — |
| | 394 |
| | (355 | ) | | 39 |
|
| Credit derivative assets | — |
| | — |
| | — |
| | 50 |
| | (47 | ) | | 3 |
|
| Deferred tax asset, net | — |
| | 76 |
| | — |
| | 153 |
| | (94 | ) | | 135 |
|
| Intercompany receivable | — |
| | — |
| | — |
| | 70 |
| | (70 | ) | | — |
|
| Financial guaranty variable interest entities’ assets, at fair value | — |
| | — |
| | — |
| | 707 |
| | — |
| | 707 |
|
| Dividend receivable from affiliate | 25 |
| | — |
| | — |
| | — |
| | (25 | ) | | — |
|
| Other | 22 |
| | 28 |
| | 51 |
| | 1,100 |
| | (234 | ) | | 967 |
|
| TOTAL ASSETS | $ | 6,893 |
| | $ | 6,504 |
| | $ | 4,291 |
| | $ | 16,693 |
| | $ | (19,732 | ) | | $ | 14,649 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
| | |
| | |
| | |
| | |
|
| Unearned premium reserves | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,565 |
| | $ | (968 | ) | | $ | 3,597 |
|
| Loss and LAE reserve | — |
| | — |
| | — |
| | 1,646 |
| | (320 | ) | | 1,326 |
|
| Long-term debt | — |
| | 843 |
| | 459 |
| | 8 |
| | (18 | ) | | 1,292 |
|
| Intercompany payable | — |
| | 70 |
| | — |
| | 300 |
| | (370 | ) | | — |
|
| Credit derivative liabilities | — |
| | — |
| | — |
| | 352 |
| | (47 | ) | | 305 |
|
| Deferred tax liabilities, net | — |
| | — |
| | 87 |
| | — |
| | (87 | ) | | — |
|
| Financial guaranty variable interest entities’ liabilities, at fair value | — |
| | — |
| | — |
| | 768 |
| | — |
| | 768 |
|
| Dividend payable to affiliate | — |
| | 25 |
| | — |
| | — |
| | (25 | ) | | — |
|
| Other | 15 |
| | 19 |
| | 22 |
| | 815 |
| | (388 | ) | | 483 |
|
| TOTAL LIABILITIES | 15 |
| | 957 |
| | 568 |
| | 8,454 |
| | (2,223 | ) | | 7,771 |
|
| TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD. | 6,878 |
| | 5,547 |
| | 3,723 |
| | 8,031 |
| | (17,301 | ) | | 6,878 |
|
| Noncontrolling interest | — |
| | — |
| | — |
| | 208 |
| | (208 | ) | | — |
|
| TOTAL SHAREHOLDERS' EQUITY | 6,878 |
| | 5,547 |
| | 3,723 |
| | 8,239 |
| | (17,509 | ) | | 6,878 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 6,893 |
| | $ | 6,504 |
| | $ | 4,291 |
| | $ | 16,693 |
| | $ | (19,732 | ) | | $ | 14,649 |
|
CONDENSED CONSOLIDATING BALANCE SHEET
ASITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF DECEMBER 31, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
| ASSETS | |
| | |
| | |
| | |
| | |
| | |
|
| Total investment portfolio and cash | $ | 36 |
| | $ | 384 |
| | $ | 22 |
| | $ | 11,029 |
| | $ | (368 | ) | | $ | 11,103 |
|
| Investment in subsidiaries | 6,164 |
| | 5,696 |
| | 3,799 |
| | 296 |
| | (15,955 | ) | | — |
|
| Premiums receivable, net of commissions payable | — |
| | — |
| | — |
| | 699 |
| | (123 | ) | | 576 |
|
| Ceded unearned premium reserve | — |
| | — |
| | — |
| | 1,099 |
| | (893 | ) | | 206 |
|
| Deferred acquisition costs | — |
| | — |
| | — |
| | 156 |
| | (50 | ) | | 106 |
|
| Reinsurance recoverable on unpaid losses | — |
| | — |
| | — |
| | 484 |
| | (404 | ) | | 80 |
|
| Credit derivative assets | — |
| | — |
| | — |
| | 69 |
| | (56 | ) | | 13 |
|
| Deferred tax asset, net | — |
| | 16 |
| | — |
| | 597 |
| | (116 | ) | | 497 |
|
| Intercompany receivable | — |
| | — |
| | — |
| | 70 |
| | (70 | ) | | — |
|
| Financial guaranty variable interest entities’ assets, at fair value | — |
| | — |
| | — |
| | 876 |
| | — |
| | 876 |
|
| Dividend receivable from affiliate | 300 |
|
| — |
|
| — |
|
| — |
| | (300 | ) | | — |
|
| Other | 11 |
| | 78 |
| | 26 |
| | 801 |
| | (222 | ) | | 694 |
|
| TOTAL ASSETS | $ | 6,511 |
| | $ | 6,174 |
| | $ | 3,847 |
| | $ | 16,176 |
| | $ | (18,557 | ) | | $ | 14,151 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
| | |
| | |
| | |
| | |
|
| Unearned premium reserves | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,488 |
| | $ | (977 | ) | | $ | 3,511 |
|
| Loss and LAE reserve | — |
| | — |
| | — |
| | 1,596 |
| | (469 | ) | | 1,127 |
|
| Long-term debt | — |
| | 843 |
| | 453 |
| | 10 |
| | — |
| | 1,306 |
|
| Intercompany payable | — |
| | 70 |
| | — |
| | 300 |
| | (370 | ) | | — |
|
| Credit derivative liabilities | — |
| | — |
| | — |
| | 458 |
| | (56 | ) | | 402 |
|
| Deferred tax liabilities, net | — |
| | — |
| | 88 |
| | — |
| | (88 | ) | | — |
|
| Financial guaranty variable interest entities’ liabilities, at fair value | — |
| | — |
| | — |
| | 958 |
| | — |
| | 958 |
|
| Dividend payable to affiliate | — |
| | 300 |
| | — |
| | — |
| | (300 | ) | | — |
|
| Other | 7 |
| | 3 |
| | 14 |
| | 665 |
| | (346 | ) | | 343 |
|
| TOTAL LIABILITIES | 7 |
| | 1,216 |
| | 555 |
| | 8,475 |
| | (2,606 | ) | | 7,647 |
|
| TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD. | 6,504 |
| | 4,958 |
| | 3,292 |
| | 7,405 |
| | (15,655 | ) | | 6,504 |
|
| Noncontrolling interest | — |
| | — |
| | — |
| | 296 |
| | (296 | ) | | — |
|
| TOTAL SHAREHOLDERS’ EQUITY | 6,504 |
| | 4,958 |
| | 3,292 |
| | 7,701 |
| | (15,951 | ) | | 6,504 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 6,511 |
| | $ | 6,174 |
| | $ | 3,847 |
| | $ | 16,176 |
| | $ | (18,557 | ) | | $ | 14,151 |
|
CONDENSED CONSOLIDATING STATEMENTFINANCIAL CONDITION AND RESULTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
| REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
| Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 190 |
| | $ | (4 | ) | | $ | 186 |
|
| Net investment income | 0 |
| | 0 |
| | 0 |
| | 101 |
| | (2 | ) | | 99 |
|
| Net realized investment gains (losses) | — |
| | 0 |
| | 0 |
| | (9 | ) | | 16 |
| | 7 |
|
| Net change in fair value of credit derivatives: | | | | | | | | | | | |
| Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | (1 | ) | | 0 |
| | (1 | ) |
| Net unrealized gains (losses) | — |
| | — |
| | — |
| | 59 |
| | — |
| | 59 |
|
| Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 58 |
| | 0 |
| | 58 |
|
| Other | 3 |
| | — |
| | — |
| | 302 |
| | (32 | ) | | 273 |
|
| TOTAL REVENUES | 3 |
| | 0 |
| | 0 |
| | 642 |
| | (22 | ) | | 623 |
|
| EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
| Loss and LAE | — |
| | — |
| | — |
| | 250 |
| | (27 | ) | | 223 |
|
| Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 8 |
| | (3 | ) | | 5 |
|
| Interest expense | — |
| | 12 |
| | 13 |
| | 3 |
| | (4 | ) | | 24 |
|
| Other operating expenses | 10 |
| | 1 |
| | 0 |
| | 91 |
| | (44 | ) | | 58 |
|
| TOTAL EXPENSES | 10 |
| | 13 |
| | 13 |
| | 352 |
| | (78 | ) | | 310 |
|
| INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (7 | ) | | (13 | ) | | (13 | ) | | 290 |
| | 56 |
| | 313 |
|
| Total (provision) benefit for income taxes | — |
| | 4 |
| | 4 |
| | (94 | ) | | (19 | ) | | (105 | ) |
| Equity in net earnings of subsidiaries | 215 |
| | 237 |
| | 178 |
| | 8 |
| | (638 | ) | | — |
|
| NET INCOME (LOSS) | $ | 208 |
| | $ | 228 |
| | $ | 169 |
| | $ | 204 |
| | $ | (601 | ) | | $ | 208 |
|
| Less: noncontrolling interest | — |
| | — |
| | — |
| | 8 |
| | (8 | ) | | — |
|
| NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 208 |
| | $ | 228 |
| | $ | 169 |
| | $ | 196 |
| | $ | (593 | ) | | $ | 208 |
|
| | | | | | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | $ | 219 |
| | $ | 237 |
| | $ | 178 |
| | $ | 274 |
| | $ | (689 | ) | | $ | 219 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
| REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
| Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 239 |
| | $ | (8 | ) | | $ | 231 |
|
| Net investment income | 0 |
| | 0 |
| | 0 |
| | 95 |
| | (1 | ) | | 94 |
|
| Net realized investment gains (losses) | 0 |
| | 3 |
| | 0 |
| | (2 | ) | | (3 | ) | | (2 | ) |
| Net change in fair value of credit derivatives: | | | | | | | | | | | |
| Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | 15 |
| | 0 |
| | 15 |
|
| Net unrealized gains (losses) | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 21 |
| | 0 |
| | 21 |
|
| Bargain purchase gain and settlement of pre-existing relationship | — |
| | — |
| | — |
| | 257 |
| | 2 |
| | 259 |
|
| Other | 0 |
| | — |
| | — |
| | (37 | ) | | — |
| | (37 | ) |
| TOTAL REVENUES | 0 |
| | 3 |
| | 0 |
| | 573 |
| | (10 | ) | | 566 |
|
| EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
| Loss and LAE | — |
| | — |
| | — |
| | (15 | ) | | 6 |
| | (9 | ) |
| Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 9 |
| | (5 | ) | | 4 |
|
| Interest expense | — |
| | 13 |
| | 13 |
| | 3 |
| | (3 | ) | | 26 |
|
| Other operating expenses | 7 |
| | 1 |
| | 1 |
| | 58 |
| | (2 | ) | | 65 |
|
| TOTAL EXPENSES | 7 |
| | 14 |
| | 14 |
| | 55 |
| | (4 | ) | | 86 |
|
| INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (7 | ) | | (11 | ) | | (14 | ) | | 518 |
| | (6 | ) | | 480 |
|
| Total (provision) benefit for income taxes | — |
| | 4 |
| | 5 |
| | (13 | ) | | 3 |
| | (1 | ) |
| Equity in net earnings of subsidiaries | 486 |
| | 433 |
| | 82 |
| | 11 |
| | (1,012 | ) | | — |
|
| NET INCOME (LOSS) | $ | 479 |
| | $ | 426 |
| | $ | 73 |
| | $ | 516 |
| | $ | (1,015 | ) | | $ | 479 |
|
| Less: noncontrolling interest | — |
| | — |
| | — |
| | 11 |
| | (11 | ) | | — |
|
| NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 479 |
| | $ | 426 |
| | $ | 73 |
| | $ | 505 |
| | $ | (1,004 | ) | | $ | 479 |
|
| | | | | | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | $ | 454 |
| | $ | 414 |
| | $ | 51 |
| | $ | 497 |
| | $ | (962 | ) | | $ | 454 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
| REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
| Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 523 |
| | $ | (11 | ) | | $ | 512 |
|
| Net investment income | 0 |
| | 1 |
| | 0 |
| | 325 |
| | (4 | ) | | 322 |
|
| Net realized investment gains (losses) | — |
| | 0 |
| | 0 |
| | 53 |
| | 1 |
| | 54 |
|
| Net change in fair value of credit derivatives: | | | | | | | | | | | |
| Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | 19 |
| | 0 |
| | 19 |
|
| Net unrealized gains (losses) | — |
| | — |
| | — |
| | 87 |
| | — |
| | 87 |
|
| Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 106 |
| | 0 |
| | 106 |
|
| Bargain purchase gain and settlement of pre-existing relationships | — |
| | — |
| | — |
| | 58 |
| | 0 |
| | 58 |
|
| Other | 8 |
| | — |
| | — |
| | 527 |
| | (129 | ) | | 406 |
|
| TOTAL REVENUES | 8 |
| | 1 |
| | 0 |
| | 1,592 |
| | (143 | ) | | 1,458 |
|
| EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
| Loss and LAE | — |
| | — |
| | — |
| | 301 |
| | 53 |
| | 354 |
|
| Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 19 |
| | (6 | ) | | 13 |
|
| Interest expense | — |
| | 36 |
| | 40 |
| | 8 |
| | (11 | ) | | 73 |
|
| Other operating expenses | 30 |
| | 8 |
| | 1 |
| | 286 |
| | (142 | ) | | 183 |
|
| TOTAL EXPENSES | 30 |
| | 44 |
| | 41 |
| | 614 |
| | (106 | ) | | 623 |
|
| INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (22 | ) | | (43 | ) | | (41 | ) | | 978 |
| | (37 | ) | | 835 |
|
| Total (provision) benefit for income taxes | — |
| | 13 |
| | 15 |
| | (194 | ) | | 9 |
| | (157 | ) |
| Equity in net earnings of subsidiaries | 700 |
| | 574 |
| | 422 |
| | 22 |
| | (1,718 | ) | | — |
|
| NET INCOME (LOSS) | $ | 678 |
| | $ | 544 |
| | $ | 396 |
| | $ | 806 |
| | $ | (1,746 | ) | | $ | 678 |
|
| Less: noncontrolling interest | — |
| | — |
| | — |
| | 22 |
| | (22 | ) | | — |
|
| NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 678 |
| | $ | 544 |
| | $ | 396 |
| | $ | 784 |
| | $ | (1,724 | ) | | $ | 678 |
|
| | | | | | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | $ | 855 |
| | $ | 705 |
| | $ | 484 |
| | $ | 1,004 |
| | $ | (2,193 | ) | | $ | 855 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
| REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
| Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 653 |
| | $ | (25 | ) | | $ | 628 |
|
| Net investment income | 0 |
| | 0 |
| | 0 |
| | 293 |
| | (2 | ) | | 291 |
|
| Net realized investment gains (losses) | 0 |
| | 3 |
| | 0 |
| | (4 | ) | | (4 | ) | | (5 | ) |
| Net change in fair value of credit derivatives: | | | | | | | | | | | |
| Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | 47 |
| | — |
| | 47 |
|
| Net unrealized gains (losses) | — |
| | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) |
| Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 24 |
| | — |
| | 24 |
|
| Bargain purchase gain and settlement of pre-existing relationship | — |
| | — |
| | — |
| | 257 |
| | 2 |
| | 259 |
|
| Other | 0 |
| | 0 |
| | 0 |
| | 10 |
| | 0 |
| | 10 |
|
| TOTAL REVENUES | 0 |
| | 3 |
| | 0 |
| | 1,233 |
| | (29 | ) | | 1,207 |
|
| EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
| Loss and LAE | — |
| | — |
| | — |
| | 182 |
| | 1 |
| | 183 |
|
| Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 23 |
| | (10 | ) | | 13 |
|
| Interest expense | — |
| | 39 |
| | 40 |
| | 8 |
| | (10 | ) | | 77 |
|
| Other operating expenses | 23 |
| | 1 |
| | 2 |
| | 165 |
| | (3 | ) | | 188 |
|
| TOTAL EXPENSES | 23 |
| | 40 |
| | 42 |
| | 378 |
| | (22 | ) | | 461 |
|
| INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (23 | ) | | (37 | ) | | (42 | ) | | 855 |
| | (7 | ) | | 746 |
|
| Total (provision) benefit for income taxes | — |
| | 13 |
| | 15 |
| | (94 | ) | | 4 |
| | (62 | ) |
| Equity in net earnings of subsidiaries | 707 |
| | 623 |
| | 272 |
| | 34 |
| | (1,636 | ) | | — |
|
| NET INCOME (LOSS) | $ | 684 |
| | $ | 599 |
| | $ | 245 |
| | $ | 795 |
| | $ | (1,639 | ) | | $ | 684 |
|
| Less: noncontrolling interest | — |
| | — |
| | — |
| | 34 |
| | (34 | ) | | — |
|
| NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 684 |
| | $ | 599 |
| | $ | 245 |
| | $ | 761 |
| | $ | (1,605 | ) | | $ | 684 |
|
| | | | | | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | $ | 805 |
| | $ | 660 |
| | $ | 261 |
| | $ | 923 |
| | $ | (1,844 | ) | | $ | 805 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 503 |
| | $ | 175 |
| | $ | 105 |
| | $ | 469 |
| | $ | (898 | ) | | $ | 354 |
|
| Cash flows from investing activities | |
| | |
| | |
| | |
| | |
| | |
|
| Fixed-maturity securities: | |
| | |
| | |
| | |
| | |
| | |
|
| Purchases | — |
| | (75 | ) | | (15 | ) | | (1,552 | ) | | 27 |
| | (1,615 | ) |
| Sales | — |
| | 112 |
| | 12 |
| | 1,004 |
| | — |
| | 1,128 |
|
| Maturities | — |
| | 7 |
| | 0 |
| | 682 |
| | — |
| | 689 |
|
| Sales (purchases) of short-term investments, net | (11 | ) | | 218 |
| | 3 |
| | (450 | ) | | — |
| | (240 | ) |
| Net proceeds from financial guaranty variable entities’ assets | — |
| | — |
| | — |
| | 117 |
| | — |
| | 117 |
|
| Investment in subsidiaries | — |
| | (28 | ) | | — |
| | (69 | ) | | 97 |
| | — |
|
| Proceeds from sale of subsidiaries | — |
| | — |
| | — |
| | 139 |
| | (139 | ) | | — |
|
| Acquisition of MBIA UK, net of cash acquired | — |
| | — |
| | — |
| | 95 |
| | — |
| | 95 |
|
| Other | — |
| | — |
| | — |
| | 58 |
| | — |
| | 58 |
|
| Net cash flows provided by (used in) investing activities | (11 | ) | | 234 |
| | — |
| | 24 |
| | (15 | ) | | 232 |
|
| Cash flows from financing activities | |
| | |
| | |
| | |
| | |
| | |
|
| Return of capital | — |
| | — |
| | — |
| | (70 | ) | | 70 |
| | — |
|
| Capital contribution | — |
| | — |
| | 25 |
| | 3 |
| | (28 | ) | | — |
|
| Dividends paid | (53 | ) | | (390 | ) | | (128 | ) | | (380 | ) | | 898 |
| | (53 | ) |
| Repurchases of common stock | (431 | ) | | — |
| | — |
| | — |
| | — |
| | (431 | ) |
| Repurchases of common stock to pay withholding taxes | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (13 | ) |
| Net paydowns of financial guaranty variable entities’ liabilities | — |
| | — |
| | — |
| | (124 | ) | | — |
| | (124 | ) |
| Repayment/ extinguishment of long-term debt | — |
| | — |
| | — |
| | (2 | ) | | (27 | ) | | (29 | ) |
| Proceeds from options exercises | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Net cash flows provided by (used in) financing activities | (492 | ) | | (390 | ) | | (103 | ) | | (573 | ) | | 913 |
| | (645 | ) |
| Effect of exchange rate changes | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Increase (decrease) in cash and restricted cash | 0 |
| | 19 |
| | 2 |
| | (76 | ) | | — |
| | (55 | ) |
| Cash and restricted cash at beginning of period | 0 |
| | 1 |
| | 0 |
| | 126 |
| | — |
| | 127 |
|
| Cash and restricted cash at end of period | $ | 0 |
| | $ | 20 |
| | $ | 2 |
| | $ | 50 |
| | $ | — |
| | $ | 72 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 288 |
| | $ | 171 |
| | $ | 159 |
| | $ | 3 |
| | $ | (810 | ) | | $ | (189 | ) |
| Cash flows from investing activities | |
| | |
| | |
| | |
| | |
| | |
|
| Fixed-maturity securities: | |
| | |
| | |
| | |
| | |
| | |
|
| Purchases | (4 | ) | | (44 | ) | | (10 | ) | | (970 | ) | | — |
| | (1,028 | ) |
| Sales | 4 |
| | — |
| | 12 |
| | 861 |
| | — |
| | 877 |
|
| Maturities | — |
| | 23 |
| | — |
| | 838 |
| | — |
| | 861 |
|
| Sales (purchases) of short-term investments, net | (49 | ) | | (3 | ) | | (1 | ) | | 133 |
| | — |
| | 80 |
|
| Net proceeds from financial guaranty variable entities’ assets | — |
| | — |
| | — |
| | 590 |
| | — |
| | 590 |
|
| Investment in subsidiaries | — |
| | — |
| | — |
| | 4 |
| | (4 | ) | | — |
|
| Acquisition of CIFG, net of cash acquired | — |
| | — |
| | — |
| | (442 | ) | | 7 |
| | (435 | ) |
| Other | — |
| | 7 |
| | — |
| | (12 | ) | | (7 | ) | | (12 | ) |
| Net cash flows provided by (used in) investing activities | (49 | ) | | (17 | ) | | 1 |
| | 1,002 |
| | (4 | ) | | 933 |
|
| Cash flows from financing activities | |
| | |
| | |
| | |
| | |
| | |
| Return of capital | — |
| | — |
| | — |
| | (4 | ) | | 4 |
| | — |
|
| Dividends paid | (52 | ) | | (223 | ) | | (158 | ) | | (429 | ) | | 810 |
| | (52 | ) |
| Repurchases of common stock | (190 | ) | | — |
| | — |
| | — |
| | — |
| | (190 | ) |
Share repurchases to pay withholding taxes
| (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
| Net paydowns of financial guaranty variable entities’ liabilities | — |
| | — |
| | — |
| | (567 | ) | | — |
| | (567 | ) |
| Payment of long-term debt | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Proceeds from options exercises
| 6 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
|
| Net cash flows provided by (used in) financing activities | (238 | ) |
| (223 | ) |
| (158 | ) |
| (1,002 | ) |
| 814 |
|
| (807 | ) |
| Effect of exchange rate changes | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Increase (decrease) in cash and restricted cash | 1 |
| | (69 | ) | | 2 |
| | (1 | ) | | — |
| | (67 | ) |
| Cash and restricted cash at beginning of period | 0 |
| | 95 |
| | 8 |
| | 63 |
| | — |
| | 166 |
|
| Cash and restricted cash at end of period | $ | 1 |
| | $ | 26 |
| | $ | 10 |
| | $ | 62 |
| | $ | — |
| | $ | 99 |
|
| |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.
Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are:
•the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, the effectiveness, acceptance and distribution of COVID-19 vaccines and therapeutics, and the global consequences of the pandemic and such actions, including their impact on the factors listed below;
•consequences of the conflict in Ukraine, including economic sanctions, volatility in energy prices, and the potential for increased cyberattacks;
•changes in the world’s credit markets, segments thereof, interest rates, inflation, credit spreads or general economic conditions;
•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;
rating agency action, including a ratings downgrade, a change•the loss of investors 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 subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL's subsidiaries have insured;
developments in the world’s financial and capital markets that adversely affect obligors’ payment rates, Assured Guaranty’s loss experience,asset management strategies or its exposurethe failure to refinancing risk in transactions (which could result in substantial liquidity claims on its guarantees);attract new investors to Assured Guaranty’s asset management business;
•the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures;
•insured losses in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates;estimates for insurance exposures, including as a result of the failure to resolve Assured Guaranty’s Puerto Rico exposures in a manner substantially consistent with the support agreements signed to date;
•increased competition, including from new entrants into the financial guaranty industry;
•poor performance of Assured Guaranty’s asset management strategies compared to the performance of the asset management strategies of Assured Guaranty’s competitors;
•the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity, or to unanticipated consequences;
•the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, most of its financial guaranty contracts written in credit default swap (CDS) form, and certain consolidated variable interest entities (VIEs);
•rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on obligors, including sovereign debtors, resultingwatch for downgrade, or a change in a reduction in the valuerating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities in Assured Guaranty’s investment portfolio and in collateral posted by and to Assured Guaranty;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 the world’s credit markets, segments thereof, interest rates or general economic conditions;
the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default swap form;
•changes in applicable accounting policies or practices;
•changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions;
the impact of changes in the world’s economy and credit and currency markets and in applicable laws or regulations relating to the decision of the United Kingdom (U.K.) to exit the European Union (EU);
•the possibility that acquisitions or alternative investments 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;
deterioration in the financial condition of Assured Guaranty’s reinsurers, the amount and timing of reinsurance recoverables actually received and the risk that reinsurers may dispute amounts owed to Assured Guaranty under its reinsurance agreements;
•difficulties with the execution of Assured Guaranty’s business strategy;
•loss of key personnel;
•the effects of mergers, acquisitions and divestitures;
•natural or man-made catastrophes;catastrophes or pandemics;
•other risk factors identified in AGL’s filings with the U.S.United States (U.S.) Securities and Exchange Commission (the SEC);
•other risks and uncertainties that have not been identified at this time; and
•management’s response to these factors.
The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in AGL's 2016the Company’s 2021 Annual Report on 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-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.
For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Available Information
The Company maintains an Internetinternet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (under assuredguaranty.com/www.assuredguaranty.com/sec-filings) the Company's annual reportCompany’s Annual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent 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 assuredguaranty.com/www.assuredguaranty.com/governance) links to the Company'sCompany’s Corporate Governance Guidelines, itsthe Company’s Global Code of Conduct, AGL'sEthics, AGL’s Bye-Laws and the charters for the committees of its Board committees.of Directors. 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 assuredguaranty.com/www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-informationand Businesses pages)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 or social media account is not incorporated by reference into, and is not a part of, this report.
Executive SummaryOverview
This executive summary
Business
The Company reports its results of management’s discussionoperations in two distinct segments, Insurance and analysis highlights selected informationAsset Management, consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and may not contain allallocate resources. The Company’s Corporate division and other activities (including financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs)) are presented separately.
In the Insurance segment, the Company provides credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled
payment due on an obligation, including a debt service payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the information that is importantshortfall to readersthe holder of this Quarterly Report. For a more detailed descriptionthe obligation. The Company markets its credit protection products directly to issuers and underwriters of events, trendspublic finance and uncertainties,structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the capital, liquidity, credit, operational and market risksU.S. and the critical accounting policiesUnited Kingdom (U.K.), and estimates affectingalso 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, which are referred to as the specialty insurance and reinsurance business. 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.
In the Asset Management segment, the Company this Quarterly Report should be readprovides investment advisory services, which include the management of CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM) have managed structured, public finance and credit investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. The establishment, in the fourth quarter of 2019, of the Asset Management segment diversifies the risk profile and revenue opportunities of the Company. As of March 31, 2022, AssuredIM had $17.0 billion of assets under management (AUM), including $1.4 billion that is managed on behalf of Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC).
Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment. AssuredIM is compensated for its entiretyinvestment advisory services generally through management fees which are based on AUM, and may also earn performance fees calculated as a percentage of net profits or based on an internal rate of return referencing distributions made to investors, in additioneach case, in respect of funds, collateralized loan obligations (CLOs) and/or accounts which it advises.
The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (the U.S. Holding Companies), as well as other operating expenses attributed to AGL's 2016 Annual Report on Form 10-K.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 1, Financial Statements, Note 2, Segment Information.
Economic Environment
Economic activity in the U.S. and throughout the world expanded in 2021 and in the three month period ended March 31, 2022 (First Quarter 2022). According to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA), real gross domestic product (GDP) increased at an annual rate of 6.9% in the fourth quarter of 2021. Although an advance estimate released by the BEA showed that GDP decreased 1.4% in First Quarter 2022, the primary reason was reported to be as a result of trade, since net imports increased as supply chains improved and businesses continued to restock. More granular measures were positive, with a 4.7% increase in consumer spending and a 5.7% increase in business investment. At the end of March 2022, the U.S. unemployment rate, seasonally adjusted, stood at 3.6%, lower than where it started the quarter at 3.9%, and down from a pandemic high of 14.7% in April 2020. More globally, the Organization for Economic Co-operation and Development (OECD) estimates that GDP in the OECD area increased by 5.1% during 2021, with U.K. GDP estimated to have grown by 6.9% for the year, in each case after experiencing material contraction in 2020. The Company believes reported statistics indicatea more robust economy makes it less likely that positive economic momentum in the United States (U.S.) since the beginning of 2016 has continued through the three-month period ended September 30, 2017 (Third Quarter 2017). obligors whose obligations it guarantees will default.
According to the U.S. Bureau of Labor Statistics, (BLS), for the months of July through September 2017, the U.S. economy added an estimated 274 thousand jobs. Additionally, the BLS estimated that the seasonally adjusted monthly unemployment rate fell to 4.2% in September 2017, down from 4.4% at the end of the second quarter of 2017 and 4.5% at the end of the first quarter of 2017, and was lower than the May 2017 unemployment figure of 4.3%, which was already a 16-year low. The BLS’ analysis of the net effect of the hurricanes was to reduce the estimate of total non-farm payroll employment for September, while having no discernible effect on the national unemployment rate.
The U.S. Bureau of Economic Analysis reported that real gross domestic product (GDP) increased at an annualized rate of 3.1% in the second quarter of 2017, more than double the annualizedinflation rate in the first quarter of 2017. This representsU.S. over the thirteenth consecutive quarter of positive growth in real GDP.
U.S. home prices also continued to rise,12-month period ending March 2022 (the latest data available), as measured by the consumer price index for all urban consumers, rose to 8.5% before seasonal adjustment, the highest since December of 1981. The energy index rose 32% and the food index 8.8% over the same 12-month period, the most since the period ending May 1981. According to the U.K.’s Office for National Statistics (ONS), the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 6.2% in the 12 months ending March 2022, up from 5.5% in the 12 months ending February 2022 and 1.0% in the 12 months ending March 2021. Consumer price inflation does not impact the Company’s primary businesses directly, but may 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.
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 30-year AAA MMD rate started First Quarter 2022 at 1.49% but rose more than 100 basis points (bps) to end the quarter at 2.53%. The average rate for the quarter was 2.00%, above the 1.54% average for 2021. With the onset of the COVID-19 pandemic, the Federal Open Market Committee (FOMC) lowered the target range
for the federal funds rate to 0% to 0.25% in March 2020. However, at the FOMC’s meeting in March 2022, the FOMC decided to raise the target range for the federal funds rate to 0.25% to 0.50%, stating that it anticipated that ongoing increases in the target range will be appropriate. In addition, the FOMC said that it expected to begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. At the conclusion of its May 3-4, 2022 meeting, the FOMC again raised the federal funds target range, this time to 0.75% to 1%, reiterating that it anticipated that ongoing increases in the target range would be appropriate. In addition, the FOMC announced that it would begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities on June 1, 2022. The level and direction of interest rates impact the Company in numerous ways. For example, higher interest rates may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product, and, over time, also increase the amount the Company can earn on its largely fixed-income investment portfolio. Specifically, the level of interest rates on the U.S. municipal bonds the Company enhances influences how high a premium the Company can charge for its public finance financial guaranty insurance product, with higher interest rates generally increasing the premium rates the Company may charge. On the other hand, high interest rates decrease the amount of excess spread available to support the distressed residential mortgage-backed securities (RMBS) the Company insures and reduce the market value of its largely fixed rate fixed-maturity securities in the investment portfolio. The Company believes further increases in interest rates and spreads in 2022, should it occur, could increase demand for insurance and permit it to increase its premium rates on new business.
The difference, or credit spread, between the 30-year A-rated general obligation relative to the 30-year AAA MMD averaged 39 bps in First Quarter 2022 up from 33 bps in 2021 but still below the 42 bps in 2020. BBB credit spreads measured on the same basis averaged 72 bps in First Quarter 2022, up modestly from the 70 bps in full year 2021. The level of credit spreads also influences how high a premium the Company can charge for its financial guaranty insurance product, with tighter credit spreads generally lowering the premium rates the Company may charge.
Home prices continued their recent surge in the First Quarter of 2022. According to the National Association of Realtors, the median existing-home price for all housing types in March 2022 was $375,300, a 15% year-over-year increase and up from $358,000 in December 2021. Existing home sales were 5.8 million in March 2022, up 4.5% year over year. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, whichcovering all nine U.S. census divisions, reported an annual19.8% annualized gain in July of 5.9% whileFebruary 2022 (the latest data available), compared to 19.1% in the previous month. The 10-City Composite annual increase came in at 18.6%, compared to 17.3% in the previous month. The 20-City Composite posted a 5.8%an 20.2% year-over-year gain.
Atgain, compared to 18.9% in the September 20, 2017 meetingprevious month. Home prices in the U.S. impact the performance of the Federal Open Market Committee (FOMC)Company's insured RMBS portfolio. Improved home prices generally result in fewer losses or more reimbursements with respect to the Company's distressed insured RMBS risks, and may impact the amount of losses or reimbursements it projects for its distressed legacy RMBS insured portfolio.
Impact of COVID-19
Variants of COVID-19 continue to spread throughout the world, while the production, acceptance, and distribution of vaccines and therapeutics for it are proceeding unevenly across the globe. The emergence 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. Consequently, and due to the nature of the Company’s business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time.
From 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 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 significant federal funding to state and local governments in 2021 and the performance it observed, the Company’s surveillance department has reduced the supplemental procedures. However, it is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments. The Company has 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 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., the FOMC maintained the target range for the federal funds rate between 1.00%U.K. and 1.25%, and reiterated its prior position that additional rate hikes were very likely in 2018, with one also possible atFrance. By the end of this year. The FOMC announced thatFebruary 2022, the Company had reopened all of its offices, choosing a hybrid remote and office work model in October 2017 it plannedresponse to begin the balance sheet normalization program that was outlined in June, reducingemployee feedback and as part of its holdingscommitment to providing a safe and healthy workplace. Whether its
employees are working remotely or in a gradualhybrid remote and predictable manner. The FOMC pointed againoffice work model, the Company continues to sustained strength inprovide the labor market, increased household spending,services and expanded business investments as the primary drivers to increase the federal funds rate going forward. In its statement, the FOMC noted that economic growth in the Third Quarter was held back by the severe economic disruptions caused by Hurricanes Harvey, Irma, and Maria, but noted that growth would likely bounce back as economic activity resumes and rebuilding begins. Please refer to Part I, Item I, Financial Statements, Note 4, Outstanding Exposure and Note 5, Expected Loss to be Paid, for information on the effects of these hurricanes on the Company's Puerto Rico and other Caribbean exposures.communications it normally would.
The Company believes that continued increases in stock prices during the quarter are also indicative of positive economic momentum in the U.S.. U.S. stocks reached record highs, as investors anticipate another strong earnings season. The Dow Jones Industrial Average (DJIA), Nasdaq composite and the S&P 500 Index all set records highs during the quarter, with the DJIA recently touching 23,000 for the first time, and corporate earnings for the S&P S&P 500 Index remaining strong for three quarters in a row.
Average municipal interest rates remained relatively low by historical standards, but above the lows experienced in 2016, when 30-year AAA MMD rates were at times below 2%. Since July 2016, the 30-year AAA MMD rate increased from a low of 1.95% to as high as 3.06% on May 2, 2017, still low by historical standards. Since then, that MMD rate has declined to 2.84% as of September 29, 2017.
Financial Performance of Assured Guaranty
Financial Results
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
| Operating income (non-GAAP)(1) | 156 |
| | 497 |
| | 570 |
| | 756 |
|
| Gain (loss) related to the effect of consolidating FG VIEs (FG VIE consolidation) included in operating income | (1 | ) | | (11 | ) | | 9 |
| | (4 | ) |
| | | | | | | | |
| Net income (loss) per diluted share | $ | 1.72 |
| | $ | 3.60 |
| | $ | 5.48 |
| | $ | 5.06 |
|
| Operating income per share (non-GAAP)(1) | 1.29 |
| | 3.74 |
| | 4.62 |
| | 5.61 |
|
| Gain (loss) related to FG VIE consolidation included in operating income per share | (0.01 | ) | | (0.09 | ) | | 0.08 |
| | (0.03 | ) |
| | | | | | | | |
| Diluted shares | 120.7 |
| | 132.8 |
| | 123.5 |
| | 134.9 |
|
| | | | | | | | |
| Gross written premiums (GWP) | $ | 45 |
| | $ | 16 |
| | $ | 235 |
| | $ | 71 |
|
| Present value of new business production (PVP)(1) | 43 |
| | 50 |
| | 212 |
| | 129 |
|
| Gross par written | 3,417 |
| | 4,687 |
| | 13,248 |
| | 12,211 |
|
|
| | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Amount | | Per Share | | Amount | | Per Share |
| | (in millions, except per share amounts) |
| Shareholders' equity | $ | 6,878 |
| | $ | 58.32 |
| | $ | 6,504 |
| | $ | 50.82 |
|
| Non-GAAP operating shareholders' equity(1) | 6,590 |
| | 55.87 |
| | 6,386 |
| | 49.89 |
|
| Non-GAAP adjusted book value(1) | 8,820 |
| | 74.78 |
| | 8,506 |
| | 66.46 |
|
| Gain (loss) related to FG VIE consolidation included in non-GAAP operating shareholders' equity | 3 |
| | 0.01 |
| | (7 | ) | | (0.06 | ) |
| Gain (loss) related to FG VIE consolidation included in non-GAAP adjusted book value | (13 | ) | | (0.11 | ) | | (24 | ) | | (0.18 | ) |
| Common shares outstanding (2) | 117.9 |
| | | | 128.0 |
| | |
____________________ | |
(1) | Please refer to “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP) and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available. Please note that the Company changed its definition of Operating Income (non-GAAP), Non-GAAP Operating Shareholders' Equity and Non-GAAP Adjusted Book Value starting in fourth quarter 2016 in response to new non-GAAP guidance issued by the SEC in 2016. Please refer to “—Non-GAAP Financial Measures” for additional details. |
| |
(2) | Please refer to "Key Business Strategies – Capital Management" below for information on common share repurchases. |
Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses: changes in credit spreads of insured credit derivative obligations, changes in fair value of assets and liabilities of financial guaranty variable interest entities (FG VIEs) and committed capital securities (CCS), changes in the Company's own credit spreads, and changes in risk-free rates used to discount expected losses. Changes in credit spreads generally have the most significant effect on the fair value of credit derivatives and FG VIE assets and liabilities. In addition to non-economic factors, other factors such as: changes in expected losses, the amount and timing of refunding transactions and terminations, realized gains and losses on the investment portfolio (including other-than-temporary impairments), the effects of large settlements and transactions, acquisitions, and the effects of the Company's various loss mitigation strategies, among others, may also have a significant effect on reported net income or loss in a given reporting period.
Third Quarter 2017
Net income for Third Quarter 2017 was $208 million compared with $479 million in the three-month period ended September 30, 2016 (Third Quarter 2016). Net income in both Third Quarter 2017 and Third Quarter 2016 included significant gains attributable to our strategic initiatives. Third Quarter 2017 includes pretax commutation gains of $255 million related to the reassumption of previously ceded contracts (recorded in other income). Third Quarter 2016 included a pretax gain of $259 million related to the acquisition of CIFG Holding Inc. (together with its subsidiaries CIFGH) (CIFG Acquisition). Excluding these gains, net income decreased due mainly to increased loss and adjustment expenses (LAE) attributable to U.S. public finance losses and lower net earned premiums from refundings and terminations.
The Company reported operating income (non-GAAP) of $156 million in Third Quarter 2017, compared with $497 million in Third Quarter 2016. The variances in operating income (non-GAAP) are attributable to the same items described for net income.
Nine Months 2017
Net income for the nine-month period ended September 30, 2017 (Nine Months 2017) was $678 million compared with $684 million for the nine-month period ended September 30, 2016 (Nine Months 2016). Net income in both Nine Months 2017 and Nine Months 2016 also included significant gains attributable to our strategic initiatives. Nine Months 2017 includes pretax commutation gains of $328 million and a pretax gain of $58 million on the acquisition of MBIA UK Insurance Limited (MBIA UK) (MBIA UK Acquisition). Nine Months 2016 includes pretax gains of $259 million on the CIFG Acquisition. Excluding these gains, net income decreased due mainly to increased loss and adjustment expenses (LAE) attributable to U.S. public finance losses and lower net earned premiums from refundings and terminations.
The Company reported operating income (non-GAAP) of $570 million in Nine Months 2017, compared with $756 million in Nine Months 2016. The variances in operating income (non-GAAP) are attributable to the same items described for net income.
Shareholders' equity increased since December 31, 2016 due primarily to positive net income (including the effect of MBIA UK Acquisition) and higher net unrealized gains on available for sale investment securities recorded in accumulated other comprehensive income (AOCI), partially offset by share repurchases and dividends. Non-GAAP operating shareholders' equity and non-GAAP adjusted book value also increased since December 31, 2016 due primarily to the MBIA UK Acquisition, new business production and commutations, offset in part by loss development, share repurchases and dividends. Shareholders' equity per share, non-GAAP operating shareholders' equity per share and non-GAAP adjusted book value per share benefited from the repurchase program that has been in place since the beginning of 2013.
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 each described in more detail below:three areas: (1) insurance, (2) asset management and alternative investments, and (3) capital management.
NewInsurance
The Company seeks to grow the insurance business through new business production, acquisitions of remaining legacy monoline insurers or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio.
Capital management
Alternative strategies Growth of the Insured Portfolio
The Company seeks to create value, includinggrow its insurance portfolio through acquisitions, investmentsnew business production in each of its three markets: U.S. public finance, international infrastructure and commutations
Loss mitigation
New Business Production
global 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.
On the other hand, the persistently low interest rate environment hasand relatively tight U.S. municipal credit spreads have dampened demand for bond insurance and, after a number of yearscompared to the levels before the financial crisis that began in which the2008. The Company was essentially the only financial guarantor, there is now one other financial guarantor active in one of its markets.
U.S. Municipal Market Data and Penetration Rates (1)
Based on Sale Date
|
| | | | | | | | | | | |
| | Nine Months 2017 | | Nine Months 2016 | | Year Ended December 31, 2016 |
| | (dollars in billions, except number of issues and percent) |
| Par: | | | | | |
| New municipal bonds issued | $ | 271.6 |
| | $ | 323.3 |
| | $ | 423.7 |
|
| Total insured | $ | 16.8 |
| | $ | 18.5 |
| | $ | 25.3 |
|
| Insured by Assured Guaranty | $ | 9.8 |
| | $ | 10.1 |
| | $ | 14.2 |
|
| Number of issues: | | | | | |
| New municipal bonds issued | 7,583 |
| | 9,489 |
| | 12,271 |
|
| Total insured | 1,242 |
| | 1,404 |
| | 1,889 |
|
| Insured by Assured Guaranty | 634 |
| | 672 |
| | 904 |
|
| Market penetration based on: | | | | | |
| Par | 6.2 | % | | 5.7 | % | | 6.0 | % |
| Number of issues | 16.4 | % | | 14.8 | % | | 15.4 | % |
| Single A par sold | 26.9 | % | | 23.1 | % | | 22.6 | % |
| Single A transactions sold | 59.5 | % | | 55.1 | % | | 55.8 | % |
| $25 million and under par sold | 20.0 | % | | 17.1 | % | | 17.8 | % |
| $25 million and under transactions sold | 19.0 | % | | 16.9 | % | | 17.5 | % |
____________________(1) Source: Thomson Reuters.
Gross Written Premiums and
New Business Production
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| GWP | | | | | | | |
| Public Finance—U.S. | $ | 37 |
| | $ | 24 |
| | $ | 132 |
| | $ | 72 |
|
| Public Finance—non-U.S. | 8 |
| | (9 | ) | | 92 |
| | 6 |
|
| Structured Finance—U.S. | 1 |
| | 1 |
| | 3 |
| | (5 | ) |
| Structured Finance—non-U.S. | (1 | ) | | 0 |
| | 8 |
| | (2 | ) |
| Total GWP | $ | 45 |
| | $ | 16 |
| | $ | 235 |
| | $ | 71 |
|
| | | | | | | | |
| PVP (1): | | | | | | | |
| Public Finance—U.S. | $ | 39 |
| | $ | 25 |
| | $ | 137 |
| | $ | 89 |
|
| Public Finance—non-U.S. | 4 |
| | 2 |
| | 58 |
| | 16 |
|
| Structured Finance—U.S. (2) | 0 |
| | 23 |
| | 5 |
| | 24 |
|
| Structured Finance—non-U.S. (3) | — |
| | — |
| | 12 |
| | — |
|
| Total PVP | $ | 43 |
| | $ | 50 |
| | $ | 212 |
| | $ | 129 |
|
| Gross Par Written (1): | | | | | | | |
| Public Finance—U.S. | $ | 3,328 |
| | $ | 3,459 |
| | $ | 11,590 |
| | $ | 10,574 |
|
| Public Finance—non-U.S. | 89 |
| | 164 |
| | 1,260 |
| | 570 |
|
| Structured Finance—U.S. (2) | — |
| | 1,064 |
| | 243 |
| | 1,067 |
|
| Structured Finance—non-U.S. (3) | — |
| | — |
| | 155 |
| | — |
|
| Total gross par written | $ | 3,417 |
| | $ | 4,687 |
| | $ | 13,248 |
| | $ | 12,211 |
|
____________________
| |
(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) Includes capital relief triple-X excess of loss life reinsurance transactions written in 2017 and 2016.
(3) Relates to reinsurance of aircraft residual value insurance (RVI) policies.
GWP include amounts collected upfront on new business written, the present value of future premiums on new financial guaranty business written (discounted at risk free rates), as well as the effects of changes in the estimated lives of transactions in the inforce book of financial guaranty business.
Third Quarter 2017
In Third Quarter 2017, U.S. public finance GWP increased to $37 million from $24 million in Third Quarter 2016, due primarily to increased PVP. Thebelieves that if interest rates further increase in non-U.S. public2022, demand for bond insurance may improve.
In certain segments of the global infrastructure and structured finance GWP was due to higher new business production in Third Quarter 2017 than Third Quarter 2016 and changes in estimated lives in Third Quarter 2016 resulting in negative GWP.
U.S. public finance PVP increased in Third Quarter 2017 compared withmarkets the comparable prior-year period due to higher par written in the secondary market. Assured Guaranty's secondary market PVP increased by more than four times compared to with Third Quarter 2016. Assured Guaranty once again guaranteed the majority of insured par issued while maintaining an A- average rating on new business written.
Outside the U.S., the Company generated $4 million of public finance PVP in Third Quarter 2017. The two transactions written in Third Quarter 2017 were secondary market guaranties of regulated utilities.
The Company believes its financial guaranty product is competitive with other financing options inoptions. For example, certain segmentsinvestors may receive advantageous capital requirement treatment with the addition of the infrastructure market. Future business activity will be influenced by the typically long lead times for these types of transactions.
Structured finance transactions tend to have long lead times and may vary from period to period. In general, the Company expects that structured finance opportunities will increase in the future as the global economy recovers, interest rates rise, more issuers return to the capital markets for financings and institutional investors again utilize financial guaranties.Company’s guaranty. The Company considers its involvement in both international infrastructure and structured finance and international infrastructure transactions to be beneficial because such transactions diversify both the Company'sCompany’s business opportunities and its risk profile beyond U.S. public finance. U.S. structured finance PVP in Third Quarter 2016 primarily comprised a structured capital relief Triple-X excessThe timing of loss life reinsurance transaction.
Nine Months 2017
GWP increased in Nine Months 2017 compared to Nine Months 2016 due to increased new business production in global public finance. the international 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
| | | | | | | | | | | | | | | | | |
| | First Quarter 2022 | | First Quarter 2021 | | Year Ended December 31, 2021 |
| | (dollars in billions, except number of issues and percentages) |
| Par: | | | | | |
| New municipal bonds issued | $ | 96.8 | | | $ | 104.5 | | | $ | 456.7 | |
| Total insured | $ | 8.2 | | | $ | 8.5 | | | $ | 37.5 | |
| Insured by Assured Guaranty | $ | 4.8 | | | $ | 5.5 | | | $ | 22.6 | |
| Number of issues: | | | | | |
| New municipal bonds issued | 2,288 | | | 2,698 | | | 11,819 | |
| Total insured | 408 | | | 514 | | | 2,198 | |
| Insured by Assured Guaranty | 168 | | | 252 | | | 1,076 | |
| Bond insurance market penetration based on: | | | | | |
| Par | 8.5 | % | | 8.1 | % | | 8.2 | % |
| Number of issues | 17.8 | % | | 19.1 | % | | 18.6 | % |
| Single A par sold | 36.5 | % | | 27.0 | % | | 26.6 | % |
| Single A transactions sold | 57.7 | % | | 56.7 | % | | 56.6 | % |
| $25 million and under par sold | 20.8 | % | | 21.3 | % | | 21.3 | % |
| $25 million and under transactions sold | 20.7 | % | | 21.9 | % | | 21.7 | % |
____________________
(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 PVP increased in Nine Months 2017 compared with the comparable prior year period duebusiness.
The Company also considers opportunities to higher par written in both the primary and secondary market, while maintaining an A- average rating onacquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business written. Outside the U.S.,or their insured portfolios, generally through reinsurance. These transactions enable the Company generated $58 millionto 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 PVP, compared with $16 million in Nine Months 2016. PVP generated outsidearea, the U.S. in Nine Months 2017 was derived from three university housing transactions, one hospital transaction, a senior liquidity guarantee providedCompany 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 European infrastructure refinancing, and several secondary market regulated utility transactions. For Nine Months 2016, non-U.S.solution, result in more favorable outcomes in distressed public finance PVP was primarily derived from secondary marketsituations 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 guarantees written on utility bondscrises, and additional future premiums related tomore 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. 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, on March 15, 2022, a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with three 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 existingorder 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). The GO/PBA Plan restructured approximately $35 billion of debt (including the Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) bonds insured obligation.by the Company) and other claims against the government of Puerto Rico and certain entities as well as $50 billion in pension obligations (none of which pension obligations are insured by the Company), all consistent with the terms of the settlement embodied in a revised GO and PBA plan support agreement (PSA) entered into by AGM and AGC on February 22, 2021, with certain other stakeholders, the Commonwealth, and the financial oversight and management board (the FOMB) (GO/PBA PSA).
•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).
As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification (together, the March Puerto Rico Resolutions), including claim payments made by the Company under the March Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO and PBA was greatly reduced. The non-U.S. structured finance PVPCompany believes the consummation of the March Puerto Rico Resolutions on March 15, 2022, mark a milestone in Nine Months 2017its Puerto Rico loss mitigation efforts. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Exposure and the Insured Portfolio section below.
In connection with the consummation of the March Puerto Rico Resolutions the Company received substantial amounts of new recovery bonds and contingent value instruments (CVIs). The Company has sold some of the new recovery bonds and CVIs it received 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 March 31, 2022, is included in the lines “fixed-maturity securities - Puerto Rico, available-for-sale” and “fixed-maturity securities - Puerto Rico, trading” in the table “Investment Portfolio Carrying Value” of Item 1, Financial Statements, Note 7, Investments.
The Company is and has for several years been working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS.
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 strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of March 31, 2022, AssuredIM was 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 and liquid strategies relating to municipal obligations.
Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform. The Company intends to leverage the AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations.
The Company monitors certain operating metrics that are common to the reinsuranceasset 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 aircraft RVI policies.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 metric AUM, 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 funds managed by AssuredIM plus $550 million of the AGM, AGC and, until its merger with AGM on April 1, 2021, MAC, (collectively, the U.S. Insurance Subsidiaries) invested assets now managed by AssuredIM under an Investment Management Agreement (IMA). The Company is using these allocations to: (a) launch new products (CLOs, opportunity funds and liquid strategy funds) on the AssuredIM platform; and (b) enhance the returns of its own investment portfolio.
As of March 31, 2022, AG Asset Strategies LLC (AGAS) had committed $702 million to funds managed by AssuredIM (AssuredIM Funds), including $229 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, asset-based finance, healthcare structured capital and municipal bonds.
Under the IMA with AssuredIM, AGM and AGC have together invested $250 million to 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
In recent years, the The Company has developed strategies to efficiently manage capital within the Assured Guaranty group more efficiently.group.
From 2013 through November 2, 2017,May 5, 2022, the Company has repurchased 79.9135.8 million common shares for approximately $2,166$4,374 million, excluding commissions. Therepresenting approximately 70.0% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 23, 2022, the AGL Board of Directors (the Board) authorized on November 1, 2017,the repurchase of an additional $300$350 million of share repurchases. Ascommon shares. Under this and previous authorizations, as of November 2, 2017, $398May 5, 2022, the Company was authorized to purchase $240 million remains available under the Company's share repurchase authorizations. The Company expects the repurchases toof its common shares. Shares may be maderepurchased 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 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. Ittime and it does not have an expiration date. Please refer to Part I,See Item 1, Financial Statements, Note 17, Shareholders'14, 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 | | | 132.0 | | | $ | 31.50 | |
| 2022 (First Quarter) | 155 | | | 2.7 | | | 56.62 | |
| 2022 (through May 5) | 61 | | | 1.0 | | | 59.86 | |
| Cumulative repurchases since the beginning of 2013 | $ | 4,374 | | | 135.8 | | | 32.21 | |
|
| | | | | | | | | | |
| | Amount | | Number of Shares | | Average price per share |
| | (in millions, except per share data) |
| 2013 | $ | 264 |
| | 12.51 |
| | $ | 21.12 |
|
| 2014 | 590 |
| | 24.41 |
| | 24.17 |
|
| 2015 | 555 |
| | 21.00 |
| | 26.43 |
|
| 2016 | 306 |
| | 10.72 |
| | 28.53 |
|
| 2017 (January 1 - March 31) | 216 |
| | 5.43 |
| | 39.83 |
|
| 2017 (April 1 - June 30) | 135 |
| | 3.46 |
| | 39.05 |
|
| 2017 (July 1 - September 30) | 80 |
| | 1.85 |
| | 43.29 |
|
| 2017 (through November 2) | 20 |
| | 0.53 |
| | 37.48 |
|
| Cumulative repurchases since the beginning of 2013 | $ | 2,166 |
| | 79.91 |
| | $ | 27.11 |
|
Accretive Effect of Cumulative Repurchases (1)
|
| | | | | | | | | | | |
| | Third Quarter 2017 | | Nine Months 2017 | | As of
September 30, 2017 |
| | (per share) |
| Net income | $ | 0.61 |
| | $ | 1.88 |
| | |
| Operating income (non-GAAP) | 0.44 |
| | 1.56 |
| | |
| Shareholders' equity | | | | | $ | 12.46 |
|
| Non-GAAP operating shareholders' equity | | | | | 11.48 |
|
| Non-GAAP adjusted book value | | | | | 19.01 |
|
_________________
| | | | | | | | | | | |
(1) | Cumulative repurchases since the beginningFirst Quarter 2022 | | As of 2013.March 31, 2022 |
| (per share) |
| Net income (loss) attributable to AGL | $ | 0.51 | | | |
| Adjusted operating income | 0.75 | | | |
| Shareholders’ equity attributable to AGL | | | $ | 38.45 | |
| Adjusted operating shareholders' equity | | | 39.16 | |
| Adjusted book value | | | 68.20 | |
In December 2016, Assured Guaranty Municipal Corp. (AGM) repurchased $300 million_________________
(1) Represents the estimated accretive effect of its common stock from its parent, Assured Guaranty Municipal Holdings Inc. (AGMH). Subsequently, AGMH distributedcumulative repurchases since the proceeds as dividends to its immediate parent, Assured Guaranty US Holdings Inc. (AGUS), and in 2017, AGUS began using these proceeds to pay dividends to AGL. AGL has used these funds predominantly to repurchase its publicly traded common shares. On September 25, 2017, Municipal Assurance Corp. (MAC) redeemed 64,322beginning of its shares from Municipal Assurance Holdings Inc. (MAC Holdings), its direct parent, for approximately $104 million in cash and $146 million in marketable securities. MAC Holdings then distributed such assets to its shareholders, AGM and Assured Guaranty Corp. (AGC), in proportion to their respective 61% and 39% ownership interests, such that AGM received approximately $152 million ($6 million in cash and $146 million in securities) and AGC received approximately $98 million (all in cash). Please refer to Part I, Item 1, Financial Statements, Note 11, Insurance Company Regulatory Requirements, for information about dividend capacity of the Company's insurance companies.2013.
The Company also considers the appropriate mix of debt and equity in its capital structure, and may repurchase some of its debt from time to time. For example, in Nine Months 2017, AGUS purchased $28structure. On May 26, 2021, the Company issued $500 million of AGMH's outstanding Junior Subordinated Debentures. 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 were 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. 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.
Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases.
The Company may choose to redeem or make additional purchases of this or other Company debt in the future. Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures.
In order to reduce leverage,Municipal Assurance Corp. Merger
On April 1, 2021, Municipal Assurance Corp. (MAC) merged with and possibly rating agency capital charges,into AGM, with AGM as the Company has mutually agreed with beneficiaries to terminate selected financial guarantysurviving company. Upon the merger all direct insurance and credit derivative contracts. In particular, the Company has targeted investment grade securities for which claims are not expected but which carry a disproportionately large rating agency capital charge. The Company terminated investment grade financial guaranty and credit default swap (CDS) contracts with net parpolicies issued by MAC became direct insurance obligations of $1.7 billion in Third Quarter 2016. There were no investment grade financial guaranty or CDS terminations in Third Quarter 2017. The Company terminated investment grade financial guaranty and CDS contracts with net par of $298 million and $5.8 billion in Nine Months 2017 and Nine Months 2016, respectively. Please refer to Part I, Item 1, Financial Statements, Note 6, Contract Accounted for as Insurance and Note 8, Contract Accounted for as Credit Derivatives, for additional information on the effect of credit derivative terminations on the consolidated statements of operations.
Alternative Strategies
The Company considers alternative strategies in order to create long-term shareholder value. For example, the Company considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, or by commuting business that it had previously ceded. These transactions enable the Company to improve its future earnings and deploy some of its excess capital. In 2016, the Company established an alternative investments group to focus on deploying a portion of the Company's excess capital to pursue acquisitions and develop new business opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its core competencies.
MBIA UK Insurance Limited.On January 10, 2017 (the MBIA UK Acquisition Date), AGC completed its acquisition of MBIA UK. Please refer to Part I, Item I, Financial Statements, Note 2, Acquisitions, for additional information. In Nine Months 2017, the acquisition contributed net income of approximately $1.04 per share including the bargain purchase gain, gain on settlement of pre-existing relationships, realized gain on Zohar II Notes, and activity since the MBIA UK Acquisition Date. The effect on operating income was approximately $0.64 per share in Nine Months 2017. Shareholders' equity and non-GAAP operating shareholders' equity benefited by $0.65 per share and non-GAAP adjusted book value benefited by $2.52 per share as of the MBIA UK Acquisition Date.
MBIA UK changed its name to Assured Guaranty (London) Ltd. and re-registered as a public limited company to become Assured Guaranty (London) plc (AGLN). Assured Guaranty currently maintains AGLN as a stand-alone entity, but is actively working to combine AGLN with its other affiliated European insurance companies. As an initial step, on June 26, 2017, AGM purchased from its affiliate AGC, all of the shares of AGC’s European subsidiaries, and then immediately contributed these European subsidiaries to AGM’s wholly owned subsidiary, Assured Guaranty (Europe) plc (AGE). While the Company and its European subsidiaries have received certain regulatory approvals, the combination is subject to further regulatory and court approvals.AGM. As a result, the Company cannot predict whether, or when, such combination will be completed.wrote off the $16 million carrying value of MAC’s insurance licenses in the first quarter of 2021. This restructuring of the Company’s U.S. Insurance Subsidiaries simplified the organizational and capital structure, reduced costs, and increased the future dividend capacity of the U.S. Insurance Subsidiaries.
CIFG Holding Inc. On July 1, 2016, AGC acquired
Executive Summary
This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the issuedinformation that is important to readers of this Quarterly Report. For a more detailed description of events, trends and outstandinguncertainties, as well as the capital, stockliquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to the Company’s 2021 Annual Report on Form 10-K.
The primary drivers of CIFGH,volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs, and committed capital securities (CCS), loss and loss adjustment expense (LAE), foreign exchange gains (losses), the level of refundings of insured obligations, and changes in the value of the Company’s alternative investments, as well as the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period.
Financial Performance of Assured Guaranty
Financial Results
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions, except per share amounts) |
| GAAP | | | |
| Net income (loss) attributable to AGL | $ | 66 | | | $ | 11 | |
| Net income (loss) attributable to AGL per diluted share | $ | 0.98 | | | $ | 0.14 | |
| Weighted average diluted shares | 67.4 | | | 77.5 | |
| | | |
| Non-GAAP | | | |
| Adjusted operating income (loss) (2) | $ | 90 | | | $ | 43 | |
| Adjusted operating income per diluted share | $ | 1.34 | | | $ | 0.55 | |
| Weighted average diluted shares | 67.4 | | | 77.5 | |
| | | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (10) | | | $ | — | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.14) | | | $ | — | |
| | | |
| Components of total adjusted operating income (loss) | | | |
| Insurance segment | $ | 133 | | | $ | 79 | |
| Asset Management segment | — | | | (7) | |
| Corporate division | (33) | | | (29) | |
| Other (1) | (10) | | | — | |
| Adjusted operating income (loss) | $ | 90 | | | $ | 43 | |
| | | |
| Insurance Segment | | | |
| Gross written premiums (GWP) | $ | 70 | | | $ | 87 | |
Present value of new business production (PVP) (2) | 69 | | | 86 | |
| Gross par written | 4,471 | | | 5,472 | |
| | | |
| Asset Management Segment | | | |
| AUM | | | |
| Inflows - third party | $ | 91 | | | $ | 873 | |
| Inflows - intercompany | — | | | 145 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | As of December 31, 2021 |
| Amount | | Per Share | | Amount | | Per Share |
| (in millions, except per share amounts) |
| Shareholders’ equity attributable to AGL | $ | 5,802 | | | $ | 89.20 | | | $ | 6,292 | | | $ | 93.19 | |
| Adjusted operating shareholders' equity (2) | 5,860 | | | 90.09 | | | 5,991 | | | 88.73 | |
| Adjusted book value (2) | 8,665 | | | 133.21 | | | 8,823 | | | 130.67 | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | 22 | | | 0.34 | | | 32 | | | 0.47 | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | 13 | | | 0.19 | | | 23 | | | 0.34 | |
| Common shares outstanding (3) | 65.0 | | | | | 67.5 | | | |
____________________
(1) Relates to the effect of consolidating FG VIEs and CIVs.
(2) See “—Non-GAAP Financial Measures” for $450.6a 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.
(3) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases.
Condensed Consolidated Results of Operations
Condensed Consolidated Results of Operations
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | (in millions) |
| Revenues: | | | |
| Net earned premiums | $ | 214 | | | $ | 103 | |
| Net investment income | 62 | | | 70 | |
| Asset management fees | 34 | | | 24 | |
| Net realized investment gains (losses) | 3 | | | (3) | |
| Fair value gains (losses) on credit derivatives | (3) | | | (19) | |
| Fair value gains (losses) on CCS | 1 | | | (19) | |
| Fair value gains (losses) on FG VIEs | 6 | | | 5 | |
| Fair value gains (losses) on CIVs | 14 | | | 16 | |
| Foreign exchange gains (losses) on remeasurement | (30) | | | — | |
| Other income (loss) | (1) | | | — | |
| Total revenues | 300 | | | 177 | |
| Expenses: | | | |
| Loss and LAE | 57 | | | 30 | |
| Interest expense | 20 | | | 21 | |
| Amortization of deferred acquisition costs (DAC) | 4 | | | 3 | |
| Employee compensation and benefit expenses | 73 | | | 60 | |
| Other operating expenses | 42 | | | 57 | |
| Total expenses | 196 | | | 171 | |
| Income (loss) before income taxes and equity in earnings (losses) of investees | 104 | | | 6 | |
| Equity in earnings (losses) of investees | (11) | | | 9 | |
| Income (loss) before income taxes | 93 | | | 15 | |
| Less: Provision (benefit) for income taxes | 18 | | | — | |
| Net income (loss) | 75 | | | 15 | |
| Less: Noncontrolling interests | 9 | | | 4 | |
| Net income (loss) attributable to Assured Guaranty Ltd. | $ | 66 | | | $ | 11 | |
| | | |
| Effective tax rate | 20.0 | % | | (0.9) | % |
Net income attributable to AGL for First Quarter 2022 was higher compared with the three month period ended March 31, 2021 (First Quarter 2021) primarily due to:
•higher net earned premiums of $214 million in cashFirst Quarter 2022 compared with $103 million in First Quarter 2021,
•fair value gains on CCS in First Quarter 2022 compared with losses in First Quarter 2021, and
•lower fair value losses on credit derivatives in First Quarter 2022 compared with First Quarter 2021.
These increases were offset in part by:
•foreign exchange losses on remeasurement in First Quarter 2022,
•higher loss expense in First Quarter 2022 compared First Quarter 2021, and
•losses in equity method alternative investments.
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%, French subsidiaries 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. controlled foreign corporation. The effective tax rate in First Quarter 2022 was higher than in First Quarter 2021 due primarily to differences in the portion of income generated by various jurisdictions.
Adjusted Operating Income
Adjusted operating income in First Quarter 2022 was $90 million, compared with $43 million in First Quarter 2021. The increase was primarily attributable to higher insurance segment adjusted operating income due to the March Puerto Rico Resolutions. See “— Results of Operations — Reconciliation to GAAP” below.
Book Value and Adjusted Book Value
Shareholders’ equity attributable to AGL declined mainly due to unrealized losses on the available-for-sale fixed-maturity investment portfolio that contributed $2.23were a result of higher interest rates and share repurchases. Adjusted operating shareholders’ equity and adjusted book value declined from December 31, 2021, mainly due to share repurchases and dividends, partially offset, in the case of adjusted book value, by net written premiums on new business production.
Shareholder’s equity attributable to AGL per share, to shareholders'adjusted operating shareholders’ equity $2.23 per share and adjusted book value per share were $89.20, $90.09 and $133.21, respectively as of March 31, 2022. Shareholders’ equity per share declined primarily due to non-GAAPunrealized losses on the available-for-sale fixed maturity portfolio. The increase in adjusted operating shareholders’ equity per share and adjusted book value per share was primarily due to the accretive effect of the share repurchase program. In the case of adjusted book value per share, net premiums written in the Insurance segment also contributed to the increase compared with December 31, 2021. See “— Overview — Key Business Strategies , Accretive Effect of Cumulative Repurchases” table above. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and $3.85 per share to non-GAAP adjusted book value.
Other Matters
Russia’s Invasion of Ukraine
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 probable 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.
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 $327 million in net par outstanding as of March 31, 2022, comprising $255 million net par exposure to the sovereign debt of Poland and $72 million net par exposure to a toll road in Hungary. The Company rates the toll road exposure below-investment-grade (BIG).
Inflation
As described above under "Overview -- Economic Environment", by some measures consumer inflation in the U.S. and the U.K. has been higher in the last few months than it has been in decades, and interest rates generally have increased. Concerns have been expressed in the financial press about inflation taking hold in the economy. Inflation and higher interest rates could impact the Company in numerous ways. For example, higher interest rates might make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product, and, over time, also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. On the other hand, high interest rates would decrease the amount of excess spread available to support the distressed RMBS the Company insures, would reduce the market value of its largely fixed rate fixed maturity investment portfolio and may make it more difficult for obligors to repay obligations the Company guarantees. The Federal Reserve Board has communicated its intention to raise interest rates, and the Company believes further increases in interest rates and spreads in 2022, should they occur, could increase demand for insurance and permit the Company to increase its premium rates on new business, although there can be no assurance that this would occur.
LIBOR Sunset
ICE Benchmark Administration (IBA) and U.K. Financial Conduct Authority (FCA) first announced in 2017 that the publication of London Interbank Offered Rate (LIBOR) would cease at the dateend of acquisition. Please refer2021. Many legal documents entered into prior to Part II, Item 8, "Financial Statements and Supplementary Data", Note 2, Acquisitions,that time did not include robust fallback language contemplating the permanent suspension of the Company's 2016 Annual Reportpublication of LIBOR. On March 5, 2021, IBA and FCA 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 Company believes that the continued publication of U.S. Dollar LIBOR on Form 10-K, for additional information.the current basis after June 2023 is unlikely. The publication of all sterling LIBOR rates ceased on December 31, 2021, as originally announced.
Alternative Investments. The alternative investments group has been investigating a number of new business opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its core competencies, including, among others, both controlling and non-controlling investments in investment managers. 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.
Separately, in September, 2017, the Company acquired a minority interest in Wasmer, Schroeder & Company LLC, an independent investment advisory firm specializing in separately managed accounts (SMAs).
The Company continueshas exposure to investigate additional opportunities.
Commutations. DuringLIBOR in the first quarterfollowing areas: (i) issuers of 2017,obligations the Company entered intoinsures have obligations, assets and hedges that reference LIBOR, and some loss mitigation securities held in the investment portfolio reference LIBOR, (ii) debt issued by the U.S. Holding Companies currently pay or will convert to, a commutation agreementfloating interest rate tied to reassume the entire portfolio previously ceded to one of its unaffiliated reinsurers, consisting predominantly (over 97%) of U.S. public finance and international public and project finance exposures. During Third Quarter 2017,LIBOR, (iii) CCS from which the Company enteredbenefits pay interest tied to LIBOR, and (iv) certain obligations issued by, and certain assets owned by, the Company’s CIVs pay interest tied to LIBOR.
U.S. Dollar LIBOR. On March 15, 2022, the U.S. president signed into two commutation agreements. In one case, it reassumedlaw the entire portfolio previously cededAdjustable Interest Rate (LIBOR) Act (the LIBOR Act) which provides, among other things, a transition to one of its unaffiliated reinsurers under quota share reinsurance, consisting predominantly of U.S. public financethe Secured Overnight Finance Rate (SOFR) as a benchmark replacement for LIBOR-based contracts that do not have adequate fallback language or a replacement rate is not selected by a determining person. The LIBOR Act eliminates the need to seek amendments to our LIBOR-based contracts that do not contain adequate fallback language. New York and international public and project finance exposures. Inother states have also passed legislation similar to the other case it reassumed a portion of the portfolio previously ceded to one of its other unaffiliated reinsurers. These commutations resulted in gains of $255 million and $328 million (recorded in other income) for Third Quarter 2017 and Nine Months 2017, respectively, and additional net unearned premium reserve of $62 million and $80 million for such periods, respectively.LIBOR Act.
Sterling LIBOR. The Company may inis cooperating with the future enter into new commutation agreements reassuming portions of its remaining ceded business.
Loss Mitigation
In an effortrelevant parties to avoid or reduce potential lossesamend the relevant documents referencing sterling LIBOR in its insurance portfolios, the Company employs a number of strategies.
In the public finance area,insured portfolio to instead reference Sterling Overnight Interbank Average Rate (SONIA), and the Company believes thatsuch amendments will be completed by year end 2022. In the meantime, the FCA has authorized temporary use of synthetic sterling LIBOR, which approximates what sterling LIBOR might have been.
Income Taxes
The U.S. Internal Revenue Service and Department of the Treasury issued final and proposed regulations in October 2020 relating to the tax treatment of passive foreign investment companies (PFIC). The final regulations are not expected to have a material impact to the Company’s business operation or its experienceshareholders 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, have resulted in more favorable outcomes in distressed public finance situations than would have been the case without its participation, as illustrated, for example, by the Company's role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises. Currently, for example, the Company is actively working to mitigate potential losses in connection with the obligations it insures of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights, and it has initiated several 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, please refer to Part I, Item 1, Financial Statements, Note 4, Outstanding Exposure.
The Company is currently working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans and so improve the performance of the related RMBS.
The Company also continues to purchase attractively priced obligations, including below-investment-grade (BIG) obligations, that it has insured and for which it has expected lossesproposed regulations are continuing to be paid, in order to mitigate the economic effectevaluated.
2017 (excluding the value of the Company's insurance) was $1,042 million, with a par of $1,661 million (including bonds related to FG VIEs of $44 million in fair value and $229 million in par).
In some instances, the terms of the Company's policy gives 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.
In an effort to recover losses the Company experienced in its insured U.S. RMBS portfolio, the Company also continues to pursue providers of representations and warranties (R&W) by enforcing R&W provisions in contracts, negotiating agreements with R&W providers relating to those provisions and, where appropriate, pursuing litigation against R&W providers.
Other Events
The Company continues to monitor developments related to the referendum held in the U.K. on June 23, 2016, in which a majority voted to exit the EU, known as "Brexit", and the U.K.’s service of formal notice on March 29, 2017 to the European Council of its wish to withdraw under Article 50 of the Treaty on EU. The Company may take action in anticipation of or in reaction to Brexit-related developments, especially those related to financial services regulation. The Company cannot predict the direction Brexit-related developments will take nor the impact of those developments on the economies of the markets the Company serves.
Results of Operations
Estimates and Assumptions
Critical Accounting Estimates
The Company’s consolidatedpreparation of financial statements include amountsin accordance with GAAP requires the application of accounting policies that are determined usingoften involve a significant degree of judgment and require the Company to make estimates and assumptions. The actual amounts realized could ultimately be materially different fromassumptions, based on available information, that affect the amounts currently provided forof assets, liabilities, revenues and expenses reported in the Company’s consolidated financial statements. Management believesThe inputs into our estimates and assumptions consider the most significant items requiringeconomic implications of COVID-19. Estimates are inherently subjectivesubject to change and complexactual results could differ from those estimates, and the differences may be material to the Consolidated Financial Statements.
Critical estimates and assumptions are expected losses, fair valueevaluated 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 other-than-temporary impairment, deferred income taxes, and premium revenue recognition. The following discussion of theassumptions and that reported results of operations includes information regardingwill not be materially affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions used for these itemsfrom time to time.
The accounting policies that the Company believes are the most dependent on the application of judgment, estimates and should be read in conjunction with the notes to the Company’s consolidated financial statements.
An understandingassumptions are listed below. See Part II. Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, of the Company’s accounting policies is of critical importance to understanding its consolidated financial statements. See Part II, Item 8. “Financial Statements and Supplementary Data” of the Company's 20162021 Annual Report on Form 10-K, for a discussion of 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 Part II. Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s 2021 Annual Report on Form 10-K, for further details regarding sensitivity analysis.
•Expected loss estimation process,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 fair value methodologies.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 carries a significant amountanalyzes the operating performance of its assets and a portion of its liabilities at fair value, the majority of which are measured at fair value on a recurring basis. Level 3 assets, consisting primarily of FG VIE assets, credit derivative assets and investments, represented approximately 16% and 19% of the total assets that are measured at fair value on a recurring basiseach segment using each segment’s adjusted operating income as of September 30, 2017 and December 31, 2016, respectively. All of the Company's liabilities that are measured at fair value are Level 3. Please refer to Part I,described in Item 1, Financial Statements, Note 7, Fair Value Measurement, for additional information about assets and liabilities classified as Level 3.2, Segment Information.
Insurance Segment Results
Insurance Segment Results
| | | | | | | | | | | |
| | First Quarter |
| 2022 | | 2021 |
| | (in millions) |
| Segment revenues | | | |
| Net earned premiums and credit derivative revenues | $ | 219 | | | $ | 107 | |
| Net investment income | 63 | | | 73 | |
| Other income (loss) | (4) | | | (1) | |
| Total segment revenues | 278 | | | 179 | |
| Segment expenses | | | |
| Loss expense | 60 | | | 30 | |
| Interest expense | 1 | | | — | |
| Amortization of DAC | 4 | | | 3 | |
| Employee compensation and benefit expenses | 38 | | | 36 | |
| Other operating expenses | 19 | | | 37 | |
| Total segment expenses | 122 | | | 106 | |
| Equity in earnings (losses) of investees | (1) | | | 19 | |
| Segment adjusted operating income (loss) before income taxes | 155 | | | 92 | |
| Less: Provision (benefit) for income taxes | 22 | | | 13 | |
| Segment adjusted operating income (loss) | $ | 133 | | | $ | 79 | |
Consolidated Results of Operations
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 |
| 2016 |
| | (in millions) |
| Revenues: | | | | | | | |
| Net earned premiums | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
| Net investment income | 99 |
| | 94 |
| | 322 |
| | 291 |
|
| Net realized investment gains (losses) | 7 |
| | (2 | ) | | 54 |
| | (5 | ) |
| Net change in fair value of credit derivatives: | | | | | | | |
| Realized gains (losses) and other settlements | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
| Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
| Net change in fair value of credit derivatives | 58 |
| | 21 |
| | 106 |
| | 24 |
|
| Fair value gains (losses) on CCS | (4 | ) | | (23 | ) | | (4 | ) | | (50 | ) |
| Fair value gains (losses) on FG VIEs | 3 |
| | (11 | ) | | 25 |
| | 11 |
|
| Bargain purchase gain and settlement of pre-existing relationships | — |
| | 259 |
| | 58 |
| | 259 |
|
| Other income (loss) | 274 |
| | (3 | ) | | 385 |
| | 49 |
|
| Total revenues | 623 |
| | 566 |
| | 1,458 |
| | 1,207 |
|
| Expenses: | | | | | | | |
| Loss and LAE | 223 |
| | (9 | ) | | 354 |
| | 183 |
|
| Amortization of deferred acquisition costs | 5 |
| | 4 |
| | 13 |
| | 13 |
|
| Interest expense | 24 |
| | 26 |
| | 73 |
| | 77 |
|
| Other operating expenses | 58 |
| | 65 |
| | 183 |
| | 188 |
|
| Total expenses | 310 |
| | 86 |
| | 623 |
| | 461 |
|
| Income (loss) before provision for income taxes | 313 |
| | 480 |
| | 835 |
| | 746 |
|
| Provision (benefit) for income taxes | 105 |
| | 1 |
| | 157 |
| | 62 |
|
| Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
Net Earned Premiums and Credit Derivative Revenues
Premiums are earned and recognized over the contractual lives, or in the case of insured obligations backed by homogeneous pools of insured obligations,assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums are expected to 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. Please refer to Part I,combination or reassumptions of previously ceded business. See Item 1, Financial Statements, Note 6,5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information and the expected timing of future premium earnings.information.
Net Earned Premiums
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 |
| 2016 |
| | (in millions) |
| Financial guaranty insurance: | | | | | | | |
| Public finance | | | | | | | |
| Scheduled net earned premiums and accretion | $ | 76 |
| | $ | 80 |
| | $ | 240 |
| | $ | 222 |
|
| Accelerations: | | | | | | | |
| Refundings | 84 |
| | 105 |
| | 189 |
| | 267 |
|
| Terminations | — |
| | 21 |
| | 1 |
| | 21 |
|
| Total accelerations | 84 |
| | 126 |
| | 190 |
| | 288 |
|
| Total Public finance | 160 |
| | 206 |
| | 430 |
| | 510 |
|
| Structured finance(1) | | | | | | | |
| Scheduled net earned premiums and accretion | 23 |
| | 25 |
| | 67 |
| | 74 |
|
| Terminations | 3 |
| | — |
| | 14 |
| | 44 |
|
| Total structured finance | 26 |
| | 25 |
| | 81 |
| | 118 |
|
| Other | 0 |
| | — |
| | 1 |
| | 0 |
|
| Total net earned premiums | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
____________________
| |
(1) | Excludes $3 million and $4 million for Third Quarter 2017 and 2016, respectively, and $11 million and $12 million for Nine Months 2017 and 2016, respectively, related to consolidated FG VIEs. |
Net earned premiums decreased in Third Quarter 2017 compared with Third Quarter 2016 due primarily to lower accelerations. Net earned premiums decreased in Nine Months 2017 compared with Nine Months 2016 due primarily to lower accelerations, offset in part by higher scheduled net earned premiums related to recent acquisitions. At September 30, 2017, $3.5 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts. The MBIA UK Acquisition increased deferred premium revenue by $383 million at the date of the acquisition. The CIFG Acquisition increased deferred premium revenue by $296 million.
The change in net earned premiums due to accelerations isare attributable to changes in the expected lives of insured obligations driven by (a)by: (i) refundings of insured obligationsobligations; or (b)(ii) terminations of insured obligations either through negotiated agreements or the exercise of ourthe Company’s contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market and have been at historically high levels in recent years due primarily to the low interest rate environment, which has allowed manywhen municipalities and other public finance issuers tocan refinance their debt obligations at lower rates.rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When 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 remaining nonrefundable deferred premium revenue remaining.revenue. The amortization of our 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 polices under the March Puerto Rico Resolutions.
Terminations are generally negotiated agreements with issuersbeneficiaries resulting in the extinguishment of the Company’s insurance obligation with respect to the insured obligations.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, such that the Company acceleratesacceleration of the recognition of the associated unearned premiums.deferred premium revenue and the reduction of any remaining premiums receivable.
The Company has not written any new credit derivatives since 2009. Other than credit derivatives that may be acquired in business combinations and reinsurance agreements, or as part of loss mitigation strategies, credit derivative exposure is expected to decline.
Insurance Segment
Net Investment IncomeEarned Premiums and Credit Derivative Revenues
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Net earned premiums: | | | |
| Financial guaranty insurance: | | | |
| Public finance | | | |
| Scheduled net earned premiums (1) | $ | 71 | | | $ | 72 | |
| Accelerations: | | | |
| Refundings | 128 | | | 16 | |
| Terminations | — | | | — | |
| Total accelerations | 128 | | | 16 | |
| Total public finance | 199 | | | 88 | |
| Structured finance scheduled net earned premiums (1) | 15 | | | 15 | |
| Specialty insurance and reinsurance | 1 | | | 1 | |
| Total net earned premiums | 215 | | | 104 | |
| | | |
| Credit derivative revenues: | | | |
| Scheduled net earned premiums | 2 | | | 3 | |
| Accelerations | 2 | | | — | |
| Total credit derivative revenues | 4 | | | 3 | |
| Total net earned premiums and credit derivative revenues | $ | 219 | | | $ | 107 | |
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues in First Quarter 2022 increased compared with First Quarter 2021 primarily due to refundings of $104 million associated with the March Puerto Rico Resolutions as discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of March 31, 2022, $3.6 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.
New Business Production
Gross Written Premiums and
New Business Production
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| GWP | | | |
| Public Finance—U.S. | $ | 49 | | | $ | 79 | |
| Public Finance—non-U.S. | 16 | | | 5 | |
| Structured Finance—U.S. | 5 | | | 3 | |
| Structured Finance—non-U.S. | — | | | — | |
| Total GWP | $ | 70 | | | $ | 87 | |
| PVP (1): | | | |
| Public Finance—U.S. | $ | 49 | | | $ | 81 | |
| Public Finance—non-U.S. | 12 | | | 3 | |
| Structured Finance—U.S. | 2 | | | 2 | |
| Structured Finance—non-U.S. (1) | 6 | | | — | |
| Total PVP | $ | 69 | | | $ | 86 | |
Gross Par Written (2): | | | |
| Public Finance—U.S. | $ | 3,931 | | | $ | 5,427 | |
| Public Finance—non-U.S. | 223 | | | — | |
| Structured Finance—U.S. | 60 | | | 45 | |
| Structured Finance—non-U.S. (1) | 257 | | | — | |
| Total gross par written | $ | 4,471 | | | $ | 5,472 | |
| Average rating on new business written | A- | | A- |
____________________
(1) First Quarter 2022 PVP and gross par written includes the present value of future premiums and exposure, respectively, associated with a financial guarantee written by the Company that, under GAAP, is accounted for under ASC 460, Guarantees.
(2) 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.”
U.S. public finance GWP and PVP in First Quarter 2022 was lower than the comparable GWP and PVP in First Quarter 2021, primarily due to a large transaction closed in First Quarter 2021 that did not recur. The average rating of U.S. public finance par written was A- in First Quarter 2022, which is consistent with the average rating in First Quarter 2021. The Company's direct par written represented 58% of the total U.S. municipal market insured issuance in First Quarter 2022, compared with 65% in First Quarter 2021, and the Company’s penetration of all municipal issuance was 4.9% in First Quarter 2022 compared with 5.3% in First Quarter 2021.
In First Quarter 2022, non-U.S. public finance GWP and PVP were primarily attributable to a U.K. water liquidity guarantee and a restructuring of an existing U.K. water transaction.
In First Quarter 2022, structured finance GWP is primarily attributable to U.S. credits. Non-U.S. structured finance PVP primarily includes guarantees of rental income cash flows, for which no GWP is reported under GAAP.
Income from Investment Portfolio
Net investment income is a function of the yield that the Company earns on invested assetsavailable-for-sale fixed-maturity securities and short-term investments, and the size of thesuch portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets.securities in this portfolio.
Net Investment Income (1)
Equity method investments in the Insurance segment include investments that the U.S. Insurance Subsidiaries make in AssuredIM Funds, as well as other alternative investments. The income (loss) on such investments is reported in “equity in earnings (losses) of investees” and typically represents the change in net asset value (NAV) of AssuredIM Funds and the Company’s share of earnings of its other equity method alternative investments. The U.S. Insurance Subsidiaries are authorized
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Income from fixed-maturity securities managed by third parties | $ | 74 |
| | $ | 75 |
| | $ | 224 |
| | $ | 231 |
|
| Income from internally managed securities: | | | | | | | |
| Fixed maturities | 27 |
| | 19 |
| | 100 |
| | 58 |
|
| Other | 1 |
| | 2 |
| | 5 |
| | 8 |
|
| Gross investment income | 102 |
| | 96 |
| | 329 |
| | 297 |
|
| Investment expenses | (3 | ) | | (2 | ) | | (7 | ) | | (6 | ) |
| Net investment income | $ | 99 |
| | $ | 94 |
| | $ | 322 |
| | $ | 291 |
|
Insurance Segment
Income from Investment Portfolio
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Net investment income | | | |
| Externally managed | $ | 47 | | | $ | 51 | |
| Loss mitigation securities and other | 12 | | | 17 | |
| Managed by AssuredIM (1) | 4 | | | 4 | |
| Intercompany loans | 2 | | | 2 | |
| Investment income | 65 | | | 74 | |
| Investment expenses | (2) | | | (1) | |
| Net investment income | $ | 63 | | | $ | 73 | |
| | | |
| Other income: | | | |
| Unrealized gain (loss) on trading securities | $ | (4) | | | $ | — | |
| | | |
| Equity in earnings (losses) of investees | | | |
| AssuredIM Funds | $ | 11 | | | $ | 10 | |
| Other | (12) | | | 9 | |
| Equity in earnings (losses) of investees | $ | (1) | | | $ | 19 | |
____________________
| |
(1) | Net investment income excludes $2 million and $1 million for Third Quarter 2017 and 2016, respectively, and $4 million and $8 million for Nine Months 2017 and 2016, respectively, related to securities in the investment portfolio owned by AGC and AGM that were issued by consolidated FG VIEs. |
(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.
Net investment income for ThirdFirst Quarter 2017 increased2022 decreased compared to ThirdFirst Quarter 2016 due2021, primarily to higher income from internally managed securities. The higher income is due primarily to improved underlying cash flow and the early payoff of certain investments.
Net investment income for Nine Months 2017 increased compared to Nine Months 2016 due primarily to the accretion on the Zohar II 2005-1 (the Zohar II Notes) (which was used as consideration for the purchase of MBIA UK) prior to the MBIA UK Acquisition Date and also due to improved underlying cash flow andlower average balances in fixed-maturity securities as short term investments were accumulated to meet liquidity needs as a result of the early payoffconsummation of certain investments.
the March Puerto Rico Resolutions on March 15, 2022. The overall pre-tax book yield was 3.59%3.15% as of September 30, 2017March 31, 2022 and 3.57%3.23% as of September 30, 2016, respectively.March 31, 2021. Excluding the internally managed portfolio, pre-tax book yield was 3.12%2.93% as of September 30, 2017 compared with 3.32%March 31, 2022 and 2.94% as of September 30, 2016. The declineMarch 31, 2021.
Equity in yield for the externally managed portfolioearnings of AssuredIM Funds in First Quarter 2022 was primarily a result of lower yielding assets related to the MBIA UK investment portfolio.
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Gross realized gains on available-for-sale securities | $ | 23 |
| | $ | 4 |
| | $ | 92 |
| | $ | 24 |
|
| Gross realized losses on available-for-sale securities | (3 | ) | | (1 | ) | | (9 | ) | | (3 | ) |
| Net realized gains (losses) on other invested assets | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Other-than-temporary impairment | (13 | ) | | (5 | ) | | (29 | ) | | (26 | ) |
| Net realized investment gains (losses) | $ | 7 |
| | $ | (2 | ) | | $ | 54 |
| | $ | (5 | ) |
Realized gains in Third Quarter 2017 comprise primarily the gain on sale of investments from the internally managed portfolio. In addition, realized gains in Nine Months 2017 include the gain on sale of the Zohar II Notes exchanged in the MBIA UK Acquisition. Realized gains in Nine Months 2016 were due primarily to sales of securities in order to fund the CIFG Acquisition. Other-than-temporary-impairments in all periods presented were primarily attributable to securities purchased for loss mitigation purposes.higher valuations of assets held in CLO, healthcare and asset-based funds. The fair value gains on investments in AssuredIM Funds in First Quarter 2021 was primarily attributable to changes in the NAV of CLO funds. Equity in earnings of other investments decreased in First Quarter 2022 compared with First Quarter 2021 primarily due to a stock price decline on a specific investment in a private equity fund.
Bargain Purchase GainCVIs issued by Puerto Rico and Settlement of Pre-existing Relationships
In connection with the MBIA UK Acquisition in Nine Months 2017, the Company recognized a $56 million bargain purchase gain and a $2 million gain on settlement of pre-existing relationships. Please refer to Part I, Item 1, Financial Statements, Note 2, Acquisitions, for additional information.
On July 1, 2016, AGC acquired allreceived as part of the issued and outstanding capital stockMarch Puerto Rico Resolutions are classified as trading with changes in fair value reported in other income. The fair value of CIFGH, the parentsuch instruments as of financial guaranty insurer CIFG Assurance North America, Inc. (CIFGNA), and on July 5, 2016, merged CIFGNA with and into AGC, with AGC as the surviving company. In connection with the acquisition, in 2016, the Company recognized a $357 million bargain purchase gain and a $98 million loss on settlement of pre-existing relationships.March 31, 2022 was $174 million.
Other Income (Loss)
Other income (loss) comprisesconsists of recurring items such as foreign exchange remeasurement gains and losses, ancillary fees on financial guaranty policies such as commitmentfor commitments and consent,consents, foreign exchange gain (loss) on remeasurement, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as commutation gains on re-assumptions of previously ceded business, loss mitigation recoveries and certain non-recurring items.
Other Income (Loss)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Foreign exchange gain (loss) on remeasurement of premium receivable and loss reserves | $ | 3 |
| | $ | (2 | ) | | $ | 17 |
| | $ | (21 | ) |
| Commutation gains | 255 |
| | 8 |
| | 328 |
| | 8 |
|
| Loss on extinguishment of debt | (2 | ) | | — |
| | (9 | ) | | — |
|
| Other | 18 |
| | (9 | ) | | 49 |
| | 62 |
|
| Total other income (loss) | $ | 274 |
| | $ | (3 | ) | | $ | 385 |
| | $ | 49 |
|
In Third Quarter 2017 and Nine Months 2017, other income comprises primarily commutation gains on reassumptions of previously ceded business. In Nine Months 2017, the loss on extinguishment of debt was related to AGUS' purchase of $28 million principal amount of AGMH's outstanding Junior Subordinated Debentures. The loss represents the difference between the amount paid to purchase AGMH's debt and the carrying value of the debt, which includes the remaining unamortized fair value adjustments that were recorded upon the Company's acquisition of AGMH in 2009. Foreign exchange gains in Nine Months 2017 and foreign exchange loss in Nine Months 2016 were due primarily to changes in the exchange rate of the British pound sterling. In Nine Months 2016, other income also included a benefit due to loss mitigation recoveries. Beginning in First Quarter 2022, other income (loss) also included unrealized gain (loss) on the portfolio of trading securities.
Economic Loss Development
The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid, forFor a discussion of the assumptions and methodologies used in calculatingestimating the expected loss to be paid (recovered) for all contracts. For a discussion ofcontracts and the loss estimation process, approach to projecting losses and theaccounting policies for measurement and recognition accounting policies under GAAP
for each type of contract, see the followingnotes listed below in Part II,II. Item 8, "FinancialFinancial Statements and Supplementary Data"Data, of the Company's 2016Company’s 2021 Annual Report on Form 10-K:
Note 5 for expected loss to be paid,
•Note 6 for contracts accounted for as insurance,insurance;
•Note 7 for contracts accounted for as credit derivatives;
•Note 9 for FG VIEs; and
•Note 10 for fair value methodologies for credit derivatives and FG VIEVIEs’ assets and liabilities,liabilities.
Note 8 for contracts accounted for as credit derivatives, and
Note 9 for consolidated FG VIEs.
The discussion of losses that follows encompasses losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. In order to effectivelyefficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. That is, management monitors and assigns ratings and calculatesThe discussion of losses that follows encompasses expected losses on all contracts in the same manner for all its exposures. Management also considers contract specific characteristics that affect the estimatesinsured portfolio regardless of expected loss.
The surveillance process for identifying transactions with expected losses is described in the notes to the consolidated financial statements. More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly.
accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists primarily of the present value of future: expected claim and LAE payments,payments; expected recoveries from issuers or excess spread and other collateral in the transaction structures,spread; cessions to reinsurers, andreinsurers; expected recoveries forrecoveries/payables stemming from breaches of R&Wrepresentation 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, and 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 in the mortgage market were consistent by sector regardless of the accounting model used. The primary drivers of economic loss development are discussed below. Changes in risk freerisk-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 following table presents the range and weighted average discount rates used to discount expected losses (recoveries).
Risk-Free Rates Used in Expected Loss (Recovery) for
U.S. Dollar Denominated Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | As of December 31, 2021 | | As of March 31, 2021 | | As of December 31, 2020 |
| Range | 0.00 | % | – | 2.61% | | 0.00 | % | – | 1.98% | | 0.00 | % | – | 2.49% | | 0.0 | % | – | 1.72% |
| Weighted average | 2.26% | | 1.02% | | 0.88% | | 0.60% |
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)
by Accounting Model
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of | | First Quarter |
| Accounting Model | | March 31, 2022 | | December 31, 2021 | | 2022 | | 2021 |
| | | (in millions) |
| Insurance | | $ | 388 | | | $ | 364 | | | $ | (44) | | | $ | 16 | |
| FG VIEs | | 38 | | | 42 | | | (4) | | | (6) | |
| Credit derivatives | | 6 | | | 5 | | | 4 | | | 3 | |
| Total | | $ | 432 | | | $ | 411 | | | $ | (44) | | | $ | 13 | |
| | | | | | | | |
| Net exposure rated below-investment-grade (BIG) | | $ | 5,783 | | | $ | 7,440 | | | | | |
Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit)
By Sector
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of | | First Quarter |
| Sector | | March 31, 2022 | | December 31, 2021 | | 2022 | | 2021 |
| | | (in millions) |
| U.S. public finance | | $ | 181 | | | $ | 197 | | | $ | (48) | | | $ | 15 | |
| Non-U.S. public finance | | 10 | | | 12 | | | (2) | | | (12) | |
| Structured finance | | | | | | | | |
| U.S. RMBS | | 195 | | | 150 | | | 7 | | | 11 | |
| Other structured finance | | 46 | | | 52 | | | (1) | | | (1) | |
| Structured finance | | 241 | | | 202 | | | 6 | | | 10 | |
| Total | | $ | 432 | | | $ | 411 | | | $ | (44) | | | $ | 13 | |
| | | | | | | | |
| Effect of changes in the risk-free rates included in economic loss development (benefit) | | $ | (47) | | | $ | (48) | |
First Quarter 2022 Net Economic Loss Development
Public Finance: The economic benefit on U.S. exposures in First Quarter 2022 was $48 million, and was primarily attributable to Puerto Rico exposures and changes in discount rates. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.7 billion as of March 31, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to the March Puerto Rico Resolutions discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. The Company projected that its total net expected loss to be paid across its troubled U.S. public finance exposures as of March 31, 2022 is $181 million, compared with $197 million as of December 31, 2021.
U.S. RMBS: The economic loss development attributable to U.S. RMBS was $7 million and was mainly attributable to a $43 million loss related to lower excess spread, partially offset by a $22 million benefit related to changes in discount rates and an $11 million benefit related to improved performance in certain transactions.
See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.
First Quarter 2021 Net Economic Loss Development
Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.4 billion as of March 31, 2021 compared with $5.4 billion as of December 31, 2020. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of March 31, 2021 was $228 million compared with $305 million as of December 31, 2020. Economic loss development on U.S. public finance exposures in First Quarter 2021 was $15 million, which was primarily attributable to Puerto Rico exposures. The economic benefit was approximately $12 million for non-U.S. public finance exposures during First Quarter 2021 mainly due to the restructuring of certain exposures and the impact of higher Euro Interbank Offered Rate (Euribor).
U.S. RMBS: The economic loss development attributable to U.S. RMBS was $11 million and was mainly related to a reduction of excess spread of $58 million, partially offset by changes in discount rates, which was a gain of $33 million, and improved performance in certain transactions and higher recoveries for secured charged-off loans.
Insurance Segment Loss Expense
The primary differences between net economic loss development and loss and LAE are that the amount reported as “loss and LAE” in the consolidated statements of operations:
operations are that loss and LAE: (1) considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty insurance contracts,
contracts; (2) eliminates loss and LAE related to FG VIEsVIEs; and
(3) does not include estimated losses on credit derivatives.
Loss Insurance segment loss expense includes loss and LAE reported in operating income (non-GAAP) (i.e. operating loss and LAE) includes losses on financial guaranty insurance contracts (other than those eliminated dueand losses on credit derivatives, without giving effect to eliminations related to consolidation of FG VIEs), and credit derivatives.VIEs.
For financial guaranty insurance contracts, theeach transaction’s expected loss and LAE reported into be expensed is compared with the consolidated statements of operations is generally recorded only when expected losses exceed deferred premium revenue.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 because of the purchase accounting fair value adjustments made at acquisition.balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to thesethose policies. See "Loss and LAE (Financial Guaranty Insurance Contracts)" below.
Net Expected Loss to be Paid
|
| | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | (in millions) |
| Public finance | $ | 1,093 |
| | $ | 904 |
|
| Structured finance | | | |
| U.S. RMBS | 176 |
| | 206 |
|
| Other structured finance | 23 |
| | 88 |
|
| Structured finance | 199 |
| | 294 |
|
| Total | $ | 1,292 |
| | $ | 1,198 |
|
Economic Loss Development (Benefit) (1)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Public finance | $ | 229 |
| | $ | 8 |
| | $ | 427 |
| | $ | 216 |
|
| Structured finance: | | | | | | | |
| U.S. RMBS | (19 | ) | | (27 | ) | | (70 | ) | | (139 | ) |
| Other structured finance | (6 | ) | | (25 | ) | | (59 | ) | | (40 | ) |
| Structured finance | (25 | ) | | (52 | ) | | (129 | ) | | (179 | ) |
| Total | $ | 204 |
| | $ | (44 | ) | | $ | 298 |
| | $ | 37 |
|
____________________
| |
(1) | Economic loss development includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. |
Third Quarter 2017 Net Economic Loss Development
The total economic loss development of $204 million in Third Quarter 2017 was primarily related to the public finance sector, offset in part by improvements in the structured finance sector. The risk-free rates for U.S. dollar denominated obligations used to discount expected losses ranged from 0.0% to 2.94% with a weighted average of 2.27% as of September 30, 2017 and 0.0% to 2.83% with a weighted average of 2.32% as of June 30, 2017. The effect of changes in the risk-free rates used to discount expected losses was a benefit of $6 million in Third Quarter 2017.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated BIG by the Company was $7.3 billion as of September 30, 2017 compared with $7.1 billion as of June 30, 2017. The Company projects that its total net expected loss across its troubled U.S. public finance credits as of September 30, 2017 will be $1,046 million, compared with $1,044 million as of June 30, 2017. Economic loss development in Third Quarter 2017 was $229 million, which was primarily attributable to Puerto Rico. See "Insured Portfolio-Exposure to Puerto Rico" below for details about significant developments that have taken place in Puerto Rico.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $19 million and was mainly related to improvement in the underlying collateral performance of home equity lines of credit mortgages and improvements in
observed liquidation rates. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid for additional information.
Other Structured Finance Economic Loss Development: The net benefit attributable to structured finance (excluding U.S. RMBS) was $6 million, due primarily to decreased future loss expectations on certain transactions reinsured by the Company. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid for additional information.
Third Quarter 2016 Net Economic Loss Development
Total economic loss of $44 million in Third Quarter 2016 was generated mainly by the structured finance sector. The risk-free rates for U.S. dollar denominated obligations used to discount expected losses ranged from 0.0% to 2.42% with a weighted average of 1.80% as of September 30, 2016 and 0.0% to 2.46% with a weighted average of 1.59% as of June 30, 2016. The effect of the change in the risk-free rates used to discount expected losses was a benefit of $29 million in Third Quarter 2016.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated BIG by the Company was $7.6 billion as of September 30, 2016 compared with $8.3 billion as of June 30, 2016. The Company projected that its total net expected loss across its troubled U.S. public finance credits as of September 30, 2016 would be $816 million, compared with $963 million as of June 30, 2016. Economic loss development in Third Quarter 2016 was $9 million, which was primarily attributable to Puerto Rico exposures.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $27 million due mainly to underlying collateral improvement on certain subprime transactions and an increase in the expected recovery rate on certain second lien transactions.
Other Structured Finance Economic Loss Development: The net benefit attributable to structured finance (excluding U.S. RMBS) was $25 million, due primarily to a benefit from the purchase of a portion of an insured obligation as part of a loss mitigation strategy.
Nine Months 2017 Net Economic Loss Development
Total economic loss development of $298 million in Nine Months 2017 was generated mainly by the U.S. public finance sector, partially offset by a net benefit in the structured finance sector. Economic loss development in the public finance sector in Nine Months 2017 was $427 million, which was primarily attributable to exposures to Puerto Rico. This was partially offset by $129 million benefit in structured finance due to lower re-default assumptions on first and second lien modified loans, and a benefit from a litigation settlement related to two triple-X transactions. The effect of the change in the risk-free rates used to discount expected losses was a loss of $28 million in Nine Months 2017.
Nine Months 2016 Net Economic Loss Development
Total economic loss development of $37 million in Nine Months 2016 was generated mainly by the U.S. public finance sector on Puerto Rico exposures, partially offset by a net benefit in the structured finance sector. Economic loss development in the public finance sector in Nine Months 2016 was $216 million, which was primarily attributable to Puerto Rico exposures. This was partially offset by a $179 million benefit due to: the acceleration of claim payments as a means of mitigating future losses on certain Alt-A transactions and transaction performance improvement in U.S. RMBS, improved performance of various other structured finance credits and changes in interest rates. The effect of the change in the risk-free rates used to discount expected losses was a loss of $79 million in Nine Months 2016.
Loss and LAE (Financial Guaranty Insurance Contracts)
The amount of Insurance segment loss and LAE recognized in the consolidated statementsexpense, which includes all policies regardless of operations for financial guaranty contracts accounted for as insuranceform, is dependent ona 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. For these transactions, each transaction’s expected loss to be expensed, net of estimated recoveries, is compared with the deferred premium revenue of that transaction. Generally, when the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in the consolidated statements of operations for the amount of such excess.
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 loss and LAEnet expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income in the consolidated statements of operations for financial guaranty insurance policies. Expected loss to be paid for FG VIEs pursuant to AGC’s and AGM’s financial guaranty policies is calculated in a manner consistent with financial guaranty insurance contracts, but eliminated in consolidation under GAAP.
The following table presents the Insurance segment loss and LAE recorded in the consolidated statements of operations. Amounts presented are net of reinsurance.expense.
Insurance Segment
Loss and LAE ReportedExpense
on the Consolidated Statements of Operations | | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| U.S. public finance | $ | 55 | | | $ | 26 | |
| Non-U.S. public finance | — | | | (8) | |
| Structured finance | | | |
| U.S. RMBS | 6 | | | 12 | |
| Other structured finance | (1) | | | — | |
| Structured finance | 5 | | | 12 | |
| Total Insurance segment loss expense | $ | 60 | | | $ | 30 | |
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Public finance | $ | 233 |
| | $ | 20 |
| | $ | 421 |
| | $ | 232 |
|
| Structured finance: | | | | | | | |
| U.S. RMBS | (4 | ) | | (2 | ) | | (14 | ) | | (3 | ) |
| Other structured finance | (5 | ) | | (27 | ) | | (48 | ) | | (42 | ) |
| Structured finance | (9 | ) | | (29 | ) | | (62 | ) | | (45 | ) |
| Total insurance contracts before FG VIE consolidation | 224 |
| | (9 | ) | | 359 |
| | 187 |
|
| Elimination of losses attributable to FG VIEs | (1 | ) | | 0 |
| | (5 | ) | | (4 | ) |
| Total loss and LAE (1) | $ | 223 |
| | $ | (9 | ) | | $ | 354 |
| | $ | 183 |
|
____________________
| |
(1) | Excludes credit derivative loss of $1 million and benefit $8 million for Third Quarter 2017 and Third Quarter 2016 and credit derivative benefit of $25 million and $25 million for Nine Months 2017 and Nine Months 2016. |
Loss expense is a function of economic loss development, as well as the amortization of unearned premium reserve. In First Quarter 2022, the largest component of loss expense was from the public finance sector, which had loss expense of $55 million primarily attributable to Puerto Rico exposures. The public finance sector also had an economic benefit of $50 million, which was also primarily attributable to Puerto Rico exposures. The difference between public finance loss expense and economic benefit was primarily attributable to the release of unearned premium reserve associated with extinguished Puerto Rico policies that previously had expected losses.
Loss and LAEexpense in ThirdFirst Quarter 20172021 was mainly driven by an increase in loss reserves on certain Puerto Rico transactions and U.S. RMBS exposures. Loss and LAE benefit in ThirdFor First Quarter 2016 was mainly driven by a decrease in loss reserves in the structured finance sector. The non-U.S. RMBS structured finance sector benefited from the purchase of a portion of an insured obligation as part of a loss mitigation strategy.
Loss and LAE in Nine Months 2017 was mainly driven by higher loss reserves on certain Puerto Rico exposures,2021, these losses were partially offset by a benefit from a litigation settlement related to two triple-X transactions. Loss and LAE in Nine Months 2016 was mainly driven by higher loss reserves on certain Puerto Rico exposures partially offset by a benefit from the non-U.S. RMBS structured finance transaction loss mitigation strategy described above, and commutations of certain assumed student loanEuropean exposures.
For financial guaranty contracts accounted for as insurance, the amounts reported in the GAAP financial statements may only reflect a portion of the current period’s economic loss development and may also include a portion of prior-period economic loss development. The difference between economic loss development on financial guaranty insurance contracts and loss and LAE recognized in the consolidated statements of operations relates to the effect of taking deferred premium revenue into account for loss and LAE, which is not considered in economic loss development.
For additional information on schedule of the expected timing of net expected losses to be expensed please refer to Part I,see Item 1, Financial Statements, Note 6,5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Losses.
Net Change in Fair Value of Credit Derivatives
Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, and the issuing company's own credit rating and credit spreads, and other market factors. With volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.
Except for net estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives are expected to reduce 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. Changes in expected losses in respect of contracts accounted for as credit derivatives are included in the discussion of “Economic Loss Development” above.
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 and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company 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 and AGM 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 and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.
The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past several years and as of September 30, 2017, 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. Please refer to Part I, Item 1, Financial Statements, Note 7, Fair Value Measurement, for additional information.
Net Change in Fair Value of Credit Derivative Gain (Loss)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Realized gains on credit derivatives | $ | 4 |
| | $ | 11 |
| | $ | 15 |
| | $ | 39 |
|
| Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (5 | ) | | 4 |
| | 4 |
| | 8 |
|
| Realized gains (losses) and other settlements(1) | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
| Net unrealized gains (losses): | | | | | | | |
| Pooled corporate obligations | 35 |
| | 3 |
| | 41 |
| | (37 | ) |
| U.S. RMBS | 11 |
| | (12 | ) | | 24 |
| | 0 |
|
| Pooled infrastructure | (1 | ) | | 4 |
| | 4 |
| | 10 |
|
| Infrastructure finance | 0 |
| | 1 |
| | 2 |
| | 0 |
|
| Other | 14 |
| | 10 |
| | 16 |
| | 4 |
|
| Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
| Net change in fair value of credit derivatives | $ | 58 |
| | $ | 21 |
| | $ | 106 |
| | $ | 24 |
|
____________________
| |
(1) | Includes realized gains and losses due to terminations and settlements of CDS contracts. |
Terminations and Settlements
of Direct Credit Derivative Contracts
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Net par of terminated credit derivative contracts | $ | 40 |
| | $ | 1,071 |
| | $ | 273 |
| | $ | 3,507 |
|
| Realized gains on credit derivatives | 0 |
| | 3 |
| | 0 |
| | 11 |
|
| Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (3 | ) | | — |
| | (15 | ) | | — |
|
| Net unrealized gains (losses) on credit derivatives | 8 |
| | 11 |
| | 24 |
| | 81 |
|
During Third Quarter 2017, unrealized fair value gains were generated primarily as a result of CDS terminations in the Other sector, run-off of net par outstanding, and tighter implied net spreads. The tighter implied net spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased 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 and AGM, which management refers to as the CDS spread on AGC and AGM, increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Nine Months 2017, unrealized fair value gains were generated primarily as a result of CDS terminations, run-off of net par outstanding, and tighter implied net spreads. The tighter implied spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased 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 and AGM increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Third Quarter 2016, unrealized fair value gains were generated primarily as a result of CDS terminations in the pooled corporate and other sectors and price improvements on the underlying collateral of the Company’s CDS. This was the primary driver of the unrealized fair value gains in the pooled corporate CLO, and other sectors. The unrealized fair value gains were partially offset by unrealized losses resulting from wider implied net spreads across all sectors. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased significantly 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 and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.
During Nine Months 2016, unrealized fair value losses were generated primarily in the trust preferred sector, due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year and five year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased. The unrealized fair value losses were partially offset by unrealized fair value gains which resulted from the terminations of several CDS transactions during the period. The majority of the CDS transactions were terminated as a result of settlement agreements with the relevant CDS counterparties.
CDS Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
|
| | | | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of June 30, 2017 | | As of
December 31, 2016 | | As of September 30, 2016 | | As of
June 30, 2016 | | As of
December 31, 2015 |
| Five-year CDS spread: | | | | | | | | | | | |
| AGC | 190 |
| | 136 |
| | 158 |
| | 170 |
| | 265 |
| | 376 |
|
| AGM | 190 |
| | 140 |
| | 158 |
| | 170 |
| | 265 |
| | 366 |
|
| One-year CDS spread | | | | | | | | | | | |
| AGC | 81 |
| | 15 |
| | 35 |
| | 31 |
| | 45 |
| | 139 |
|
| AGM | 81 |
| | 15 |
| | 29 |
| | 31 |
| | 47 |
| | 131 |
|
Effect of Changes in the Company’s Credit Spread on
Net Unrealized Gains (Losses) on Credit Derivatives
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Change in unrealized gains (losses) of credit derivatives: | | | | | | | |
| Before considering implication of the Company’s credit spreads | $ | 38 |
| | $ | 44 |
| | $ | 75 |
| | $ | 85 |
|
| Resulting from change in the Company’s credit spreads | 21 |
| | (38 | ) | | 12 |
| | (108 | ) |
| After considering implication of the Company’s credit spreads | $ | 59 |
| | $ | 6 |
| | $ | 87 |
| | $ | (23 | ) |
Management believes that the trading level of AGC’s and AGM’s credit spreads over the past several years has been due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets. Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security markets relative to pre-financial crisis levels. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high-yield collateralized debt obligations (CDO), trust preferred securities CDOs, and collateralized loan obligation (CLO) markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.
Financial Guaranty Variable Interest Entities
As of September 30, 2017 and December 31, 2016, the Company consolidated 31 and 32 VIEs, respectively. The table below presents the effects on reported GAAP income resulting from consolidating these FG VIEs and eliminating their related insurance and investment amounts. The consolidation of FG VIEs has an effect on net income and shareholders' equity due to:
changes in fair value gains (losses) on FG VIE assets and liabilities,
the eliminations of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse, and
the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE debt.
Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. Please refer to Part I, Item 1, Financial Statements, Note 9, Consolidated Variable Interest Entities, for additional information.
Effect of Consolidating FG VIEs on Net Income (Loss)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Fair value gains (losses) on FG VIEs | $ | 3 |
| | $ | (11 | ) | | $ | 25 |
| | $ | 11 |
|
| Elimination of insurance and investment balances | (4 | ) | | (6 | ) | | (10 | ) | | (16 | ) |
| Effect on income before tax | (1 | ) | | (17 | ) | | 15 |
| | (5 | ) |
| Less: tax provision (benefit) | 0 |
| | (6 | ) | | 5 |
| | (2 | ) |
| Effect on net income (loss) | $ | (1 | ) | | $ | (11 | ) | | $ | 10 |
| | $ | (3 | ) |
Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. During Third Quarter 2017 and Nine Months 2017, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $3 million and $25 million, respectively. During Third Quarter 2017, the primary driver of the gain was price depreciation on the FG VIE recourse liabilities during the quarter resulting from the Company's credit risk. During the Nine Months 2017, the primary driver of the gain is price appreciation on the FG VIE assets resulting from improvements in the underlying collateral.
During Third Quarter 2016, the Company recorded a pre-tax net fair value loss on consolidated FG VIEs of $11 million and during Nine Months 2016, the Company recorded a gain of $11 million. The primary drivers of the loss during Third Quarter 2016 were the net mark-to-market losses due to price depreciation on the FG VIE assets, resulting from declines in value in the underlying collateral, and the price appreciation on the FG VIE recourse liabilities during the quarter, resulting from the Company's credit risk. The primary driver of the Nine Months 2016 gain in fair value of FG VIEs assets and liabilities was net mark-to-market gains due to price appreciation on the FG VIE assets during the nine months period resulting from improvements in the underlying collateral.
Fair Value Gains (Losses) on CCS
The decrease fair value losses on the Company's CCS for Third Quarter 2017 and Nine Months 2017 compared to the prior year comparable periods was a result of improvements in observed market prices on securities referencing the Company.
Other Operating Expenses
OtherThe decrease in other operating expenses in ThirdFirst Quarter 2022 compared with First Quarter 2021 was primarily attributable to the write-off of a $16 million intangible asset attributable to MAC insurance licenses in First Quarter 2021. MAC was merged with and into AGM on April 1, 2021. See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for additional information.
Financial Strength Ratings
On March 18, 2022, Moody’s Investors Service, Inc. (Moody’s) upgraded the financial strength rating of AGM and AGUK to A1 (stable) from A2 (stable).
Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency assigning the rating, are shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | |
| S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC | | Kroll Bond Rating
Agency | | Moody’s Investors Service, Inc. | | A.M. Best Company,
Inc. |
| AGM | AA (stable) (7/8/21) | | AA+ (stable) (10/20/21) | | A1 (stable) (3/18/22) | | — |
| AGC | AA (stable) (7/8/21) | | AA+ (stable) (10/20/21) | | (1) | | — |
| Assured Guaranty Re Ltd. (AG Re) | AA (stable) (7/8/21) | | — | | — | | — |
| Assured Guaranty Re Overseas Ltd. (AGRO) | AA (stable) (7/8/21) | | — | | — | | A+ (stable) (7/15/21) |
| Assured Guaranty UK Limited (AGUK) | AA (stable) (7/8/21) | | AA+ (stable) (10/20/21) | | A1 (stable) (3/18/22) | | — |
| Assured Guaranty (Europe) SA (AGE) | AA (stable) (7/8/21) | | AA+ (stable) (10/20/21) | | — | | — |
____________________
(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 revision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL’s insurance subsidiaries in the future or cease to rate one or more of AGL’s insurance subsidiaries, either voluntarily or at the request of that subsidiary.
For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “— Liquidity and Capital Resources —” section below.
Asset Management Segment Results
Asset Management Segment Results
| | | | | | | | | | | |
| First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Segment revenues | | | |
| Management fees (1) | $ | 21 | | | $ | 19 | |
| Performance fees | 16 | | | 1 | |
| Other income (loss) | 2 | | | — | |
| Total segment revenues | 39 | | | 20 | |
| Segment expenses | | | |
| Employee compensation and benefit expenses | 29 | | | 19 | |
| Other operating expenses (1) (2) | 10 | | | 10 | |
| Total segment expenses | 39 | | | 29 | |
| Segment adjusted operating income (loss) before income taxes | — | | | (9) | |
| Less: Provision (benefit) for income taxes | — | | | (2) | |
| Segment adjusted operating income (loss) | $ | — | | | $ | (7) | |
_____________________
(1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross as revenues.
(2) Includes amortization of intangible assets of $3 million in both First Quarter 2022 and First Quarter 2021.
Management and Performance Fees
Management fees are generated by CLOs, opportunity funds, liquid strategies, and the wind-down funds. CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO Equity that is held directly by AssuredIM Funds. Management fees from opportunity funds and liquid strategies include funds that were launched since the BlueMountain Acquisition in which the Insurance segment’s U.S. Insurance Subsidiaries invest along with two previously established opportunity funds in their harvest periods. The Company also generates fees from legacy hedge and opportunity funds now subject to an orderly wind-down.
Management Fees
| | | | | | | | | | | |
| First Quarter |
| 2022 | | 2021 |
| (in millions) |
| CLOs | $ | 12 | | | $ | 12 | |
| Opportunity funds and liquid strategies | 8 | | | 4 | |
| Wind-down funds | 1 | | | 3 | |
| Total management fees | $ | 21 | | | $ | 19 | |
Fees from opportunity funds increased primarily due to higher AUM of $1.9 billion March 31, 2022 compared with $1.5 billion as of March 31, 2021. Fees from the wind-down funds decreased as distributions to investors continued. As of March 31, 2022, AUM of the wind-down funds was $0.5 billion compared with $1.3 billion as of March 31, 2021 and $0.6 billion as of December 31, 2021. CLO fee-earning AUM was $13.9 billion, or 97%, of total CLO AUM as of March 31, 2022, compared with $12.0 billion, or 83%, of total CLO AUM as of March 31, 2021.
Performance fees and increased compensation expenses in First Quarter 2022 were attributable to the performance of the healthcare and asset-based funds.
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 our asset management business. The Company uses measures of its AUM in its decision-making process and uses 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 $7the Asset Management segment and equals the sum of the following:
•the amount of aggregate collateral balance and principal cash of AssuredIM’s CLOs, including CLO Equity that may be held by AssuredIM Funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji), which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and 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; and
•the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments. Changes in NAV attributable to movements in fund value of certain private equity funds are reported on a quarter lag.
The Company’s calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which AssuredIM 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 AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in AssuredIM Funds. For CLOs, this also includes CLO Equity that may be held by AssuredIM Funds.
“Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners’ investments of AssuredIM (or its affiliates) into the AssuredIM Funds.
“Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs.
“Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse funds.
“Fee earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors.
“Non-fee earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors. AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company. Further, 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 to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by AssuredIM.
Roll Forward of Assets Under Management
First Quarter 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CLOs | | Opportunity Funds | | Liquid Strategies | | Wind-Down Funds | | Total |
| | (in millions) |
| AUM, December 31, 2021 | $ | 14,699 | | | $ | 1,824 | | | $ | 389 | | | $ | 582 | | | $ | 17,494 | |
| Inflows - third party (1) | — | | | 91 | | | — | | | — | | | 91 | |
| Inflows - intercompany | — | | | — | | | — | | | — | | | — | |
| Outflows: | | | | | | | | | |
| Redemptions | — | | | — | | | — | | | — | | | — | |
| Distributions (2) | (335) | | | (104) | | | — | | | (135) | | | (574) | |
| Total outflows | (335) | | | (104) | | | — | | | (135) | | | (574) | |
| Net flows | (335) | | | (13) | | | — | | | (135) | | | (483) | |
| Change in value | (82) | | | 63 | | | (14) | | | 12 | | | (21) | |
| AUM, March 31, 2022 | $ | 14,282 | | | $ | 1,874 | | | $ | 375 | | | $ | 459 | | | $ | 16,990 | |
_____________________
(1) Opportunity funds inflows in First Quarter 2022 is primarily related to the healthcare strategy fund.
(2) Distributions from opportunity funds include $48 million duerelated to the AssuredIM Funds created prior to BlueMountain Acquisition. As of March 31, 2022, AUM related to these funds was $128 million.
Components of Assets Under Management
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CLOs (1) | | Opportunity Funds | | Liquid Strategies | | Wind-Down Funds | | Total |
| | (in millions) |
| As of March 31, 2022: | | | | | | | | | |
| Funded AUM | $ | 14,172 | | | $ | 1,265 | | | $ | 375 | | | $ | 437 | | | $ | 16,249 | |
| Unfunded AUM | 110 | | | 609 | | | — | | | 22 | | | 741 | |
| | | | | | | | | |
| Fee-earning AUM | $ | 13,889 | | | $ | 1,597 | | | $ | 375 | | | $ | 280 | | | $ | 16,141 | |
| Non-fee earning AUM | 393 | | | 277 | | | — | | | 179 | | | 849 | |
| | | | | | | | | |
| Intercompany AUM | | | | | | | | | |
| Funded AUM | $ | 557 | | | $ | 212 | | | $ | 355 | | | $ | — | | | $ | 1,124 | |
| Unfunded AUM | 108 | | | 121 | | | — | | | — | | | 229 | |
| | | | | | | | | |
| As of December 31, 2021: | | | | | | | | | |
| Funded AUM | $ | 14,575 | | | $ | 1,297 | | | $ | 389 | | | $ | 560 | | | $ | 16,821 | |
| Unfunded AUM | 124 | | | 527 | | | — | | | 22 | | | 673 | |
| | | | | | | | | |
| Fee-earning AUM | $ | 14,252 | | | $ | 1,527 | | | $ | 389 | | | $ | 408 | | | $ | 16,576 | |
| Non-fee earning AUM | 447 | | | 297 | | | — | | | 174 | | | 918 | |
| | | | | | | | | |
| Intercompany AUM | | | | | | | | | |
| Funded AUM | $ | 541 | | | $ | 217 | | | $ | 368 | | | $ | — | | | $ | 1,126 | |
| Unfunded AUM | 123 | | | 121 | | | — | | | — | | | 244 | |
_____________________
(1) CLO AUM includes CLO Equity that is held by various AssuredIM Funds. This CLO Equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM Funds.
Corporate Division Results
Corporate Division Results
| | | | | | | | | | | |
| First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Revenues | $ | 1 | | | $ | — | |
| Expenses | | | |
| Interest expense | 21 | | | 23 | |
| Employee compensation and benefit expenses | 6 | | | 5 | |
| Other operating expenses | 7 | | | 4 | |
| Total expenses | 34 | | | 32 | |
| Equity in earnings (losses) of investees | — | | | — | |
| Adjusted operating income (loss) before income taxes | (33) | | | (32) | |
| Less: Provision (benefit) for income taxes | — | | | (3) | |
| Adjusted operating income (loss) | $ | (33) | | | $ | (29) | |
Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $2 million in both First Quarter 2022 and First Quarter 2021 related primarily to lower acquisitionthe $250 million AGUS debt to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition.
Corporate division employee compensation and benefits expenses are based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other expenses include Board of Director expenses, legal fees and other direct or allocated expenses.
Other (Effect of FG VIEs and CIVs)
The effect of consolidating FG VIEs and CIVs, intersegment eliminations, and reclassifications of reimbursable fund expenses to revenue are presented in “Other.” See Item 1, Financial Statements, Note 2, Segment Information.
The types of entities the Company consolidates when it is deemed to be the primary beneficiary primarily include: (1) entities whose debt obligations the insurance subsidiaries insure; (2) custodial trusts established in connection with the consummation of the March Puerto Rico Resolutions; and (3) investment vehicles such as collateralized financing entities, CLO warehouses and AssuredIM Funds. The Company eliminates the effects of intercompany transactions between its FG VIEs and CIVs, and its insurance and asset management subsidiaries, as well as intercompany transactions between CIVs.
The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), has a significant gross-up effect on the consolidated financial statements, and includes: (1) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; (3) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs, and establishing the noncontrolling interests.
The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on assets, liabilities and cash flows, and includes: (1) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (2) eliminating the asset management fees earned by AssuredIM from the CIVs; (3) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees and (4) establishing non-controlling interest for amounts not owned by the Company. The economic effect of the Company’s ownership interest in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, and as separate line items (“assets of CIVs,” “liabilities of CIVs,” and redeemable and non-redeemable non-controlling interest) on a consolidated basis.
The table below reflects the effect of consolidating FG VIEs and CIVs on the condensed consolidated statements of operations. The amounts represent: (1) the revenues and expenses of the FG VIEs and higher rent expensethe CIVs; and accelerated amortization(2) the amounts eliminated between consolidated FG VIEs or CIVs and the operating and investment subsidiaries.
Effect of Consolidating FG VIEs and CIVs on the Condensed Consolidated Statements of Operations
Increase (Decrease)
| | | | | | | | | | | | | | |
| | | First Quarter |
| | | 2022 | | 2021 |
| Effect on Financial Statement Line Item | | (in millions) |
| Fair value gains (losses) on FG VIEs (1) | | $ | 6 | | | $ | 5 | |
| Fair value gains (losses) on CIVs | | 14 | | | 16 | |
| Equity in earnings (losses) of investees (2) | | (10) | | | (10) | |
| Other (3) | | (11) | | | (7) | |
| Effect on income before tax | | (1) | | | 4 | |
| Less: Tax provision (benefit) | | — | | | — | |
| Effect on net income (loss) | | (1) | | | 4 | |
| Less: Effect on noncontrolling interests (4) | | 9 | | | 4 | |
| Effect on net income (loss) attributable to AGL | | $ | (10) | | | $ | — | |
| | | | |
| By Type of VIE | | | | |
| FG VIEs | | $ | 2 | | | $ | — | |
| CIVs | | (12) | | | — | |
| Effect on net income (loss) attributable to AGL | | $ | (10) | | | $ | — | |
____________________
(1) Changes in 2016fair value of the FG VIEs’ assets and liabilities that are attributable to factors other than (i) changes in the Company’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 AssuredIM Funds.
(3) Includes net earned premiums, net investment income, asset management fees, other income (loss), loss and LAE 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.
Fair value gains on CIVs in First Quarter 2022 and First Quarter 2021 were attributable to realized gains or losses, changes in underlying investment prices and investment interest, net of fees and expenses.
Fair value gains on FG VIEs for First Quarter 2022 were attributable to price depreciation on insured fixed rate debt that were negatively impacted due to the increase in interest rates. Fair value gains on FG VIEs for First Quarter 2021 were attributable to price depreciation on insured fixed rate debt that were negatively impacted due to the assumptions in forward interest rates.
Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
to Adjusted Operating Income (Loss)
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Net income (loss) attributable to AGL | $ | 66 | | | $ | 11 | |
| Less pre-tax adjustments: | | | |
| Realized gains (losses) on investments | 3 | | | (3) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (3) | | | (19) | |
| Fair value gains (losses) on CCS | 1 | | | (19) | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (29) | | | 1 | |
| Total pre-tax adjustments | (28) | | | (40) | |
| Less tax effect on pre-tax adjustments | 4 | | | 8 | |
| Adjusted operating income (loss) | $ | 90 | | | $ | 43 | |
| | | |
| Gain (loss) related to FG VIE and CIV consolidation, net of tax, included in adjusted operating income | $ | (10) | | | $ | — | |
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Gross realized gains on sales available-for-sale securities | $ | — | | | $ | 1 | |
| Gross realized losses on sales available-for-sale securities | (2) | | | (2) | |
| Net foreign currency gains (losses) | — | | | 1 | |
| Change in credit impairment and intent to sell | (5) | | | (4) | |
| Other net realized gains (losses) | 10 | | | 1 | |
| Net realized investment gains (losses) | $ | 3 | | | $ | (3) | |
Other net realized gains in First Quarter 2022 related primarily to the sale of one of the Company’s alternative investments.
Non-Credit Impairment-Related Unrealized Fair Value Gains (Losses) on Credit Derivatives
Changes in the fair value of credit derivatives occur because of changes in the Company’s own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates, and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-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 they do not represent actual claims or losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. 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.
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 since 2009 and, as of March 31, 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 1, Financial Statements, Note 9, Fair Value Measurement, for additional information.
First Quarter 2022 non-credit impairment-related unrealized fair value losses were generated primarily as a result of increases in the credit spread of underlying reference obligations, offset in part by the increased cost to buy protection on AGC, as the market cost of AGC’s protection increased during the period. First Quarter 2021 non-credit impairment-related unrealized fair value losses were generated primarily as a result of the Company's movedecreased cost to buy protection on AGC, as the market cost of its New York offices. Other operating expensesAGC's credit protection decreased during the period. These losses were partially offset by the higher discount rates.
Sensitivity to Changes in Nine Months 2017 decreased by $5 million compared to Nine Months 2016 due primarily to lower rent and depreciation expense, offset in part by higher compensation expense.
Provision for Income TaxCredit Spread
Provision for Income Taxes and Effective Tax Rates
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (dollars in millions) |
| Total provision (benefit) for income taxes | $ | 105 |
| | $ | 1 |
| | $ | 157 |
| | $ | 62 |
|
| Effective tax rate | 33.6 | % | | 0.3 | % | | 18.8 | % | | 8.3 | % |
The Company’s effective tax rate reflectsfollowing table summarizes the proportion of income recognized by eachestimated change in fair value on the net balance of the Company’s operating subsidiaries,credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC.
Effect of Changes in Credit Spread
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 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) |
| | | (in millions) |
| Increase of 25 bps | | $ | (241) | | | $ | (85) | | | $ | (250) | | | $ | (96) | |
| Base Scenario | | (156) | | | — | | | (154) | | | — | |
| Decrease of 25 bps | | (86) | | | 70 | | | (83) | | | 71 | |
| All transactions priced at floor | | (32) | | | 124 | | | (37) | | | 117 | |
____________________
(1)Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread.
Fair Value Gains (Losses) on CCS
Fair value gains on CCS in First Quarter 2022 were primarily due to a significant increase in LIBOR. Fair value losses on CCS in First Quarter 2021 were primarily due to a tightening in market spreads. Fair value of CCS is heavily affected by, and in part fluctuates with, U.S. subsidiaries taxed atchanges 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 periods primarily relate to remeasurement of long-dated premiums receivables, 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 euro relative to the U.S. marginal corporate income tax ratedollar.
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 filed a request with the U.S. Internal Revenue Service (IRS) to revoke the election, which was approved in May 2017. As a result of the revocation of the Section 953(d) election, AGE will no longer be liable to pay future U.S. taxes beginning in 2017.
In April 2017, the Company received a final letter from the IRS to close the audit for the period of 2009 - 2012, with no additional findings or changes, and as a result the Company released previously recorded uncertain tax position reserves and accrued interest of approximately $37 million in the second quarter of 2017. The Company’s overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. In each of the periods presented, the portion of taxable income from each jurisdiction varied. For Third Quarter 2017 and Nine Months 2017, the non-taxable book to tax differences were mostly consistent compared with the prior period, with the exception of the benefit on bargain purchase gains from the MBIA UK Acquisition and the CIFG Acquisition in January 2017 and July 2016, respectively.
Non-GAAP Financial Measures
To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, 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).
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 Assured Guaranty.the Company.
By disclosing non-GAAP financial measures, theThe Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally. Assured Guaranty believes its presentation of non-GAAP financial measures along with the effect on those measures of consolidating FG VIEs (FG 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 variable interest entities (VIEs) that have issued debt obligations insured bywhere it is deemed to be the Company. However,primary beneficiary which include:
•FG VIEs, which the Company does not own such VIEs and where its exposure is limited to its obligation under itsthe financial guaranty insurance contract. Therefore, thecontract, and
•CIVs in which certain subsidiaries invest and which are managed by AssuredIM.
The Company had previously removeddiscloses the effect of FG VIE and CIV consolidation that is embedded in its calculation of itseach non-GAAP financial measures. However, since fourth quarter 2016, basedmeasure, 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 SEC's May 2016 complianceCompany of each of the consolidated FG VIEs and disclosure interpretations,CIVs is reflected primarily in the results of the Insurance segment.
Management of the Company no longer removes the effect of FG VIE consolidation from its publicly disclosed non-GAAP financial measures. This change affects the Company's calculation of operating income (non-GAAP), operating ROE, non-GAAP operating shareholders’ equity and non-GAAP adjusted book value. Wherever possible, the Company has separately disclosed the effect of FG VIE consolidation. The prior-year quarterly non-GAAP financial measures have been updated to reflect the revised calculation.
Management 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.
Many investors, analysts and The financial news reporters use non-GAAPmeasures that the Company uses to help determine compensation are: (1) adjusted operating shareholders’ equity,income, further adjusted to remove the effect of FG VIE 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. ManyManagement also believes that many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.
Many investors, analysts and financial news reporters also use non-GAAP 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. OperatingCompany’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 core financial measures that the Company uses to help determine compensation are: (1) non-GAAP operating income, adjusted to remove the effect of FG VIE consolidation, (2) non-GAAP operating shareholders' equity, adjusted to
remove the effect of FG VIE consolidation, (3) growth in non-GAAP adjusted book value per share, adjusted to remove the effect of FG VIE consolidation, and (4) PVP.
The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. ATo 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 (non-GAAP)
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 adjustsCompany. Adjusted operating income further by removing FG VIE consolidation to arrive at its core operating income measure. 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.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.
2) 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. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss. |
| |
2) | Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company's credit spreads, and other market factors and are not expected to result in an economic gain or loss.
|
| |
3) | 3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. |
| |
4) | Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves.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) | 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)net income (loss) attributable to AGL to adjusted operating income (loss).
to Operating Income (non-GAAP)
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
| Less pre-tax adjustments: | | | | | | | |
| Realized gains (losses) on investments | 7 |
| | (2 | ) | | 54 |
| | (6 | ) |
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | 55 |
| | (4 | ) | | 60 |
| | (32 | ) |
| Fair value gains (losses) on CCS | (4 | ) | | (23 | ) | | (4 | ) | | (50 | ) |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 18 |
| | (2 | ) | | 49 |
| | (21 | ) |
| Total pre-tax adjustments | 76 |
| | (31 | ) | | 159 |
| | (109 | ) |
| Less tax effect on pre-tax adjustments | (24 | ) | | 13 |
| | (51 | ) | | 37 |
|
| Operating income (non-GAAP) | $ | 156 |
| | $ | 497 |
| | $ | 570 |
| | $ | 756 |
|
| | | | | | | | |
| Gain (loss) related to FG VIE consolidation (net of tax provision (benefit) of $(1), $(6), $5 and $(2)) included in operating income | $ | (1 | ) | | $ | (11 | ) | | $ | 9 |
| | $ | (4 | ) |
Non-GAAPAdjusted Operating Shareholders’ Equity and Non-GAAP Adjusted Book Value
Management believes that non-GAAPadjusted 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 adjusts non-GAAP operating shareholders’ equity further by removing FG VIE consolidation to arrive at its core operating shareholders' equity and core adjusted book value.loss.
Non-GAAP operating shareholders’ equity is the basis of the calculation of non-GAAP adjusted book value (see below). Non-GAAP Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:
| |
1) | Elimination of non-credit-impairment1) Elimination of non-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) | 2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. |
| |
3) | Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss.
|
3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). 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 would 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 non-GAAP adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in non-GAAP 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 non-GAAP adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company’s in-force premiums and revenues net of expected losses. Non-GAAP adjustedAdjusted book value is non-GAAPadjusted 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.1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.
|
| |
2) | Addition of the net present value of estimated net future revenue on non-financial guaranty contracts.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 expected future net earned premiums, net of expected losses to be expensed, which are not reflected in GAAP equity.
|
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 asset or liabilityeffects 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 non-GAAP adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current non-GAAP adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
Reconciliation of Shareholders’ Equity Attributable to AGL
to Non-GAAPAdjusted Operating Shareholders’ Equity and Adjusted Book Value
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 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 | $ | 5,802 | | | $ | 89.20 | | | $ | 6,292 | | | $ | 93.19 | |
| Less pre-tax adjustments: | | | | | | | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (57) | | | (0.88) | | | (54) | | | (0.80) | |
| Fair value gains (losses) on CCS | 24 | | | 0.38 | | | 23 | | | 0.34 | |
| Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | (26) | | | (0.41) | | | 404 | | | 5.99 | |
| Less taxes | 1 | | | 0.02 | | | (72) | | | (1.07) | |
| Adjusted operating shareholders’ equity | 5,860 | | | 90.09 | | | 5,991 | | | 88.73 | |
| Pre-tax adjustments: | | | | | | | |
| Less: Deferred acquisition costs | 135 | | | 2.07 | | | 131 | | | 1.95 | |
| Plus: Net present value of estimated net future revenue | 164 | | | 2.52 | | | 160 | | | 2.37 | |
| Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed | 3,369 | | | 51.79 | | | 3,402 | | | 50.40 | |
| Plus taxes | (593) | | | (9.12) | | | (599) | | | (8.88) | |
| Adjusted book value | $ | 8,665 | | | $ | 133.21 | | | 8,823 | | | 130.67 | |
| | | | | | | |
| Gain (loss) related to FG VIE and CIV consolidation included in: | | | | | | | |
| Adjusted operating shareholders’ equity (net of tax provision (benefit) of $5 and $5) | $ | 22 | | | $ | 0.34 | | | $ | 32 | | | $ | 0.47 | |
| Adjusted book value (net of tax provision (benefit) of $3 and $3) | 13 | | | 0.19 | | | 23 | | | 0.34 | |
|
| | | | | | | | | | | | | | | |
| | As of
September 30, 2017 | | As of
December 31, 2016 |
| | After-Tax | | Per Share | | After-Tax | | Per Share |
| | (dollars in millions, except per share amounts) |
| Shareholders’ equity | $ | 6,878 |
| | $ | 58.32 |
| | $ | 6,504 |
| | $ | 50.82 |
|
| Less pre-tax adjustments: | | | | | | | |
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (129 | ) | | (1.09 | ) | | (189 | ) | | (1.48 | ) |
| Fair value gains (losses) on CCS | 58 |
| | 0.49 |
| | 62 |
| | 0.48 |
|
| Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | 506 |
| | 4.29 |
| | 316 |
| | 2.47 |
|
| Less taxes | (147 | ) | | (1.24 | ) | | (71 | ) | | (0.54 | ) |
| Non-GAAP operating shareholders’ equity | 6,590 |
| | 55.87 |
| | 6,386 |
| | 49.89 |
|
| Pre-tax adjustments: | | | | | |
| | |
|
| Less: Deferred acquisition costs | 106 |
| | 0.89 |
| | 106 |
| | 0.83 |
|
| Plus: Net present value of estimated net future revenue | 144 |
| | 1.22 |
| | 136 |
| | 1.07 |
|
| Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed | 3,091 |
| | 26.21 |
| | 2,922 |
| | 22.83 |
|
| Plus taxes | (899 | ) | | (7.63 | ) | | (832 | ) | | (6.50 | ) |
| Non-GAAP adjusted book value | $ | 8,820 |
| | $ | 74.78 |
| | $ | 8,506 |
| | $ | 66.46 |
|
| | | | | | | | |
| Gain (loss) related to FG VIE consolidation included in non-GAAP operating shareholders' equity (net of tax (provision) benefit of $(1) and $4) | $ | 3 |
| | $ | 0.01 |
| | (7 | ) | | (0.06 | ) |
| | | | | | | | |
| Gain (loss) related to FG VIE consolidation included in non-GAAP adjusted book value (net of tax benefit of $7 and $12) | $ | (13 | ) | | $ | (0.11 | ) | | (24 | ) | | (0.18 | ) |
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 non-financial guaranty insurance contracts. There is no corresponding GAAP financial measure. This amount represents the net present value of estimated future revenue from the Company’s non-financial guarantythese 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.
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
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2017 | | Third Quarter 2016 |
| | Public Finance | | Structured Finance | | | | Public Finance | | Structured Finance | | |
| | U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total | | U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total |
| | (in millions) |
| GWP | $ | 37 |
| | $ | 8 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 45 |
| | $ | 24 |
| | $ | (9 | ) | | $ | 1 |
| | $ | 0 |
| | $ | 16 |
|
| Less: Installment GWP and other GAAP adjustments(1) | 2 |
| | 8 |
| | 1 |
| | (1 | ) | | 10 |
| | (1 | ) | | (9 | ) | | 1 |
| | 0 |
| | (9 | ) |
| Upfront GWP | 35 |
| | — |
| | — |
| | — |
| | 35 |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
| Plus: Installment premium PVP | 4 |
| | 4 |
| | 0 |
| | — |
| | 8 |
| | 0 |
| | 2 |
| | 23 |
| | — |
| | 25 |
|
| PVP | $ | 39 |
| | $ | 4 |
| | $ | 0 |
| | $ | — |
| | $ | 43 |
| | $ | 25 |
| | $ | 2 |
| | $ | 23 |
| | $ | — |
| | $ | 50 |
|
| | | | Nine Months 2017 | | Nine Months 2016 | | First Quarter 2022 | | First Quarter 2021 |
| | Public Finance | | Structured Finance | | | | Public Finance | | Structured Finance | | | | 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 | | 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 | $ | 132 |
| | $ | 92 |
| | $ | 3 |
| | $ | 8 |
| | $ | 235 |
| | $ | 72 |
| | $ | 6 |
| | $ | (5 | ) | | $ | (2 | ) | | $ | 71 |
| GWP | $ | 49 | | | $ | 16 | | | $ | 5 | | | $ | — | | | $ | 70 | | | $ | 79 | | | $ | 5 | | | $ | 3 | | | $ | — | | | $ | 87 | |
| Less: Installment GWP and other GAAP adjustments(1) | (1 | ) | | 90 |
| | 3 |
| | (2 | ) | | 90 |
| | (17 | ) | | 6 |
| | (5 | ) | | (2 | ) | | (18 | ) | |
| Less: Installment GWP and other GAAP adjustments (1) | | Less: Installment GWP and other GAAP adjustments (1) | — | | | 16 | | | 3 | | | — | | | 19 | | | 34 | | | 3 | | | 1 | | | — | | | 38 | |
| Upfront GWP | 133 |
| | 2 |
| | — |
| | 10 |
| | 145 |
| | 89 |
| | — |
| | 0 |
| | — |
| | 89 |
| Upfront GWP | 49 | | | — | | | 2 | | | — | | | 51 | | | 45 | | | 2 | | | 2 | | | — | | | 49 | |
| Plus: Installment premium PVP | 4 |
| | 56 |
| | 5 |
| | 2 |
| | 67 |
| | 0 |
| | 16 |
| | 24 |
| | — |
| | 40 |
| |
| Plus: Installment premiums and other (2) | | Plus: Installment premiums and other (2) | — | | | 12 | | | — | | | 6 | | | 18 | | | 36 | | | 1 | | | — | | | — | | | 37 | |
| PVP | $ | 137 |
| | $ | 58 |
| | $ | 5 |
| | $ | 12 |
| | $ | 212 |
| | $ | 89 |
| | $ | 16 |
| | $ | 24 |
| | $ | — |
| | $ | 129 |
| PVP | $ | 49 | | | $ | 12 | | | $ | 2 | | | $ | 6 | | | $ | 69 | | | $ | 81 | | | $ | 3 | | | $ | 2 | | | $ | — | | | $ | 86 | |
___________________
| |
(1) | Includes(1) This 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 any cancellations of assumed reinsurance contracts, and other GAAP adjustments. |
(2) This 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. This 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 ASC 460, Guarantees.
Insured Portfolio
The Company’s financial guaranty and specialty exposures, as well as a guarantee are described in Item 1, Financial Statements, Note 3, Outstanding Exposure.
Financial Guaranty Exposure
The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.
The following table presents the financial guaranty portfolio by asset classsector, 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). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated) from par and principal or interest (debt service) outstanding, which amounts are included in the investment portfolio, because it manages such securities as investments and not insurance exposure. As of September 30, 2017 and December 31, 2016, the Company excluded $2.0 billion and $2.1 billion, respectively, of net par related to loss mitigation securities (which are mostly BIG), and other loss mitigation strategies.along with each sector’s average rating.
Financial Guaranty Portfolio
Net Par Outstanding and Average Internal Rating by Sector
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 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 | | $ | 71,993 | | | A- | | $ | 72,896 | | | A- |
| Tax backed | | 34,698 | | | A- | | 35,726 | | | A- |
| Municipal utilities | | 25,238 | | | A- | | 25,556 | | | A- |
| Transportation | | 18,252 | | | BBB+ | | 17,241 | | | BBB+ |
| Healthcare | | 9,780 | | | BBB+ | | 9,588 | | | BBB+ |
| Higher education | | 6,871 | | | A- | | 6,927 | | | A- |
| Infrastructure finance | | 6,298 | | | A- | | 6,329 | | | A- |
| Housing revenue | | 999 | | | BBB- | | 1,000 | | | BBB- |
| Investor-owned utilities | | 509 | | | A- | | 611 | | | A- |
| Renewable energy | | 183 | | | A- | | 193 | | | A- |
| Other public finance | | 1,136 | | | A- | | 1,152 | | | A- |
| Total U.S. public finance | | 175,957 | | | A- | | 177,219 | | | A- |
| Non-U.S public finance: | | | | | | | | |
| Regulated utilities | | 18,732 | | | BBB+ | | 18,814 | | | BBB+ |
| Infrastructure finance | | 15,723 | | | BBB | | 16,475 | | | BBB |
| Sovereign and sub-sovereign | | 10,574 | | | A+ | | 10,886 | | | A+ |
| Renewable energy | | 2,231 | | | A- | | 2,398 | | | A- |
| Pooled infrastructure | | 1,246 | | | AAA | | 1,372 | | | AAA |
| Total non-U.S. public finance | | 48,506 | | | BBB+ | | 49,945 | | | BBB+ |
| Total public finance | | 224,463 | | | A- | | 227,164 | | | A- |
| Structured finance: | | | | | | | | |
| U.S. structured finance: | | | | | | | | |
| Life insurance transactions | | 3,443 | | | AA- | | 3,431 | | | AA- |
| RMBS | | 2,277 | | | BB+ | | 2,391 | | | BB+ |
| Financial products | | 600 | | | AA- | | 770 | | | AA- |
| Consumer receivables | | 545 | | | A+ | | 583 | | | A+ |
| Pooled corporate obligations | | 518 | | | AA+ | | 534 | | | AA+ |
| Other structured finance | | 718 | | | BBB+ | | 665 | | | BBB+ |
| Total U.S. structured finance | | 8,101 | | | A | | 8,374 | | | A |
| Non-U.S. structured finance: | | | | | | | | |
| Pooled corporate obligations | | 342 | | | AAA | | 351 | | | AAA |
| RMBS | | 310 | | | A | | 325 | | | A |
| Other structured finance | | 163 | | | AA | | 178 | | | AA |
| Total non-U.S structured finance | | 815 | | | AA | | 854 | | | AA |
| Total structured finance | | 8,916 | | | A | | 9,228 | | | A |
| Total net par outstanding | | $ | 233,379 | | | A- | | $ | 236,392 | | | A- |
|
| | | | | | | | | | | | |
| | | As of September 30, 2017 | | As of December 31, 2016 |
| Sector | | Net Par Outstanding | | Avg. Rating | | Net Par Outstanding | | Avg. Rating |
| | | (dollars in millions) |
| Public finance: | | | | | | |
| | |
| U.S.: | | | | | | |
| | |
| General obligation | | $ | 93,904 |
| | A- | | $ | 107,717 |
| | A |
| Tax backed | | 45,795 |
| | A- | | 49,931 |
| | A- |
| Municipal utilities | | 33,883 |
| | A- | | 37,603 |
| | A |
| Transportation | | 17,876 |
| | A- | | 19,403 |
| | A- |
| Healthcare | | 9,856 |
| | A | | 11,238 |
| | A |
| Higher education | | 8,911 |
| | A | | 10,085 |
| | A |
| Infrastructure finance | | 4,185 |
| | BBB+ | | 3,769 |
| | BBB+ |
| Housing | | 1,221 |
| | A- | | 1,559 |
| | A- |
| Investor-owned utilities | | 587 |
| | BBB+ | | 697 |
| | BBB+ |
| Other public finance—U.S. | | 1,998 |
| | A | | 2,796 |
| | A |
| Total public finance—U.S. | | 218,216 |
| | A- | | 244,798 |
| | A |
| Non-U.S.: | | | | | | |
| | |
| Infrastructure finance | | 18,803 |
| | BBB | | 10,731 |
| | BBB |
| Regulated utilities | | 15,847 |
| | BBB+ | | 9,263 |
| | BBB+ |
| Pooled infrastructure | | 1,553 |
| | AAA | | 1,513 |
| | AAA |
| Other public finance | | 6,524 |
| | A | | 4,874 |
| | A |
| Total public finance—non-U.S. | | 42,727 |
| | BBB+ | | 26,381 |
| | BBB+ |
| Total public finance | | 260,943 |
| | A- | | 271,179 |
| | A- |
| Structured finance: | | | | | | |
| | |
| U.S.: | | | | | | |
| | |
| RMBS | | 5,064 |
| | BBB- | | 5,637 |
| | BBB- |
| Insurance securitizations | | 2,308 |
| | AA- | | 2,308 |
| | A+ |
| Pooled corporate obligations | | 2,042 |
| | AA- | | 10,050 |
| | AAA |
| Consumer receivables | | 1,630 |
| | A- | | 1,652 |
| | BBB+ |
| Financial products | | 1,432 |
| | AA- | | 1,540 |
| | AA- |
| Commercial receivables | | 162 |
| | BBB | | 230 |
| | BBB- |
| Other structured finance—U.S. | | 504 |
| | A+ | | 640 |
| | AA- |
| Total structured finance—U.S. | | 13,142 |
| | A- | | 22,057 |
| | A+ |
| Non-U.S.: | | | | | | |
| | |
| RMBS | | 639 |
| | A- | | 604 |
| | A- |
| Pooled corporate obligations | | 371 |
| | AA- | | 1,535 |
| | AA |
| Commercial receivables | | 309 |
| | A | | 356 |
| | BBB+ |
| Other structured finance | | 363 |
| | A | | 587 |
| | AA |
| Total structured finance—non-U.S. | | 1,682 |
| | A | | 3,082 |
| | AA- |
| Total structured finance | | 14,824 |
| | A- | | 25,139 |
| | AA- |
| Total net par outstanding | | $ | 275,767 |
| | A- | | $ | 296,318 |
| | A |
The following tables set forthSecond-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
As of September 30, 2017
insurer default. The Company
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 915 |
| | 0.4 | % | | $ | 2,523 |
| | 5.9 | % | | $ | 2,333 |
| | 17.8 | % | | $ | 419 |
| | 25.0 | % | | $ | 6,190 |
| | 2.2 | % |
| AA | | 33,614 |
| | 15.4 |
| | 301 |
| | 0.7 |
| | 4,853 |
| | 36.9 |
| | 76 |
| | 4.5 |
| | 38,844 |
| | 14.1 |
|
| A | | 124,332 |
| | 57.0 |
| | 13,657 |
| | 32.0 |
| | 1,778 |
| | 13.5 |
| | 268 |
| | 15.9 |
| | 140,035 |
| | 50.8 |
|
| BBB | | 52,021 |
| | 23.8 |
| | 23,965 |
| | 56.1 |
| | 724 |
| | 5.5 |
| | 762 |
| | 45.3 |
| | 77,472 |
| | 28.1 |
|
| BIG | | 7,334 |
| | 3.4 |
| | 2,281 |
| | 5.3 |
| | 3,454 |
| | 26.3 |
| | 157 |
| | 9.3 |
| | 13,226 |
| | 4.8 |
|
| Total net par outstanding (1) | | $ | 218,216 |
| | 100.0 | % | | $ | 42,727 |
| | 100.0 | % | | $ | 13,142 |
| | 100.0 | % | | $ | 1,682 |
| | 100.0 | % | | $ | 275,767 |
| | 100.0 | % |
_____________________
| |
(1) | The September 30, 2017 amounts include $13.0 billion of net par from the MBIA UK Acquisition. Please refer to Part I, Item 1, Financial Statements, Note 13, Reinsuranceunderwrites 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 March 31, 2022 and Other Monoline Exposures, for the effect of commutations on net par outstanding. |
Financial Guaranty Portfolio by Internal Rating
As of December 31, 2016 2021 was $4.7 billion and $4.9 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were BIG was $39 million and $43 million as of March 31, 2022 and December 31, 2021, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 2,066 |
| | 0.8 | % | | $ | 2,221 |
| | 8.4 | % | | $ | 9,757 |
| | 44.2 | % | | $ | 1,447 |
| | 47.0 | % | | $ | 15,491 |
| | 5.2 | % |
| AA | | 46,420 |
| | 19.0 |
| | 170 |
| | 0.6 |
| | 5,773 |
| | 26.2 |
| | 127 |
| | 4.1 |
| | 52,490 |
| | 17.7 |
|
| A | | 133,829 |
| | 54.7 |
| | 6,270 |
| | 23.8 |
| | 1,589 |
| | 7.2 |
| | 456 |
| | 14.8 |
| | 142,144 |
| | 48.0 |
|
| BBB | | 55,103 |
| | 22.5 |
| | 16,378 |
| | 62.1 |
| | 879 |
| | 4.0 |
| | 759 |
| | 24.6 |
| | 73,119 |
| | 24.7 |
|
| BIG | | 7,380 |
| | 3.0 |
| | 1,342 |
| | 5.1 |
| | 4,059 |
| | 18.4 |
| | 293 |
| | 9.5 |
| | 13,074 |
| | 4.4 |
|
| Total net par outstanding | | $ | 244,798 |
| | 100.0 | % | | $ | 26,381 |
| | 100.0 | % | | $ | 22,057 |
| | 100.0 | % | | $ | 3,082 |
| | 100.0 | % | | $ | 296,318 |
| | 100.0 | % |
Exposure to Puerto Rico
The Company hashad 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 $5.0$2.2 billion net par outstanding as of September 30, 2017,March 31, 2022, all of which arewas rated BIG. In recent years, Puerto Rico has experienced significant general fund budget deficits and a challenging economic environment. More recently, Hurricane Maria created additional challenges for Puerto Rico. Beginning on January 1, 2016, a number of Puerto Rico creditsexposures have defaulted on bond payments, and the Company has now paid claims on mostall of its Puerto Rico credits as shown inexposures except the table "Puerto Rico Net Par Outstanding" below. Additional information about recent developments inMunicipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the individual credits insured byUniversity of Puerto Rico (U of PR).
The following tables present information in respect of the Company may be foundPuerto Rico exposures to supplement the disclosures and discussions provided in Part I, Item 1, Financial Statements, Note 4,3, Outstanding Exposure.
The Company groups its Puerto Rico exposure into three categories:
Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year. The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company. Prior to the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico asserting that Puerto Rico's attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief.
Other Public Corporations. The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.
Exposure to Puerto Rico (1)By Company
As of September 30, 2017March 31, 2022
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Par Outstanding | | |
| | | AGM | | AGC | |
AG Re | | Eliminations (2) | | Total Net Par Outstanding (3) | | Gross Par Outstanding |
| | | (in millions) |
| Commonwealth Constitutionally Guaranteed | | | | | | | | | | | | |
| Commonwealth of Puerto Rico - General Obligation Bonds (4) (5) | | $ | 670 |
| | $ | 343 |
| | $ | 407 |
| | $ | (1 | ) | | $ | 1,419 |
| | $ | 1,469 |
|
| Puerto Rico Public Buildings Authority (PBA) (4) | | 9 |
| | 141 |
| | 0 |
| | (9 | ) | | 141 |
| | 146 |
|
| Public Corporations - Certain Revenues Potentially Subject to Clawback | | | | | | | | | | | | |
| Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) (4) (5) | | 252 |
| | 511 |
| | 204 |
| | (85 | ) | | 882 |
| | 913 |
|
| PRHTA (Highway revenue) (4) (5) | | 358 |
| | 93 |
| | 44 |
| | — |
| | 495 |
| | 556 |
|
| Puerto Rico Convention Center District Authority (PRCCDA) (4) | | — |
| | 152 |
| | — |
| | — |
| | 152 |
| | 152 |
|
| Puerto Rico Infrastructure Financing Authority (PRIFA) (4) | | — |
| | 17 |
| | 1 |
| | — |
| | 18 |
| | 18 |
|
| Other Public Corporations | | | | | | | | | | | | |
| Puerto Rico Electric Power Authority (PREPA) (4) (5) | | 547 |
| | 73 |
| | 233 |
| | — |
| | 853 |
| | 870 |
|
| Puerto Rico Aqueduct and Sewer Authority (PRASA) | | — |
| | 284 |
| | 89 |
| | — |
| | 373 |
| | 373 |
|
| Municipal Finance Agency (MFA) | | 221 |
| | 54 |
| | 85 |
| | — |
| | 360 |
| | 416 |
|
| Puerto Rico Sales Tax Financing Corporation (COFINA) (4) (5) | | 263 |
| | — |
| | 9 |
| | — |
| | 272 |
| | 272 |
|
| University of Puerto Rico (U of PR) | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Total exposure to Puerto Rico | | $ | 2,320 |
| | $ | 1,669 |
| | $ | 1,072 |
| | $ | (95 | ) | | $ | 4,966 |
| | $ | 5,186 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Par Outstanding | | |
| | | AGM | | AGC | | AG Re | | Eliminations (1) | | Total
Net Par Outstanding | | Gross
Par Outstanding |
| | | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | | | | | | | | | | | |
| Commonwealth of Puerto Rico - GO (2) | | $ | 6 | | | $ | 28 | | | $ | 13 | | | $ | — | | | $ | 47 | | | $ | 47 | |
| PBA (2) | | 1 | | | 5 | | | — | | | (1) | | | 5 | | | 5 | |
| Total GO/PBA Plan | | 7 | | | 33 | | | 13 | | | (1) | | | 52 | | | 52 | |
| Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) | | 233 | | | 467 | | | 178 | | | (79) | | | 799 | | | 799 | |
| PRHTA (Highway revenue) | | 381 | | | 51 | | | 25 | | | — | | | 457 | | | 457 | |
| Total HTA/CCDA PSA | | 614 | | | 518 | | | 203 | | | (79) | | | 1,256 | | | 1,256 | |
| Total Subject to a Plan or Support Agreement | | 621 | | | 551 | | | 216 | | | (80) | | | 1,308 | | | 1,308 | |
| | | | | | | | | | | | |
| Other Puerto Rico Exposures | | | | | | | | | | | | |
| PREPA | | 469 | | | 69 | | | 210 | | | — | | | 748 | | | 759 | |
| MFA (3) | | 126 | | | 16 | | | 37 | | | — | | | 179 | | | 187 | |
| PRASA and U of PR (3) | | — | | | 2 | | | — | | | — | | | 2 | | | 2 | |
| Total Other Puerto Rico Exposures | | 595 | | | 87 | | | 247 | | | — | | | 929 | | | 948 | |
| Total exposure to Puerto Rico | | $ | 1,216 | | | $ | 638 | | | $ | 463 | | | $ | (80) | | | $ | 2,237 | | | $ | 2,256 | |
___________________
| |
(1) | The September 30, 2017 amounts include $389 million (which comprises $36 million of General Obligation Bonds, $134 million of PREPA, $144 million PRHTA (Highways revenue), and $75 million of MFA) related to 2017 commutations of previously ceded business. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. Please refer to Part I, Item 1, Financial Statements, Note 13, Reinsurance and Other Monoline Exposures, for more information. |
| |
(2) | (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. |
| |
(3) | Includes exposure to capital appreciation bonds with a current aggregate net par outstanding of $25 million and a fully accreted net par at maturity of $56 million. Of these amounts, current net par of $19 million and fully accreted net par at maturity of $50 million relate to the COFINA, current net par of $4 million and fully accreted net par at maturity of $4 million relate to the PRHTA, and current net par of $2 million and fully accreted net par at maturity of $2 million relate to the Commonwealth General Obligation Bonds. |
| |
(4) | As of the date of this filing, the Company has paid claims on these credits.
|
| |
(5) | As of the date of this filing, the seven-member federal financial oversight board established by PROMESA has certified a filing under Title III of PROMESA for these credits. |
(2)On March 15, 2022, the Modified Eighth Amended Title III Joint Plan of Adjustment, confirmed on January 18, 2022, was consummated, pursuant to which the Company, among other things, fully paid claims on all of its directly insured Puerto Rico GO bonds, other than certain GO bonds whose holders made certain elections. On the same date and pursuant to the same Plan of Adjustment, the Company fully paid claims on all of its directly insured PBA bonds, other than certain PBA bonds whose holders made certain elections.
(3) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
The following table showstables 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.
Amortization Schedule
of Net Par Outstanding of Puerto Rico
As of September 30, 2017March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Scheduled Net Par Amortization |
| | 2022 (2Q) | 2022 (3Q) | 2022 (4Q) | 2023 | 2024 | 2025 | 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 | Total |
| | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | | | | | | | | | | | |
| Commonwealth of Puerto Rico - GO | $ | — | | $ | 20 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | | $ | 25 | | $ | — | | $ | — | | $ | — | | $ | 47 | |
| PBA | — | | — | | — | | 3 | | — | | 2 | | — | | — | | — | | — | | — | | 5 | |
| Total - GO/PBA Plan | — | | 20 | | — | | 3 | | — | | 2 | | 2 | | 25 | | — | | — | | — | | 52 | |
| PRHTA (Transportation revenue) | — | | 28 | | — | | 34 | | 4 | | 29 | | 24 | | 164 | | 310 | | 201 | | 5 | | 799 | |
| PRHTA (Highway revenue) | — | | 40 | | — | | 31 | | 33 | | 34 | | 1 | | 78 | | 240 | | — | | — | | 457 | |
| Total - HTA/CCDA PSA | — | | 68 | | — | | 65 | | 37 | | 63 | | 25 | | 242 | | 550 | | 201 | | 5 | | 1,256 | |
| Total Subject to a Plan or Support Agreement | — | | 88 | | — | | 68 | | 37 | | 65 | | 27 | | 267 | | 550 | | 201 | | 5 | | 1,308 | |
| | | | | | | | | | | | |
| Other Puerto Rico Exposures | | | | | | | | | | | | |
| PREPA | — | | 28 | | — | | 95 | | 93 | | 68 | | 106 | | 332 | | 26 | | — | | — | | 748 | |
| MFA | — | | 43 | | — | | 23 | | 18 | | 18 | | 37 | | 40 | | — | | — | | — | | 179 | |
| PRASA and U of PR | — | | — | | — | | — | | 1 | | — | | — | | — | | 1 | | — | | — | | 2 | |
| Total Other Puerto Rico Exposures | — | | 71 | | — | | 118 | | 112 | | 86 | | 143 | | 372 | | 27 | | — | | — | | 929 | |
| | | | | | | | | | | | |
| Total | $ | — | | $ | 159 | | $ | — | | $ | 186 | | $ | 149 | | $ | 151 | | $ | 170 | | $ | 639 | | $ | 577 | | $ | 201 | | $ | 5 | | $ | 2,237 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Scheduled Net Par Amortization |
| | 2017 (4Q) | 2018 (1Q) | 2018 (2Q) | 2018 (3Q) | 2018 (4Q) | 2019 | 2020 | 2021 | 2022 - 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 - 2047 | Total |
| | (in millions) |
| Commonwealth Constitutionally Guaranteed | | | | | | | | | | | | | | |
| Commonwealth of Puerto Rico - General Obligation Bonds | $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 78 |
| $ | 0 |
| $ | 87 |
| $ | 141 |
| $ | 15 |
| $ | 226 |
| $ | 278 |
| $ | 489 |
| $ | 105 |
| $ | — |
| $ | 1,419 |
|
| PBA | — |
| — |
| — |
| — |
| — |
| 3 |
| 5 |
| 13 |
| 24 |
| 42 |
| 54 |
| — |
| — |
| 141 |
|
| Public Corporations - Certain Revenues Potentially Subject to Clawback | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
| PRHTA (Transportation revenue) | 0 |
| 0 |
| 0 |
| 38 |
| — |
| 32 |
| 25 |
| 18 |
| 119 |
| 156 |
| 295 |
| 194 |
| 5 |
| 882 |
|
| PRHTA (Highway revenue) | — |
| — |
| — |
| 20 |
| — |
| 21 |
| 22 |
| 35 |
| 106 |
| 73 |
| 218 |
| — |
| — |
| 495 |
|
| PRCCDA | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 19 |
| 133 |
| — |
| — |
| 152 |
|
| PRIFA | — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| — |
| 2 |
| — |
| — |
| 14 |
| — |
| 18 |
|
| Other Public Corporations | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
| PREPA | — |
| — |
| — |
| 5 |
| — |
| 26 |
| 48 |
| 28 |
| 390 |
| 330 |
| 26 |
| 0 |
| — |
| 853 |
|
| PRASA | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 53 |
| 57 |
| — |
| 2 |
| 261 |
| 373 |
|
| MFA | — |
| — |
| — |
| 57 |
| — |
| 55 |
| 45 |
| 40 |
| 130 |
| 33 |
| — |
| — |
| — |
| 360 |
|
| COFINA | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (1 | ) | (1 | ) | (2 | ) | (5 | ) | (7 | ) | 34 |
| 102 |
| 152 |
| 272 |
|
| U of PR | — |
| — |
| — |
| 0 |
| — |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1 |
| — |
| — |
| 1 |
|
| Total | $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 200 |
| $ | 0 |
| $ | 223 |
| $ | 285 |
| $ | 147 |
| $ | 1,045 |
| $ | 981 |
| $ | 1,250 |
| $ | 417 |
| $ | 418 |
| $ | 4,966 |
|
Amortization Schedule
of Net Debt Service Outstanding of Puerto Rico
As of September 30, 2017March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Scheduled Net Debt Service Amortization |
| | 2022 (2Q) | 2022 (3Q) | 2022 (4Q) | 2023 | 2024 | 2025 | 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 | Total |
| | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | | | | | | | | | | | |
| Commonwealth of Puerto Rico - GO | $ | — | | $ | 22 | | $ | — | | $ | 2 | | $ | 2 | | $ | 1 | | $ | 3 | | $ | 28 | | $ | — | | $ | — | | $ | — | | $ | 58 | |
| PBA | — | | — | | — | | 3 | | — | | 2 | | — | | — | | — | | — | | — | | 5 | |
| Total - GO/PBA Plan | — | | 22 | | — | | 5 | | 2 | | 3 | | 3 | | 28 | | — | | — | | — | | 63 | |
| PRHTA (Transportation revenue) | — | | 48 | | — | | 73 | | 42 | | 67 | | 61 | | 323 | | 423 | | 237 | | 5 | | 1,279 | |
| PRHTA (Highway revenue) | — | | 52 | | — | | 54 | | 52 | | 53 | | 18 | | 159 | | 279 | | — | | — | | 667 | |
| Total - HTA/CCDA PSA | — | | 100 | | — | | 127 | | 94 | | 120 | | 79 | | 482 | | 702 | | 237 | | 5 | | 1,946 | |
| Total Subject to a Plan or Support Agreement | — | | 122 | | — | | 132 | | 96 | | 123 | | 82 | | 510 | | 702 | | 237 | | 5 | | 2,009 | |
| | | | | | | | | | | | |
| Other Puerto Rico Exposures | | | | | | | | | | | | |
| PREPA | 3 | | 43 | | 3 | | 128 | | 122 | | 92 | | 126 | | 380 | | 29 | | — | | — | | 926 | |
| MFA | — | | 48 | | — | | 29 | | 24 | | 22 | | 41 | | 45 | | — | | — | | — | | 209 | |
| PRASA and U of PR | — | | — | | — | | — | | 1 | | — | | — | | — | | 1 | | — | | — | | 2 | |
| Total Other Puerto Rico Exposures | 3 | | 91 | | 3 | | 157 | | 147 | | 114 | | 167 | | 425 | | 30 | | — | | — | | 1,137 | |
| | | | | | | | | | | | |
| Total | $ | 3 | | $ | 213 | | $ | 3 | | $ | 289 | | $ | 243 | | $ | 237 | | $ | 249 | | $ | 935 | | $ | 732 | | $ | 237 | | $ | 5 | | $ | 3,146 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Scheduled Net Debt Service Amortization |
| | 2017 (4Q) | 2018 (1Q) | 2018 (2Q) | 2018 (3Q) | 2018 (4Q) | 2019 | 2020 | 2021 | 2022 - 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 - 2047 | Total |
| | (in millions) |
| Commonwealth Constitutionally Guaranteed | | | | | | | | | | | | | | |
| Commonwealth of Puerto Rico - General Obligation Bonds | $ | 0 |
| $ | 37 |
| $ | 0 |
| $ | 114 |
| $ | 0 |
| $ | 156 |
| $ | 206 |
| $ | 74 |
| $ | 494 |
| $ | 475 |
| $ | 595 |
| $ | 111 |
| $ | — |
| $ | 2,262 |
|
| PBA | — |
| 4 |
| — |
| 4 |
| — |
| 10 |
| 12 |
| 20 |
| 54 |
| 58 |
| 62 |
| — |
| — |
| 224 |
|
| Public Corporations - Certain Revenues Potentially Subject to Clawback | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
| PRHTA (Transportation revenue) | 0 |
| 23 |
| 0 |
| 61 |
| — |
| 76 |
| 67 |
| 59 |
| 306 |
| 308 |
| 403 |
| 229 |
| 5 |
| 1,537 |
|
| PRHTA (Highway revenue) | — |
| 13 |
| — |
| 33 |
| — |
| 47 |
| 46 |
| 58 |
| 198 |
| 147 |
| 253 |
| — |
| — |
| 795 |
|
| PRCCDA | — |
| 3 |
| — |
| 3 |
| — |
| 7 |
| 7 |
| 7 |
| 35 |
| 50 |
| 152 |
| — |
| — |
| 264 |
|
| PRIFA | — |
| 0 |
| — |
| 2 |
| — |
| 1 |
| 1 |
| 1 |
| 6 |
| 4 |
| 4 |
| 16 |
| — |
| 35 |
|
| Other Public Corporations | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
| PREPA | 3 |
| 18 |
| 3 |
| 22 |
| 3 |
| 65 |
| 87 |
| 63 |
| 528 |
| 380 |
| 29 |
| 0 |
| — |
| 1,201 |
|
| PRASA | — |
| 10 |
| — |
| 10 |
| — |
| 19 |
| 19 |
| 19 |
| 147 |
| 129 |
| 68 |
| 70 |
| 327 |
| 818 |
|
| MFA | — |
| 9 |
| — |
| 67 |
| — |
| 70 |
| 58 |
| 50 |
| 157 |
| 36 |
| — |
| — |
| — |
| 447 |
|
| COFINA | 0 |
| 6 |
| 0 |
| 6 |
| 0 |
| 13 |
| 13 |
| 13 |
| 70 |
| 68 |
| 102 |
| 162 |
| 160 |
| 613 |
|
| U of PR | — |
| 0 |
| — |
| 0 |
| — |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1 |
| — |
| — |
| 1 |
|
| Total | $ | 3 |
| $ | 123 |
| $ | 3 |
| $ | 322 |
| $ | 3 |
| $ | 464 |
| $ | 516 |
| $ | 364 |
| $ | 1,995 |
| $ | 1,655 |
| $ | 1,669 |
| $ | 588 |
| $ | 492 |
| $ | 8,197 |
|
Financial Guaranty Exposure to Residential Mortgage-Backed SecuritiesU.S. RMBS
The tables below providefollowing table presents information on the risk ratings and certain other risk characteristicsin respect of the Company’s financial guaranty insurance, FG VIEU.S. RMBS exposures to supplement the disclosures and credit derivative RMBS exposures. Asdiscussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid
(Recovered). U.S. RMBS exposures represent 2%1.0% of the total net par outstanding, and BIG U.S. RMBS represent 22%21.8% of total BIG net par outstanding. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid, for a discussion of expected losses to be paid on U.S. RMBS exposures.
Distribution of U.S. RMBS by Rating and Type of Exposure as of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Ratings: | | Prime First Lien | | Alt-A First Lien | | Option ARMs | | Subprime First Lien | | Second Lien | | Total Net Par Outstanding |
| | | (in millions) |
| AAA | | $ | 5 |
| | $ | 153 |
| | $ | 26 |
| | $ | 1,325 |
| | $ | 0 |
| | $ | 1,509 |
|
| AA | | 17 |
| | 217 |
| | 32 |
| | 246 |
| | — |
| | 512 |
|
| A | | 10 |
| | — |
| | 0 |
| | 82 |
| | 0 |
| | 92 |
|
| BBB | | 11 |
| | 0 |
| | — |
| | 69 |
| | 1 |
| | 81 |
|
| BIG | | 115 |
| | 511 |
| | 63 |
| | 1,080 |
| | 1,100 |
| | 2,869 |
|
| Total exposures | | $ | 157 |
| | $ | 881 |
| | $ | 121 |
| | $ | 2,803 |
| | $ | 1,101 |
| | $ | 5,064 |
|
Distribution of U.S. RMBS by Year Insured and Type of Exposure as of September 30, 2017March 31, 2022
| | Year insured: | | Prime First Lien | | Alt-A First Lien | | Option ARMs | | Subprime First Lien | | Second Lien | | Total Net Par Outstanding | Year
insured: | | Prime
First Lien | | Alt-A
First Lien | | Option
ARMs | | Subprime
First Lien | | Second
Lien | | Total Net Par
Outstanding |
| | | (in millions) | | | (in millions) |
| 2004 and prior | | $ | 21 |
| | $ | 39 |
| | $ | 13 |
| | $ | 847 |
| | $ | 56 |
| | $ | 975 |
| 2004 and prior | | $ | 11 | | | $ | 10 | | | $ | — | | | $ | 384 | | | $ | 20 | | | $ | 425 | |
| 2005 | | 78 |
| | 312 |
| | 27 |
| | 158 |
| | 229 |
| | 804 |
| 2005 | | 25 | | | 136 | | | 16 | | | 191 | | | 69 | | | 437 | |
| 2006 | | 59 |
| | 60 |
| | 21 |
| | 610 |
| | 318 |
| | 1,069 |
| 2006 | | 29 | | | 29 | | | 1 | | | 54 | | | 127 | | | 240 | |
| 2007 | | — |
| | 471 |
| | 59 |
| | 1,116 |
| | 498 |
| | 2,144 |
| 2007 | | — | | | 215 | | | 18 | | | 737 | | | 172 | | | 1,142 | |
| 2008 | | — |
| | — |
| | — |
| | 71 |
| | — |
| | 71 |
| 2008 | | — | | | — | | | — | | | 33 | | | — | | | 33 | |
| Total exposures | | $ | 157 |
| | $ | 881 |
| | $ | 121 |
| | $ | 2,803 |
| | $ | 1,101 |
| | $ | 5,064 |
| Total exposures | | $ | 65 | | | $ | 390 | | | $ | 35 | | | $ | 1,399 | | | $ | 388 | | | $ | 2,277 | |
| | Exposures rated BIG | | Exposures rated BIG | | $ | 43 | | | $ | 226 | | | $ | 16 | | | $ | 807 | | | $ | 137 | | | $ | 1,229 | |
Exposure to the U.S. Virgin Islands
The Company has $498 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rates $224 million BIG. The $274 million USVI net par the Company rates investment grade is comprised primarily of bonds secured by a lien on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum. The $224 million BIG USVI net par comprises (a) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.
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 to this year’s hurricanes and has made its debt service payments to date.
Exposure to Selected European Countries
The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal, Spain and Turkey (collectively, the Selected European Countries). The Company’s direct economic exposure to the Selected European Countries, based on par, is shown in the following tables, both gross and net of ceded reinsurance.
Gross Direct Economic Exposure
to Selected European Countries(1)
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Hungary | | Italy | | Portugal | | Spain | | Turkey | | Total |
| | (in millions) |
| Sub-sovereign exposure(2) | $ | 214 |
| | $ | 1,217 |
| | $ | 76 |
| | $ | 474 |
| | $ | — |
| | $ | 1,981 |
|
| Non-sovereign exposure(3) | 125 |
| | 465 |
| | — |
| | — |
| | 200 |
| | 790 |
|
| Total | $ | 339 |
| | $ | 1,682 |
| | $ | 76 |
| | $ | 474 |
| | $ | 200 |
| | $ | 2,771 |
|
| Total BIG | $ | 262 |
| | $ | — |
| | $ | 76 |
| | $ | 474 |
| | $ | — |
| | $ | 812 |
|
Net Direct Economic Exposure
to Selected European Countries(1)
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Hungary | | Italy | | Portugal | | Spain | | Turkey | | Total |
| | (in millions) |
| Sub-sovereign exposure(2) | $ | 214 |
| | $ | 1,034 |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 1,779 |
|
| Non-sovereign exposure(3) | 125 |
| | 449 |
| | — |
| | — |
| | 200 |
| | 774 |
|
| Total | $ | 339 |
| | $ | 1,483 |
| | $ | 75 |
| | $ | 456 |
| | $ | 200 |
| | $ | 2,553 |
|
| Total BIG | $ | 262 |
| | $ | — |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 793 |
|
____________________
| |
(1) | While exposures are shown in U.S. dollars, the obligations are in various currencies, primarily euros.
|
| |
(2) | Sub-sovereign exposure in Selected European Countries includes transactions backed by receivables from, or supported by, sub-sovereigns, which are governmental or government-backed entities other than the ultimate governing body of the country.
|
| |
(3) | Non-sovereign exposure in Selected European Countries includes debt of regulated utilities, RMBS and diversified payment rights (DPR) securitizations.
|
The $200 million net insured par exposure in Turkey is to DPR securitizations sponsored by a major Turkish bank. These DPR securitizations were established outside of Turkey and involve payment orders in U.S. dollars, pounds sterling and euros from persons outside of Turkey to beneficiaries in Turkey who are customers of the sponsoring bank. The sponsoring bank's correspondent banks have agreed to remit all such payments to a trustee-controlled account outside Turkey, where debt service payments for the DPR securitization are given priority over payments to the sponsoring bank.
The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $46 million to Selected European Countries in transactions with $0.7 billion of net par outstanding.
Non-Financial Guaranty Insurance
The Company provided capital relief triple-X excess of loss life reinsurance on approximately $540 million of exposure as of September 30, 2017 and $390 million as of December 31, 2016. The triple-X excess of loss life reinsurance exposure is expected to increase to approximately $1.2 billion prior to September 30, 2036.
In addition, the Company started providing reinsurance on aircraft RVI policies in the first quarter of 2017 and had net exposure of $116 million to such reinsurance as of September 30, 2017.
The capital relief triple-X excess of loss life reinsurance and aircraft residual value reinsurance are all rated investment grade internally. This non-financial guaranty exposure has a similar risk profile to the Company's other structured finance investment grade exposure written in financial guaranty form.
Monoline and Reinsurer Exposures
The Company has exposure to other monolines and reinsurers through reinsurance arrangements (both as a ceding company and as an assuming company) and in "second-to-pay" transactions. A number of the monolines and reinsurers to which the Company has exposure have experienced financial distress and, as a result, have been downgraded by the rating agencies. In addition, state insurance regulators have intervened with respect to some of these distressed insurers, in some instances limiting the amount of claim payments they are permitted to pay currently in cash.
Ceded par outstanding represents the portion of insured risk ceded to external reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. 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. In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table below are required to post collateral for the benefit of the Company in an amount at least equal 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 in the table below post collateral on terms negotiated with the Company. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of September 30, 2017 was approximately $123 million.
Assumed par outstanding represents the amount of par assumed by the Company from third party insurers and reinsurers, including other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.
In "second-to-pay" transactions, the Company provides insurance on an obligation that is already insured by another financial guarantor. In that case, if the underlying obligor and the financial guarantor both fail to pay an amount scheduled to be paid, the Company would be obligated to pay. The Company underwrites these transactions based on the underlying obligation, without regard to the financial guarantor. Please refer to Part I, Item 1, Financial Statements, Note 13, Reinsurance and Other Monoline Exposures, for additional information.
Reinsurance and Other Exposures to Monolines
|
| | | | | | | | | | | | |
| | | Par Outstanding |
| | | As of September 30, 2017 |
| Reinsurer | | Ceded Par Outstanding (1) | | Assumed Par Outstanding | | Second-to- Pay Insured Par Outstanding (2) |
| | | (in millions) |
| Reinsurers rated investment grade: | | | | | | |
| National Public Finance Guarantee Corporation | | $ | — |
| | $ | 3,245 |
| | $ | 2,730 |
|
| Subtotal | | — |
| | 3,245 |
| | 2,730 |
|
| Reinsurers rated BIG or not rated: | | | | | | |
| American Overseas Reinsurance Company Limited (3) | | 2,445 |
| | — |
| | — |
|
| Syncora Guarantee Inc. (3) | | 1,994 |
| | 674 |
| | 1,156 |
|
| ACA Financial Guaranty Corp. | | 208 |
| | — |
| | 10 |
|
| Ambac Assurance Corporation and Ambac Assurance UK Limited | | 112 |
| | 4,902 |
| | 1,927 |
|
| MBIA Insurance Corporation | | — |
| | 137 |
| | 565 |
|
| Financial Guaranty Insurance Company and FGIC UK Limited | | — |
| | 275 |
| | 821 |
|
| Ambac Assurance Corp. Segregated Account | | — |
| | 567 |
| | 51 |
|
| Subtotal | | 4,759 |
| | 6,555 |
| | 4,530 |
|
| Other (3) | | 52 |
| | 111 |
| | 410 |
|
| Total | | $ | 4,811 |
| | $ | 9,911 |
| | $ | 7,670 |
|
____________________
| |
(1) | Of the total ceded par to reinsurers rated BIG or not rated, $305 million is rated BIG. |
| |
(2) | The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG, and/or not rated, is $774 million. |
| |
(3) | The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of September 30, 2017 was approximately $123 million. |
Liquidity and Capital Resources
Liquidity Requirements and Sources
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 to:
•make periodic capital investments in their operating subsidiaries, subsidiaries;
•fund acquisitions of new businesses;
•purchase or redeem the Company’s outstanding Company debtdebt; 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 time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See “—Dividends From Subsidiaries” below Overview— Key Business Strategies, Capital Management” above for a discussioninformation on common share repurchases.
Long-Term Debt Obligations
The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities of the dividend restrictionsCompany’s Annual Report on Form 10-K for the year ended December 31, 2021, and Guarantor and U.S. Holding Companies' Summarized Financial Information, below.
U.S. Holding Companies
Long-Term Debt and Intercompany Loans
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of March 31, 2022 | | As of December 31, 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 subtotal | | | | | 1,580 | | | 1,580 | |
| AGUS - intercompany loans from insurance subsidiaries | | | | | | | |
| AGC and AGM | 3.50% | | 2030 | | 250 | | | 250 | |
| AGRO | 6 month LIBOR +3.00% | | 2023 | | 20 | | | 20 | |
| AGUS intercompany loans subtotal | | | | | 270 | | | 270 | |
| Total AGUS | | | | | 1,850 | | | 1,850 | |
| AGMH | | | | | | | |
| Junior Subordinated Debentures | 6.40% | | 2066 | | 300 | | | 300 | |
| Total AGMH | | | | | 300 | | | 300 | |
| AGMH’s long-term debt purchased by AGUS (1) | | | | | (154) | | | (154) | |
| U.S. Holding Company debt | | | | | $ | 1,996 | | | $ | 1,996 | |
____________________
(1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
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 continuation of LIBOR on the current basis will not be guaranteed after June 2023. See the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors, of the Company’s 2021 Annual Report on Form 10-K.
From time to time, AGL and its insurance companysubsidiaries 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.
For more information, see the Company’s 2021 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities.
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.
| | | | | | | | | | | |
| As of March 31, 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Assets | | | |
| Fixed-maturity securities (1) | $ | 83 | | | $ | 4 | |
| Short-term investments, other invested assets and cash | 59 | | | 305 | |
| Receivables from affiliates (2) | 35 | | | — | |
| Receivable from U.S. Holding Companies | 50 | | | — | |
| Other assets | 1 | | | 34 | |
| Liabilities | | | |
| Long-term debt | — | | | 1,671 | |
| Loans payable to affiliates | — | | | 270 | |
| Payable to affiliates (2) | 16 | | | 11 | |
| Payable to AGL | — | | | 50 | |
| Other liabilities | 4 | | | 102 | |
____________________
(1) As of March 31, 2022, weighted average durations of AGL’s and the U.S. Holding Companies' fixed-maturity securities (excluding AGUS’ investment in AGMH’s debt) were 6.3 years and 5.0 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
| | | | | | | | | | | |
| First Quarter 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Revenues | $ | 1 | | | $ | — | |
| Expenses | | | |
| Interest expense | — | | | 21 | |
| Other expenses | 11 | | | 2 | |
| Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (10) | | | (23) | |
| Net income (loss) | (10) | | | (20) | |
The following table presents significant cash flow items 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.
AGL and U.S. Holding Company SubsidiariesCompanies
Significant Cash Flow Items
| | | | | | | | | | | |
| First Quarter 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Dividends received from subsidiaries (1) | $ | 135 | | | $ | 224 | |
| Interest paid | — | | | (9) | |
| Investments in subsidiaries | — | | | (15) | |
| Dividends paid to AGL | — | | | (135) | |
| Dividends paid | (17) | | | — | |
| Repurchases of common shares (2) | (152) | | | — | |
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Intercompany sources (uses): | | | | | | | |
| Distributions to AGL from: | | | | | | | |
| AG Re | $ | 45 |
| | $ | 35 |
| | $ | 125 |
| | $ | 85 |
|
| AGUS | 70 |
| | 120 |
| | 390 |
| | 223 |
|
| Distributions to AGUS from: | | | | | | | |
| AGC | 15 |
| | 15 |
| | 66 |
| | 38 |
|
| AGMH | 55 |
| | 55 |
| | 128 |
| | 158 |
|
| Distributions from AGUS to: | | | | | | | |
| AGMH | — |
| | — |
| | (25 | ) | | — |
|
| Distributions to AGMH from: | | | | | | | |
| AGM | 63 |
| | 65 |
| | 142 |
| | 192 |
|
| External sources (uses): | | | | | | | |
| Dividends paid to AGL shareholders | (17 | ) | | (17 | ) | | (53 | ) | | (52 | ) |
| Repurchases of common shares(1) | (80 | ) | | (55 | ) | | (431 | ) | | (190 | ) |
| Interest paid by AGMH and AGUS | (8 | ) | | (7 | ) | | (53 | ) | | (55 | ) |
| Purchase of AGMH's debt by AGUS | (22 | ) | | — |
| | (27 | ) | | — |
|
| |
(1) | Please refer to Part I, Item 1, Financial Statements, Note 17, Shareholders' Equity, for additional information about share repurchases and authorizations. |
(1) AGL’s dividends include dividends from AGUS.
Distributions From Subsidiaries
The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance company subsidiaries as dividends or other distributions will be a major source of its liquidity. The insurance company subsidiaries’ ability to pay dividends depends 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. Dividend restrictions applicable to AGC, AGM, MAC and to AG Re, are described in Part I,(2) See Item 1, Financial Statements, Note 11, Insurance Company Regulatory Requirements.14, Shareholders’ Equity, for additional information about share repurchases and authorizations.
Dividend restrictions by insurance company subsidiary are as follows:
The maximum amount available during 2017 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $196 million. Of such $196 million, $54 million is available for distribution in the fourth quarter of 2017.
The maximum amount available during 2017 for AGC to distribute as ordinary dividends is approximately $107 million. Of such $107 million, approximately $41 million is available for distribution in the fourth quarter of 2017.
Through August 25, 2017, MAC paid $36 million in dividends based on dividend capacity at that point. After the $250 million share repurchase on September 25, 2017, MAC has no additional dividend capacity for the remainder of 2017.
Based on the applicable law and regulations, in 2017 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $128 million without the prior approval of the Bermuda Monetary Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $314 million as of September 30, 2017. Such dividend capacity is further limited by the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements. As of September 30, 2017, AG Re had unencumbered assets of approximately $572 million.
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.
On June 30, 2016, MAC obtained approval from
For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities of the NYDFS to repay its $300 million surplus note to MAC Holdings and its $100 million surplus note (plus accrued interest) to AGM. Accordingly,Company’s Annual Report on June 30, 2016, MAC transferred cash and/or marketable securities to (i) MAC Holdings in an aggregate amount equal to $300 million, and (ii) AGM in an aggregate amount of $102.5 million. MAC Holdings, upon receipt of such $300 million from MAC, distributed cash and/or marketable securities in an aggregate amount of $300 million to its shareholders, AGM and AGC, in proportion to their respective 61% and 39% ownership interests such that AGM received $182 million and AGC received $118 million.Form 10-K for the year ended December 31, 2021.
On November 25, 2016, the New York Superintendent approved AGM's request to repurchase 125 of its shares of common stock from its direct parent, AGMH, for approximately $300 million. AGM implemented the stock redemption plan in December 2016. Each share repurchased by AGM was retired and ceased to be an authorized share. Pursuant to AGM's Amended and Restated Charter, the par value of AGM's remaining shares of common stock issued and outstanding increased automatically in order to maintain AGM's total paid-in capital at $15 million and its authorized capital at $20 million.
On August 17, 2017, the New York Superintendent approved MAC's request to repurchase 64,322 of its shares of
common stock from its direct parent, MAC Holdings, for approximately $250 million. MAC implemented the stock
redemption plan on September 25, 2017, transferring approximately $104 million in cash and $146 million in marketable
securities to MAC Holdings, which then distributed such assets to its shareholders, AGM and AGC, in proportion to their
respective 61% and 39% ownership interests, such that AGM received approximately $152 million ($6 million in cash and
$146 million in securities) and AGC received approximately $98 million (all in cash). Each share repurchased by MAC was
retired and ceased to be an authorized share. Pursuant to MAC's Amended and Restated Charter, the par value of MAC's
remaining shares of common stock issued and outstanding increased automatically in order to maintain MAC's total paid-in
capital at $15 million.
External FinancingLong-Term Debt Obligations
From time to time, AGLThe Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sourcesSupplementary Data, Note 13, Long-Term Debt and Credit Facilities of financing may or maythe Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and Guarantor and U.S. Holding Companies' Summarized Financial Information, below.
U.S. Holding Companies
Long-Term Debt and Intercompany Loans
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of March 31, 2022 | | As of December 31, 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 subtotal | | | | | 1,580 | | | 1,580 | |
| AGUS - intercompany loans from insurance subsidiaries | | | | | | | |
| AGC and AGM | 3.50% | | 2030 | | 250 | | | 250 | |
| AGRO | 6 month LIBOR +3.00% | | 2023 | | 20 | | | 20 | |
| AGUS intercompany loans subtotal | | | | | 270 | | | 270 | |
| Total AGUS | | | | | 1,850 | | | 1,850 | |
| AGMH | | | | | | | |
| Junior Subordinated Debentures | 6.40% | | 2066 | | 300 | | | 300 | |
| Total AGMH | | | | | 300 | | | 300 | |
| AGMH’s long-term debt purchased by AGUS (1) | | | | | (154) | | | (154) | |
| U.S. Holding Company debt | | | | | $ | 1,996 | | | $ | 1,996 | |
____________________
(1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
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 continuation of LIBOR on the current basis will not be available toguaranteed after June 2023. See the Risk Factor captioned “The Company and if available,may be adversely impacted by the costtransition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors, of such financing may not be acceptable to the Company.Company’s 2021 Annual Report on Form 10-K.
Intercompany Loans and Guarantees
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. SuchThe commitment under the revolving credit facility terminates on October 25, 20182023 (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 Federal short-term or mid-term interest rate as the case may be, 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.
In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fundFor more information, see the acquisition of MAC. During 2016, AGUS repaid $20 million in outstanding principal as well as accruedCompany’s 2021 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and unpaid interest,Supplementary Data, Note 13, Long-Term Debt and the parties agreed to extend the maturity date of the loan from May 2017 to November 2019. As of September 30, 2017, $70 million remained outstanding.Credit Facilities.
Furthermore, Guarantor and U.S. Holding Companies’ Summarized Financial Information
AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130$1,430 million aggregate principal amount of senior notes issued by AGUS and AGMH,the U.S. Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by AGUSthe U.S. Holding Companies, and AGMH,the intercompany loans. The following tables include summarized financial information for AGL and the U.S. Holding Companies, excluding their investments in each case, as describe under "Commitments and Contingencies -- Long-Term Debt Obligations" below.subsidiaries.
| | | | | | | | | | | |
| As of March 31, 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Assets | | | |
| Fixed-maturity securities (1) | $ | 83 | | | $ | 4 | |
| Short-term investments, other invested assets and cash | 59 | | | 305 | |
| Receivables from affiliates (2) | 35 | | | — | |
| Receivable from U.S. Holding Companies | 50 | | | — | |
| Other assets | 1 | | | 34 | |
| Liabilities | | | |
| Long-term debt | — | | | 1,671 | |
| Loans payable to affiliates | — | | | 270 | |
| Payable to affiliates (2) | 16 | | | 11 | |
| Payable to AGL | — | | | 50 | |
| Other liabilities | 4 | | | 102 | |
____________________
(1) As of September 30, 2017, AGL had $47 million in cashMarch 31, 2022, weighted average durations of AGL’s and short-term investments. AGUS and AGMH had a total of $59 million in cash and short-term investments. In addition, the Company's U.S. holding companies have $80 million inHolding Companies' fixed-maturity securities (excluding AGUS'AGUS’ investment in AGMH'sAGMH’s debt) were 6.3 years and 5.0 years, respectively.
(2) Represents receivable and payables with weighted average duration of 0.3 years.non-guarantor subsidiaries.
Insurance Company Subsidiaries
| | | | | | | | | | | |
| First Quarter 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Revenues | $ | 1 | | | $ | — | |
| Expenses | | | |
| Interest expense | — | | | 21 | |
| Other expenses | 11 | | | 2 | |
| Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (10) | | | (23) | |
| Net income (loss) | (10) | | | (20) | |
Liquidity of the insurance company subsidiaries is primarily used to pay for:
operating expenses,
claims on the insured portfolio,
posting of collateral in connection with credit derivatives and reinsurance transactions,
reinsurance premiums,
dividends to AGL, AGUS and/or AGMH, as applicable,
principal of and, where applicable, interest on surplus notes, and
capital investments in their own subsidiaries, where appropriate.
Management believes that its subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operatingThe following table presents significant cash flow including premium collectionsitems for AGL and coupon payments as well as scheduled maturitiesthe U.S. Holding Companies (other than investment income, operating expenses and paydownstaxes) related to distributions from their respective investment portfolios. The Company targets a balance of its most liquid assets including cashsubsidiaries and short-term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold temporarily impairedoutflows for debt securities until the date of anticipated recovery.
Beyond the next twelve months, the ability of the operating subsidiaries to declare and payservice, dividends may be influenced by a variety of factors, including market conditions, insurance regulations and rating agency capital requirements and general economic conditions.
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.capital management activities.
Payments made in settlement of the Company’s obligations arising from its insured portfolio may,AGL and often do, vary significantly from year-to-year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses.U.S. Holding Companies
Significant Cash Flow Items
Claims (Paid) Recovered
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in millions) |
| Public finance | $ | (222 | ) | | $ | (196 | ) | | $ | (251 | ) | | $ | (213 | ) |
| Structured finance: | | | | | | | |
| U.S. RMBS | 13 |
| | 5 |
| | 40 |
| | (100 | ) |
| Other structured finance | 0 |
| | (23 | ) | | (14 | ) | | (47 | ) |
| Structured finance | 13 |
| | (18 | ) | | 26 |
| | (147 | ) |
| Claims (paid) recovered, net of reinsurance(1) | $ | (209 | ) | | $ | (214 | ) | | $ | (225 | ) | | $ | (360 | ) |
| | | | | | | | | | | |
| First Quarter 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Dividends received from subsidiaries (1) | $ | 135 | | | $ | 224 | |
| Interest paid | — | | | (9) | |
| Investments in subsidiaries | — | | | (15) | |
| Dividends paid to AGL | — | | | (135) | |
| Dividends paid | (17) | | | — | |
| Repurchases of common shares (2) | (152) | | | — | |
____________________
| |
(1) | Includes $3 million paid and $3 million paid for consolidated FG VIEs for Third Quarter 2017 and 2016, respectively, and $7 million paid and $9 million paid for consolidated FG VIEs for Nine Months 2017 and 2016, respectively. |
(1) AGL’s dividends include dividends from AGUS.
In addition, the Company has net par exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.0 billion, all of which are BIG. Puerto Rico has experienced significant general fund budget deficits in recent years. Beginning in 2016, the Commonwealth and certain related authorities and public corporations have defaulted on obligations to make payments on its debt. In addition to high debt levels, Puerto Rico faces a challenging economic environment. Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public corporations is set forth in Part I,(2) See Item 1, Financial Statements, Note 4, Outstanding Exposure.14, Shareholders’ Equity, for additional information about share repurchases and authorizations.
Generally, dividends paid by a U.S. company to a long-term infrastructure project that was financed by bonds that mature prior to the expiration of the project concession. The Company expects the cash flows from the project to be sufficient to repay all of the debt over the life of the project concession, and also expects the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay claims when the debt matures from 2018 to 2022, and then recover from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such claim payments. However, the recovery of such amounts is uncertain and may take from 10 to 35 years, depending on the performance of the underlying collateral.
In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.
If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from amounts 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 andBermuda holding company are subject to early termination. However, early termination of a lease does not result30% withholding tax. After AGL became tax resident in a draw on the AGM policy ifU.K., it became subject to the tax-exempt entity makestax rules applicable to companies resident in the required termination payment. If allU.K., including the leases were to terminate earlybenefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the tax-exempt entities do not makeU.S. reduces or eliminates the required early termination payments, then AGM would be exposedU.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to possible liquidity claims on gross exposure of approximately $865 million as of September 30, 2017. To date, noneU.K. resident persons entitled to the benefits of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease defaulttreaty.
For more information, see also Part II, Item 8. Financial Statements and a claim on the AGM policy. At September 30, 2017, approximately $1.6 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have not resulted in any claims on AGM.
The termsSupplementary Data, Note 13, Long-Term Debt and Credit Facilities of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivative Association, Inc. (ISDA) in order to provideAnnual Report on Form 10-K for payments on a scheduled "pay-as-you-go" basis and to replicate the terms of a traditional financial guaranty insurance policy. Some contracts the Company entered into as the credit protection seller, however, utilize standard ISDA settlement mechanics of cash settlement (i.e., a process to value the loss of market value of a reference obligation) or physical settlement (i.e., delivery of the reference obligation against payment of principal by the protection seller) in the event of a “credit event,” as defined in the relevant contract. Cash settlement or physical settlement generally requires the payment of a larger amount, prior to the maturity of the reference obligation, than would settlement on a “pay-as-you-go” basis.
The transaction documentation for $502 million of the CDS insured by AGC requires AGC to post collateral, in some cases subject to a cap, to secure its obligation to make payments under such contracts. As of September 30, 2017, AGC was posting $18 million of collateral to satisfy these requirements.
Consolidated Cash Flows
Consolidated Cash Flow Summary
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 |
| 2016 |
| | (in millions) |
| Net cash flows provided by (used in) operating activities before effects of FG VIE consolidation | $ | 150 |
| | $ | (153 | ) | | $ | 338 |
| | $ | (205 | ) |
| Effect of FG VIE consolidation | 6 |
| | 11 |
| | 16 |
| | 16 |
|
| Net cash flows provided by (used in) operating activities - reported | 156 |
| | (142 | ) | | 354 |
| | (189 | ) |
| Net cash flows provided by (used in) investing activities before effects of FG VIE consolidation | (161 | ) | | (320 | ) | | 124 |
| | 382 |
|
| Effect of FG VIE consolidation | 32 |
| | 25 |
| | 108 |
| | 551 |
|
| Net cash flows provided by (used in) investing activities - reported | (129 | ) | | (295 | ) | | 232 |
| | 933 |
|
| Net cash flows provided by (used in) financing activities before effects of FG VIE consolidation | (119 | ) | | (68 | ) | | (521 | ) | | (240 | ) |
| Effect of FG VIE consolidation | (38 | ) | | (36 | ) | | (124 | ) | | (567 | ) |
| Net cash flows provided by (used in) financing activities - reported (1) | (157 | ) | | (104 | ) | | (645 | ) | | (807 | ) |
| Effect of exchange rate changes | 1 |
| | (1 | ) | | 4 |
| | (4 | ) |
| Cash and restricted cash at beginning of period | 201 |
| | 641 |
| | 127 |
| | 166 |
|
| Total cash and restricted cash at the end of the period | $ | 72 |
| | $ | 99 |
| | $ | 72 |
| | $ | 99 |
|
____________________
| |
(1) | Claims paid on consolidated FG VIEs are presented in the consolidated cash flow statements as a component of paydowns on FG VIE liabilities in financing activities as opposed to operating activities. |
Excluding net cash flows from consolidated FG VIEs, cash inflows from operating activities increased in Nine Months 2017 compared with Nine Months 2016 due primarily to lower net claim payments, commutation premiums received and higher premium collections on new business in 2017.
Investing activities were primarily net sales (purchases) of fixed-maturity and short-term investment securities. Investing cash flows in Nine Months 2017 and Nine Months 2016 include inflows of $117 million and $590 million from paydowns on FG VIE assets, respectively. The decrease in inflows from FG VIEs was due to the proceeds from a paydown of a large transaction in Nine Months 2016. In Nine Months 2017, cash acquired in the MBIA UK Acquisition was $95 million. Consideration paid for MBIA UK was in the form of Zohar II Notes. In Third Quarter 2016 the Company paid $435 million, net of cash acquired, to acquire CIFGH.
Financing activities consisted primarily of paydowns of FG VIE liabilities and share repurchases. Financing cash flows in Nine Months 2017 and Nine Months 2016 include outflows of $124 million and $567 million for FG VIEs, respectively. The decrease in outflows from FG VIEs was due to the paydown of a large transaction in Nine Months 2016. The remaining cash flows from financing activities relate mainly to share repurchases, which were $431 million and $190 million in Nine Months 2017 and Nine Months 2016, respectively.
From October 1, 2017 through November 2, 2017, the Company repurchased an additional $20 million of common shares. The Board of Directors authorized, on November 1, 2017, an additional $300 million of share repurchases As of November 2, 2017, the Company had remaining authorization to purchase common shares of $398 million. For more information about the Company's share repurchases and authorizations, please refer to Part I, Item 1, Financial Statements, Note 17, Shareholders' Equity.
Commitments and Contingencies
Leases
AGL and its subsidiaries lease office space and certain other items. Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed sinceyear ended December 31, 2016.2021.
Long-Term Debt Obligations
The Company has outstanding principal and interest paid on long-term debt were as follows:
Principal Outstanding
issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Interest Paid onSupplementary Data, Note 13, Long-Term Debt
and Credit Facilities of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and Guarantor and U.S. Holding Companies' Summarized Financial Information, below.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Amount | | Interest Paid |
| | As of September 30, | | As of December 31, | | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 |
| 2016 | | 2017 | | 2016 |
| | (in millions) |
| AGUS | $ | 850 |
| | $ | 850 |
| | $ | 1 |
| | $ | — |
| | $ | 23 |
| | $ | 25 |
|
| AGMH | 730 |
| | 730 |
| | 7 |
| | 7 |
| | 30 |
| | 30 |
|
| AGM | 8 |
| | 9 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Purchased debt (1) | (28 | ) | | — |
| | 0 |
| | — |
| | 0 |
| | — |
|
| Total | $ | 1,560 |
| | $ | 1,589 |
| | $ | 8 |
| | $ | 7 |
| | $ | 53 |
| | $ | 55 |
|
Long-Term Debt and Intercompany Loans
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of March 31, 2022 | | As of December 31, 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 subtotal | | | | | 1,580 | | | 1,580 | |
| AGUS - intercompany loans from insurance subsidiaries | | | | | | | |
| AGC and AGM | 3.50% | | 2030 | | 250 | | | 250 | |
| AGRO | 6 month LIBOR +3.00% | | 2023 | | 20 | | | 20 | |
| AGUS intercompany loans subtotal | | | | | 270 | | | 270 | |
| Total AGUS | | | | | 1,850 | | | 1,850 | |
| AGMH | | | | | | | |
| Junior Subordinated Debentures | 6.40% | | 2066 | | 300 | | | 300 | |
| Total AGMH | | | | | 300 | | | 300 | |
| AGMH’s long-term debt purchased by AGUS (1) | | | | | (154) | | | (154) | |
| U.S. Holding Company debt | | | | | $ | 1,996 | | | $ | 1,996 | |
____________________
(1) In 2017, AGUS purchased $28 millionRepresents principal amount of Junior Subordinated Debentures issued by AGMH.AGMH that has been purchased by AGUS.
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.
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.
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 ofpay interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month London Interbank Offered Rate (LIBOR) plus a margin equal to 2.38%. 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 atbased on LIBOR. If the then applicable rate. AGUS may not defer interest past the maturity date.
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 callable without premium or penalty in whole or in part.
6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are callable without premium or penalty in whole or in part.
5.6% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part.
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 one-month LIBOR plus 2.215%. The continuation of LIBOR on the current basis will not be guaranteed after June 2023. See the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a floatingreference rate” under Operational Risks in Part 1, Item 1A, Risk Factors, of the Company’s 2021 Annual Report on Form 10-K.
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 one-month LIBOR plus 2.215% until repaid. AGMH may elect100% 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 one ormaturity. 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.
For more times to deferinformation, see the Company’s 2021 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities.
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 oneAGL and the U.S. Holding Companies, excluding their investments in subsidiaries.
| | | | | | | | | | | |
| As of March 31, 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Assets | | | |
| Fixed-maturity securities (1) | $ | 83 | | | $ | 4 | |
| Short-term investments, other invested assets and cash | 59 | | | 305 | |
| Receivables from affiliates (2) | 35 | | | — | |
| Receivable from U.S. Holding Companies | 50 | | | — | |
| Other assets | 1 | | | 34 | |
| Liabilities | | | |
| Long-term debt | — | | | 1,671 | |
| Loans payable to affiliates | — | | | 270 | |
| Payable to affiliates (2) | 16 | | | 11 | |
| Payable to AGL | — | | | 50 | |
| Other liabilities | 4 | | | 102 | |
____________________
(1) As of March 31, 2022, weighted average durations of AGL’s and the U.S. Holding Companies' fixed-maturity securities (excluding AGUS’ investment in AGMH’s debt) were 6.3 years and 5.0 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
| | | | | | | | | | | |
| First Quarter 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Revenues | $ | 1 | | | $ | — | |
| Expenses | | | |
| Interest expense | — | | | 21 | |
| Other expenses | 11 | | | 2 | |
| Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (10) | | | (23) | |
| Net income (loss) | (10) | | | (20) | |
The following table presents significant cash flow items 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.
AGL and U.S. Holding Companies
Significant Cash Flow Items
| | | | | | | | | | | |
| First Quarter 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Dividends received from subsidiaries (1) | $ | 135 | | | $ | 224 | |
| Interest paid | — | | | (9) | |
| Investments in subsidiaries | — | | | (15) | |
| Dividends paid to AGL | — | | | (135) | |
| Dividends paid | (17) | | | — | |
| Repurchases of common shares (2) | (152) | | | — | |
____________________
(1) AGL’s dividends include dividends from AGUS.
(2) See Item 1, Financial Statements, Note 14, 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.
For more consecutiveinformation, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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.
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 SA, 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 interest periodson, 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, although the Company may enter into secured short-term loan facilities with financial institutions, as described below, 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 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. As of March 31, 2022, the Company intended to hold and had the ability to hold 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’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, not exceed ten years. vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. While it appears to the Company that significant federal funding in 2021 may have mitigated the financial stress from direct and indirect consequences of COVID-19 for most obligors and assets underlying obligations guaranteed by the Company, the pandemic may still result in further
increases in claims and loss reserves. The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various intermittent closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it, and the effectiveness and acceptance of vaccines and therapeutics for it, remain unknown, so the Company cannot predict the ultimate size of any increases in claims that may result from the pandemic.
In addition, as of March 31, 2022, the Company has financial guaranty exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $2.2 billion net par outstanding, all of which is rated BIG. As set forth in Item 1, Financial Statements, Note 3, Outstanding Exposure, its $1.3 billion net outstanding par exposure to PRHTA is subject to a plan of adjustment filed by the FOMB with the Title III Court on May 2, 2022 (HTA Plan). The Company anticipates making substantial claim payments in connection with the consummation of the HTA Plan, should consummation occur, and is taking this into account in projecting its liquidity needs.
While the Company has the capacity to generate sufficient liquidity internally to fund the full amount of the gross claim payments it would be required to pay under the HTA Plan, the Company may enter into a secured short-term loan facility to partially fund such gross claim payments until it sells the securities it expects to receive under the HTA Plan. See Item 1. Financial Statements Note 11, Credit Facilities, for a description of the secured short-term facility it used to partially fund the claim payments it made in connection with the consummation of the March Puerto Rico Resolutions in March 2022.
In connection with the completionacquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.
If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this offering, AGMH entered into a replacement capital covenant forearly termination payment is funded from monies that were pre-funded and invested at the benefitclosing of personsthe 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 buy, hold or sell a specified seriesguaranteed the payment of AGMH long-term indebtedness ranking seniorthese unfunded strip coverage amounts to the debentures. Underlessor, in the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or anyevent that a tax-exempt entity defaulted on its obligation to pay this portion of its subsidiariesearly 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 $446 million as of March 31, 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. As of March 31, 2022, approximately $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” basis and to replicate the terms of a traditional financial guaranty insurance policy. The documentation for certain CDS were negotiated to require the Company to also pay if the obligor becomes bankrupt or beforeif the datereference obligation were restructured. Furthermore, some CDS documentation requires the Company to make a payment due to an event that is twenty yearsunrelated 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 final repayment date, exceptmaturity 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 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 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 rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16, Insurance Company Regulatory Requirements, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a complete discussion of the Company’s dividend restrictions applicable to AGC, AGM, AG Re and AGRO.
Dividend restrictions by insurance subsidiary are as follows:
•The maximum amount available during 2022 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $291 million, but none is available for distribution in the second quarter of 2022.
•The maximum amount available during 2022 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $207 million, of which approximately $25 million is available for distribution in the second quarter of 2022.
•Based on the applicable law and regulations, in 2022 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 Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $236 million as of March 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 $146 million as of March 31, 2022, and (ii) the amount of statutory surplus, which as of March 31, 2022 was $42 million.
•Based on the applicable law and regulations, in 2021 AGRO (an indirect subsidiary of AGRe) 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 $106 million as of March 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 $396 million as of March 31, 2022, and (ii) the amount of statutory surplus, which as of March 31, 2022 was $270 million.
Distributions From Insurance Company Subsidiaries
| | | | | | | | | | | |
| First Quarter |
| 2022 | | 2021 |
| (in millions) |
| Dividends paid by AGC to AGUS | $ | 125 | | | $ | 13 | |
| Dividends paid by AGM to AGMH | 96 | | | 82 | |
Ratings Impact on Financial Guaranty Business
A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay. See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Assumed Reinsurance
Some of the 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 extent that AGMH has received proceedsceding 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 March 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 sale of replacement capital securities. The proceeds from this offering were usedaggregate amounts those subsidiaries could be required to pay a dividend to the shareholders of AGMH.all such ceding companies would be approximately $268 million, including $237 million by AGC and $31 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. TheEach custodial trusts weretrust 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 basis points,bps, and the annualized rate on the AGM Committed Preferred Trust Securities (CPS) is one-month LIBOR plus 200 basis points.bps. LIBOR may be discontinued. See “— Executive Summary — Other Matters — LIBOR Sunset” above and the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part I, Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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 sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income.
The Company’s fixed-maturity securities and short-term investments had a duration of 5.4 years as of September 30, 2017 and 5.3 years as of December 31, 2016. 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 71% of the Company’s valuation of investments please refer to Part I, Item 1, Financial Statements, Note 10, Investments and Cash.
Fixed-Maturity Securities and Short-Term Investments
total investment portfolio is managed by Security Type
|
| | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| | (in millions) |
| Fixed-maturity securities: | |
| | |
| | |
| | |
|
| Obligations of state and political subdivisions | $ | 5,445 |
| | $ | 5,705 |
| | $ | 5,269 |
| | $ | 5,432 |
|
| U.S. government and agencies | 256 |
| | 270 |
| | 424 |
| | 440 |
|
| Corporate securities | 1,932 |
| | 1,976 |
| | 1,612 |
| | 1,613 |
|
| Mortgage-backed securities(1): | | | | | | | |
|
| RMBS | 866 |
| | 881 |
| | 998 |
| | 987 |
|
| Commercial mortgage-backed securities (CMBS) | 551 |
| | 562 |
| | 575 |
| | 583 |
|
| Asset-backed securities | 682 |
| | 852 |
| | 835 |
| | 945 |
|
| Foreign government securities | 313 |
| | 300 |
| | 261 |
| | 233 |
|
| Total fixed-maturity securities | 10,045 |
| | 10,546 |
| | 9,974 |
| | 10,233 |
|
| Short-term investments | 948 |
| | 949 |
| | 590 |
| | 590 |
|
| Total fixed-maturity and short-term investments | $ | 10,993 |
| | $ | 11,495 |
| | $ | 10,564 |
| | $ | 10,823 |
|
____________________
| |
(1) | Government-agency obligations were approximately 39% of mortgage backed securities as of September 30, 2017 and 42% as of December 31, 2016, based on fair value. |
The following tables summarize, for all fixed-maturity securities in an unrealized loss position as of September 30, 2017 and December 31, 2016, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 445 |
| | $ | (10 | ) | | $ | 253 |
| | $ | (7 | ) | | $ | 698 |
| | $ | (17 | ) |
| U.S. government and agencies | 114 |
| | 0 |
| | 4 |
| | 0 |
| | 118 |
| | 0 |
|
| Corporate securities | 136 |
| | (1 | ) | | 252 |
| | (17 | ) | | 388 |
| | (18 | ) |
| Mortgage-backed securities: | | | | | | | |
| | | | |
| RMBS | 107 |
| | (1 | ) | | 170 |
| | (11 | ) | | 277 |
| | (12 | ) |
| CMBS | 50 |
| | 0 |
| | 76 |
| | (4 | ) | | 126 |
| | (4 | ) |
| Asset-backed securities | 66 |
| | 0 |
| | 3 |
| | 0 |
| | 69 |
| | 0 |
|
| Foreign government securities | 35 |
| | (1 | ) | | 147 |
| | (18 | ) | | 182 |
| | (19 | ) |
| Total | $ | 953 |
| | $ | (13 | ) | | $ | 905 |
| | $ | (57 | ) | | $ | 1,858 |
| | $ | (70 | ) |
| Number of securities (1) | |
| | 292 |
| | |
| | 230 |
| | |
| | 513 |
|
| Number of securities with other-than-temporary impairment | |
| | 9 |
| | |
| | 14 |
| | |
| | 23 |
|
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 1,110 |
| | $ | (38 | ) | | $ | 6 |
| | $ | (1 | ) | | $ | 1,116 |
| | $ | (39 | ) |
| U.S. government and agencies | 87 |
| | (1 | ) | | — |
| | — |
| | 87 |
| | (1 | ) |
| Corporate securities | 492 |
| | (11 | ) | | 118 |
| | (20 | ) | | 610 |
| | (31 | ) |
| Mortgage-backed securities: | |
| | |
| | |
| | |
| |
|
| |
|
|
| RMBS | 391 |
| | (23 | ) | | 94 |
| | (15 | ) | | 485 |
| | (38 | ) |
| CMBS | 165 |
| | (5 | ) | | — |
| | — |
| | 165 |
| | (5 | ) |
| Asset-backed securities | 36 |
| | 0 |
| | 0 |
| | 0 |
| | 36 |
| | 0 |
|
| Foreign government securities | 44 |
| | (5 | ) | | 114 |
| | (27 | ) | | 158 |
| | (32 | ) |
| Total | $ | 2,325 |
| | $ | (83 | ) | | $ | 332 |
| | $ | (63 | ) | | $ | 2,657 |
| | $ | (146 | ) |
| Number of securities(1) | |
| | 622 |
| | |
| | 60 |
| | |
| | 676 |
|
| Number of securities with other-than-temporary impairment | |
| | 8 |
| | |
| | 9 |
| | |
| | 17 |
|
___________________
| |
(1) | The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.
|
Of the securities in an unrealized loss position for 12 months or more as of September 30, 2017, 28 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2017 was $26 million. As of December 31, 2016,external parties. Each of the securities in an unrealized loss position for 12 months or more, 41 securities had unrealized losses greater than 10%three external investment managers must maintain a minimum average rating of book value with an unrealized lossA+/A1/A+ by S&P Global Ratings, a division of $59 million. The Company has determined that the unrealized losses recorded as of September 30, 2017Standard & Poor's Financial Services LLC (S&P), Moody’s and December 31, 2016 were yield related and not the result of other-than-temporary-impairment.Fitch Ratings Inc., respectively.
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 primarily of high-quality,investment-grade, liquid instruments. Other invested assets include other alternative investments. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 1, Financial Statements, Note 7, Investments and Note 9, Fair Value Measurement.
Investment Portfolio
Carrying Value
| | | | | | | | | | | |
| As of |
| | March 31, 2022 | | December 31, 2021 |
| | (in millions) |
| Fixed-maturity securities, available-for-sale (1) | $ | 8,156 | | | $ | 8,202 | |
| Fixed-maturity securities - Puerto Rico, trading | 174 | | | — | |
| Short-term investments | 585 | | | 1,225 | |
| Other invested assets | 152 | | | 181 | |
| Total | $ | 9,067 | | | $ | 9,608 | |
____________________
(1) Include $514 million of new recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions.
The Company’s available-for-sale fixed-maturity securities had a duration of 4.3 years and 4.7 years as of March 31, 2022 and December 31, 2021, respectively. Generally, the Company’s fixed-maturity securities are designated as available-for-sale, except for CVIs received under the March Puerto Rico Resolutions, which are classified as trading.
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 September 30, 2017March 31, 2022
| | | | Amortized Cost | | Estimated Fair Value | | Amortized
Cost | | Estimated
Fair Value |
| | (in millions) | | (in millions) |
| Due within one year | $ | 249 |
| | $ | 250 |
| Due within one year | $ | 202 | | | $ | 203 | |
| Due after one year through five years | 1,518 |
| | 1,552 |
| Due after one year through five years | 1,956 | | | 1,948 | |
| Due after five years through 10 years | 2,280 |
| | 2,365 |
| Due after five years through 10 years | 1,869 | | | 1,853 | |
| Due after 10 years | 4,581 |
| | 4,936 |
| Due after 10 years | 3,442 | | | 3,430 | |
| Mortgage-backed securities: | |
| | |
| Mortgage-backed securities: | | | |
| RMBS | 866 |
| | 881 |
| RMBS | 437 | | | 400 | |
| CMBS | 551 |
| | 562 |
| |
| Commercial mortgage-backed securities (CMBS) | | Commercial mortgage-backed securities (CMBS) | 321 | | | 322 | |
| Total | $ | 10,045 |
| | $ | 10,546 |
| Total | $ | 8,227 | | | $ | 8,156 | |
Available-for-Sale Fixed-Maturity Securities By Rating
The following table summarizes the ratings distributions of the Company’s investment portfolioavailable-for-sale fixed-maturity securities as of September 30, 2017March 31, 2022 and December 31, 2016.2021. Ratings reflect the lower of the Moody’s Investors Service, Inc. (Moody’s) and S&P classifications, except for bonds purchased for loss mitigation orand certain other risk management strategies,securities, which use Assured Guaranty’s internal ratings classifications.classifications, or are not rated, such as the Puerto Rico securities received under the March Puerto Rico Resolutions.
Distribution of
Available-for-Sale Fixed-Maturity Securities by Rating
| | | | | | | | As of |
| Rating | | As of
September 30, 2017 | | As of
December 31, 2016 | Rating | | March 31, 2022 | | December 31, 2021 |
| AAA | | 14.4 | % | | 11.6 | % | AAA | | 13.8 | % | | 14.6 | % |
| AA | | 52.0 |
| | 54.8 |
| AA | | 36.0 | | | 38.2 | |
| A | | 19.6 |
| | 17.9 |
| A | | 23.6 | | | 25.1 | |
| BBB | | 3.0 |
| | 1.9 |
| BBB | | 12.1 | | | 13.7 | |
| BIG(1) | | 10.5 |
| | 13.5 |
| |
| BIG (1) | | BIG (1) | | 7.3 | | | 7.5 | |
Not rated | | 0.5 |
| | 0.3 |
| | 7.2 | | | 0.9 | |
| Total | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % |
____________________
| |
(1) | Comprised primarily of loss mitigation and other risk management assets. Please refer to Part I, Item I, Financial Statements, Note 10, Investments and Cash, for additional information. |
(1)Includes primarily loss mitigation securities. See Item I, Financial Statements, Note 7, Investments, for additional information.
(2)As of March 31, 2022, primarily represent new recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions.
Other Investments
Other invested assets reported on the condensed consolidated balance sheets primarily consist of investments in renewable and clean energy and private equity funds managed by a third party.
The Insurance segment reports AGAS’s percentage ownership of AssuredIM Funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of March 31, 2022 and December 31, 2021, all of the funds in which AGAS invests are consolidated in the Company’s consolidated financial statements. The amounts in the table below represent the fair value of AGAS’s interests in the AssuredIM Funds. See Commitments below.
Fair Value of AGAS’s Interest in AssuredIM Funds
| | | | | | | | | | | | | | |
| | As of |
| Strategy | | March 31, 2022 | | December 31, 2021 |
| | | (in millions) |
| CLOs | | $ | 245 | | | $ | 228 | |
| Municipal bonds | | 103 | | | 107 | |
| Healthcare | | 103 | | | 115 | |
| Asset-based | | 108 | | | 93 | |
| Total | | $ | 559 | | | $ | 543 | |
Equity in Earnings (Losses) of Investees of AGAS’s Investment in AssuredIM Funds
| | | | | | | | | | | | | | |
| | First Quarter |
| Strategy | | 2022 | | 2021 |
| | | (in millions) |
| CLOs | | $ | 7 | | | $ | 7 | |
| Municipal bonds | | (4) | | | 1 | |
| Healthcare | | 3 | | | — | |
| Asset-based | | 5 | | | 2 | |
| Total | | $ | 11 | | | $ | 10 | |
Restricted Assets
Based on fair value, investments and restricted cashother 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, total $286totaled $229 million and $285$243 million as of September 30, 2017March 31, 2022 and December 31, 2016,2021, 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 $1,676$1,160 million and $1,420$1,231 million, based on fair value, as of September 30, 2017March 31, 2022 and December 31, 2016,2021, respectively.
Commitments
The fair valueCompany is authorized to invest up to $750 million in AssuredIM Funds. As of March 31, 2022, the Insurance segment had total commitments to AssuredIM Funds of $702 million, of which $473 million represented net invested capital and $229 million was undrawn. The Company had unfunded commitments of $96 million as of March 31, 2022 related to certain of the Company’s pledged securitiesother 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 secure its obligations under its CDS exposure totaled $18amount and timing); and (2) capital contributions from AGUS ($15 million and $116$15 million asin First Quarter 2022 and First Quarter 2021, respectively, had been contributed to supplement cash from operations). As of September 30, 2017March 31, 2022, AssuredIM had $24 million in cash and December 31, 2016, respectively. In February 2017, the Company terminated all of its remaining CDS contracts with one of its counterparties asshort-term investments.
AssuredIM’s liquidity needs primarily include: (1) paying operating expenses including compensation; (2) paying dividends or other distributions to which it had collateral posting obligationsAGUS; and all(3) capital to support growth and expansion of the collateral that theasset management business.
Lease Obligations
The Company had been posting to that counterparty was returned to the Company. Please refer tohas entered into several lease agreements for office space in Bermuda, New York, San Francisco,
London, Paris, and other locations with various lease terms. See Part I,II, Item I,8, Financial Statements and Supplementary Data, Note 8, Contracts Accounted for as Credit Derivatives, for additional information.
Liquidity Arrangements with respect to AGMH’s former Financial Products Business
AGMH’s former financial products segment had been in the business of borrowing funds through the issuance of guaranteed investment contracts (GICs) and medium term notes and reinvesting the proceeds in investments that met AGMH’s investment criteria. The financial products business also included the equity payment undertaking agreement portion18, Leases, of the leveraged lease business, described under "--Insurance Company Subsidiaries" above.
The GIC Business
Until November 2008, AGMH, through its financial products business, offered GICs to municipalities and other market participants. The GICs were issued through certain non-insurance subsidiaries of AGMH. In return for an initial payment, each GIC entitles its holder to receive the return of the holder’s invested principal plus interest at a specified rate, and to withdraw principal from the GIC as permitted by its terms. AGM insures the payment obligations on all these GICs.
The proceeds of GICs were loaned to AGMH’s former subsidiary FSA Asset Management LLC (FSAM). FSAM in turn invested these funds in fixed-income obligations (the FSAM assets).
As of September 30, 2017, approximately 32.5% of the FSAM assets (measured by aggregate principal balance) were in cash or were obligations backed by the full faith and credit of the U.S. Although AGMH no longer holds any ownership interest in FSAM or the GIC issuers, AGM’s insurance policies on the GICs remain in place, and must remain in place until each GIC is terminated.
In June 2009, in connection with the Company'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.
To support the primary payment obligations under the GICs, each of Dexia SA and Dexia Crédit Local S.A. are party to a put contract. Pursuant to the put contract, FSAM may put an amount of its FSAM assets to Dexia SA and Dexia Crédit Local S.A. in exchange for funds that FSAM would in turn make available to meet demands for payment under the GICs. To secure their obligations under this put contract, Dexia SA and Dexia Crédit Local S.A. are required to post eligible highly liquid collateral having an aggregate value (subject to agreed reductions and advance rates) equal to at least the excess of (i) the aggregate principal amount of all outstanding GICs over (ii) the aggregate mark-to-market value of FSAM’s assets.
As of September 30, 2017, the aggregate accreted GIC balance was approximately $1.4 billion, compared with approximately $10.2 billion as of December 31, 2009. As of September 30, 2017, the aggregate fair market value of the assets supporting the GIC business (disregarding the agreed upon reductions) plus cash and positive derivative value exceeded by nearly $0.7 billion the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Even after applying the agreed upon reductions to the fair market value of the assets, the aggregate value of the assets supporting the GIC business plus cash and positive derivative value exceeded the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Accordingly, no posting of collateral was required under the primary put contract.
To provide additional support, Dexia Crédit Local S.A. provides a liquidity commitment to FSAM to lend against FSAM assets under a revolving credit agreement. As of September 30, 2017 the commitment totaled $1.5 billion, of which approximately $0.8 billion was drawn. The agreement requires the commitment remain in place, generally until the GICs have been paid in full.
Despite the put contract and revolving credit agreement, and the significant portion of FSAM assets comprised of highly liquid securities backed by the full faith and credit of the U.S., AGM remains subject to the risk that Dexia SA and its affiliates may not fulfill their contractual obligations. In that case, the GIC issuers may not have the financial ability to pay upon the withdrawal of GIC funds or post collateral or make other payments in respect of the GICs, thereby resulting in claims upon the AGM financial guaranty insurance policies.
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. FSAM 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 Medium Term Notes Business
In connection with the acquisition of AGMH, Dexia Crédit Local S.A. agreed to fund, on behalf of AGM, 100% of all policy claims made under financial guaranty insurance policies issued by AGM in relation to the medium term notes issuance program of FSA Global Funding Limited. As of September 30, 2017, FSA Global Funding Limited had approximately $294.9 million of medium term notes outstanding.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an updated sensitivity analysis for credit derivatives and expected losses on contracts accounted for as insurance. For other quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", of our Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016. There2021, 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 consolidating FG VIEs and CIVs; however, the Company’s consolidated financial statements include the effect of consolidating FG VIEs and CIVs. The primary sources and uses of cash at Assured Guaranty’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 the 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.
•CIVs. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (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.
See Item. 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.
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 March 31, 2022, these credit facilities had varying maturities ranging from April 28, 2022 to September 15, 2023 with the aggregate principal amount not exceeding $1.0 billion. The available commitment was based on the amount of equity contributed to the warehouse which was $591 million. As of March 31, 2022, $310 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 100 basis points (bps) to 3-month LIBOR plus 100 bps (with a floor on the Euribor/LIBOR rates of zero). The CLO warehouses were in compliance with all financial covenants as of March 31, 2022.
As of March 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 $80 million jointly and $48 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributed to the funds. As of March 31, 2022, $15 million was drawn down 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 March 31, 2022.
Condensed Consolidated Cash Flows
The summarized condensed consolidated statements of cash flow in the table below presents the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of FG VIEs and CIVs.
Condensed Consolidated Cash Flow Summary
| | | | | | | | | | | |
| | First Quarter |
| | 2022 | | 2021 |
| | (in millions) |
| Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation | $ | (640) | | | $ | (42) | |
| Effect of FG VIEs and CIVs consolidation (1) | (252) | | | (424) | |
| Net cash flows provided by (used in) operating activities | (892) | | | (466) | |
| | | |
| Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation | 831 | | | 81 | |
| Effect of FG VIEs and CIVs consolidation (1) | 19 | | | 44 | |
| Net cash flows provided by (used in) investing activities | 850 | | | 125 | |
| | | |
| Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation | | | |
| Dividends paid | (17) | | | (18) | |
| Repurchases of common shares | (152) | | | (77) | |
| Other | (10) | | | (12) | |
| Effect of FG VIEs and CIVs consolidation (1) | 169 | | | 496 | |
| Net cash flows provided by (used in) financing activities (2) | (10) | | | 389 | |
| | | |
| Effect of exchange rate changes | (1) | | | — | |
| Increase (decrease) in cash and cash equivalents and restricted cash | (53) | | | 48 | |
| Cash and cash equivalents and restricted cash at beginning of period | 342 | | | 298 | |
| Cash and cash equivalents and restricted cash at the end of the period | $ | 289 | | | $ | 346 | |
____________________
(1) This includes the effects of consolidating FG VIEs and CIVs.
(2) Claims paid on consolidated FG VIEs are presented in the condensed 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 VIEs, was an outflow of $640 million in First Quarter 2022 and an outflow of $42 million in First Quarter 2021. The increase in cash outflows during 2022 was primarily due to claim payments made net of cash recoveries received in connection with the March Puerto Rico Resolutions. See Item 1. Financial Statements, Note 3, Outstanding Exposure, for additional information. Cash flows from operations attributable to the effect of VIE consolidation was negative in 2022 and 2021 due to the inclusion of investing activities of CIVs, which included cash outflows for purchases of investments, offset in part by sales of investments.
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 higher sales of short-term investments in 2022 to fund share repurchases and claim payments in connection with the March Puerto Rico Resolutions. See Item 1. Financial Statements, Note 3, Outstanding Exposure, for additional information.
Financing activities primarily consist of share repurchases, dividends, and paydowns of FG VIEs’ liabilities, as well and CLO issuances and CLO warehouse financing activities. The decrease in financing cash flow activity from VIEs was primarily due to First Quarter 2021 including the consolidation of an additional CLO and securitization of a previously consolidated CLO warehouse. See Item 1. Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
From March 1 through May 5, 2022, the Company repurchased an additional 1.0 million of common shares. As of May 5, 2022, the Company was authorized to purchase $240 million of its common shares. For more information about the Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders’ Equity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2022, there were no material changes into the market risks thatto which the Company is exposed to since December 31, 2016.2021.
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ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
Assured Guaranty’s management, with the participation of AGL’s President and Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are effective in recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission’s rules and forms, information required to be disclosed by AGL in the reports that it files or submits under the Exchange Act and ensuring that such information is accumulated and communicated to management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management of the Company, with the participation of its President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017.March 31, 2022. Based on their evaluation as of September 30, 2017March 31, 2022 covered by this Form 10-Q, the Company’s President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting during First Quarter 2022 which were identified in connection with the evaluation required pursuant to Rules 13a-15 or 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. | OTHER INFORMATION |
PART II.OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims, as described in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016, in the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2017, and June 30, 2017,2021 and in Part I, Item 1, Financial Statements, Note 14,13, Commitments and Contingencies – Legal Proceedings contained in this Form 10-Q. There were no material developments to such proceedings during the three months ended September 30, 2017.
ITEM 1A.RISK FACTORS
Please refer toSee the risk factors set forth in Part I, "Item“Item 1A. Risk Factors"Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2021. There have been no material changes to the risk factors disclosed in such Annual Report on Form 10-K during the nine months ended September 30, 2017.10-K.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer’s Purchases of Equity Securities
The following table reflects purchases of AGL common shares made by the Company during ThirdFirst Quarter 2017.2022.
|
| | | | | | | | | | | | | | |
| 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) |
| July 1 - July 31 | | 688,432 |
| | $ | 43.78 |
| | 685,243 |
| | $ | 167,872,823 |
|
| August 1 - August 31 | | 679,770 |
| | $ | 44.17 |
| | 679,165 |
| | $ | 137,872,863 |
|
| September 1 - September 30 | | 483,493 |
| | $ | 41.37 |
| | 483,493 |
| | $ | 117,872,889 |
|
| Total | | 1,851,695 |
| | $ | 43.29 |
| | 1,847,901 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| January 1 - January 31 | | 940,333 | | | $ | 52.80 | | | 940,333 | | | $ | 56,124,501 | |
| February 1 - February 28 | | 1,051,645 | | | $ | 57.55 | | | 836,967 | | | $ | 359,035,582 | |
| March 1 - March 31 | | 961,259 | | | $ | 60.66 | | | 960,923 | | | $ | 300,749,261 | |
| Total | | 2,953,237 | | | $ | 57.05 | | | 2,738,223 | | | |
____________________
(1) After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through May 5, 2022, the Company has repurchased a total of 135.8 million common shares for approximately $4,374 million, excluding commissions, at an average price of $32.21 per share. On February 24, 2022, the Company announced that the Board of Directors had authorized an additional $350 million of share repurchases. As of May 5, 2022, the remaining authorization the Company was authorized to purchase was $240 million of its common shares, on a settlement basis. The repurchase program has no expiration date and the Board has previously increased the authorization periodically.
(2) Excludes commissions.
ITEM 6.EXHIBITS
The following exhibits are filed with this report:
| | | | | | | | |
(1)Exhibit
Number | | Description of Document |
| 10.1 | | | |
| 10.2 | | | |
| 10.3 | | | |
| 10.4 | | | |
| 10.5 | | | |
| 10.6 | | | |
| 10.7 | | | |
| 10.8 | | | Form of 2013 through November 2, 2017,Indemnification Agreement between the Company has repurchased a total of 79.9 million common shares for approximately $2,166 million, excluding commissions, at an average price of $27.11 per share. The Board of Directors authorized, on November 1, 2017, an additional $300 million of share repurchases. As of November 2, 2017, $398 million of total capacity remained from the existing Board of Directors share repurchase authorizations, on a settlement basis.and its executive officers and directors* |
| 31.1 | | | |
(2)31.2 | Excludes commissions. |
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ITEM 5.32.1 | OTHER INFORMATION |
On November 1, 2017, Assured Guaranty Ltd. (the “Company”) mutually agreed with James M. Michener, the Company’s General Counsel and Secretary, that Mr. Michener would resign as General Counsel and Secretary and as an executive officer of the Company, effective December 31, 2017, in accordance with the terms of a separation agreement (the “Separation Agreement”) which he and the Company entered into on such date. Pursuant to the Separation Agreement, Mr. Michener will remain employed by the Company in a non-executive officer position, serving as Senior Advisor to the Chief Executive Officer, for a transition period (the “Transition Period”) beginning on January 1, 2018 and ending upon his retirement on December 31, 2018 (the “Retirement Date”). Ling Chow, the Company’s U.S. General Counsel, will succeed Mr. Michener as the Company’s new General Counsel, beginning on January 1, 2018. The Company entered into the Separation Agreement in recognition of Mr. Michener’s successful years of service with the Company and to encourage him to work through the Retirement Date in order to facilitate the transition of his duties to his successor, to advise the Company regarding ongoing litigation, and so he would remain available to consult on matters related to his experience with the Company.
The Separation Agreement provides that if Mr. Michener remains employed though the Retirement Date, his base salary and cash and equity incentive opportunities during the Transition Period will be equal to his current base salary and cash and equity incentive opportunities. The Compensation Committee will determine the exact amount of Mr. Michener’s
incentive awards for the 2017 fiscal year after the 2017 financial results are available. If the Compensation Committee awards Mr. Michener equity awards for the 2017 fiscal year, such awards will be granted as restricted stock units pursuant to a grant agreement substantially in the form attached as an exhibit to the Separation Agreement with 50% of such units settling on the one-year anniversary of the date of grant and 50% settling on the two-year anniversary of the date of grant. In addition, the Compensation Committee will determine the exact amount of Mr. Michener’s incentive awards for the 2018 fiscal year after the 2018 financial results are available. Mr. Michener’s 2018 incentive award amounts, if any, will be paid in cash rather than any equity grant because he will no longer be eligible for a grant pursuant to the Company’s 2004 Long-Term Incentive Plan once he is no longer employed by the Company. The portion of the 2018 incentive award amount, if any, attributable to an equity grant will be paid 50% in December 2019 and the remaining 50% in December 2020. The Separation Agreement specifies that during the Transition Period, Mr. Michener will be required to own AGL shares having a value equal to two times his base salary, which is the level applicable to managing directors, group heads and equivalent positions under the under the Company’s stock ownership guidelines.
Pursuant to the Separation Agreement, if Mr. Michener remains employed though the Retirement Date, any unvested equity awards that he holds on the Retirement Date will vest in accordance with the terms that the applicable award agreement provides upon retirement. However, any previously granted cash and equity awards, including the performance share units granted to Mr. Michener in 2017, that include Company or individual performance-based vesting conditions (e.g., the achievement of certain pre-established share price targets) remain subject to satisfaction of such applicable performance conditions following the Retirement Date. The Separation Agreement addresses the timing of payments and distributions to Mr. Michener so that they remain exempt from or comply with the provisions of Sections 409A and 457A of the Internal Revenue Code.
In the event that Mr. Michener’s employment is terminated before the Retirement Date as a result of death or permanent disability, upon the Compensation Committee’s evaluation of his performance for the relevant year, the Compensation Committee would have the discretion to award him a cash payment in lieu of an equity incentive and/or a cash incentive for the year during which such termination occurs. In the event of a termination prior to the Retirement Date for any other reason, any unvested equity awards that he holds on the date of such termination will vest in accordance with the terms that the applicable award agreement provides as a result of such other termination, as applicable.
Mr. Michener will remain eligible for the Company’s severance policy, which is described in its 2017 proxy statement, for any termination prior to the Retirement Date subject to the terms of such plan. Mr. Michener’s Bermuda housing subsidy will continue through December 31, 2017 and he will reimbursed for moving expenses from Bermuda to the United States. He will also be reimbursed for tax preparation and financial planning through calendar year 2018.
The Separation Agreement contains covenants by Mr. Michener relating to protection of the Company's confidential information, cooperation, non-competition, non-solicitation and non-disparagement and other standard provisions. Payments pursuant to the Separation Agreement are subject to forfeiture and/or clawback in the event of violation of such covenants. Mr. Michener executed a release of claims as part of the Separation Agreement. The Separation Agreement provides that Mr. Michener will execute another release of claims within 45 days after his retirement.
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ITEM 6.32.2 | EXHIBITS. | | |
| 101.1 | | | The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2022 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets at March 31, 2022 and December 31, 2021; (ii) Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2022 and 2021; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the Three Months ended March 31, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements. |
| 104.1 | | | The Cover Page Interactive Data File from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 formatted, in Inline XBRL (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101). |
See Exhibit Index for a list
* Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | |
| ASSURED GUARANTY LTD.
(Registrant)
|
| |
Dated November 3, 2017May 6, 2022 | By: | /s/ ROBERT A. BAILENSON
|
| | |
| | Robert A. Bailenson Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)
|
EXHIBIT INDEX
|
| | | |
Exhibit
Number
| | Description of Document |
31.1 |
| | |
31.2 |
| | |
32.1 |
| | |
32.2 |
| | |
101.1 |
| | The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2017 and 2016 (iv) Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2017 (v) Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements.
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