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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | |
| ☒ | | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended SeptemberJune 30, 20222023
or
| | | | | | | | |
| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition Period from to
Commission File 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 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 4, 2022August 7, 2023 was 59,994,45858,610,144 (includes 36,40338,464 unvested restricted shares).
ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Assured Guaranty Ltd.
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in millions except share data)
| | | As of | | As of |
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| Assets | Assets | | | | Assets | | | |
| Investments: | Investments: | | | | Investments: | | | |
| Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $57 and $42 (amortized cost of $7,506 and $7,822) | $ | 6,780 | | | $ | 8,202 | | |
| Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $79 and $65 (amortized cost of $7,044 and $7,707) | | Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $79 and $65 (amortized cost of $7,044 and $7,707) | $ | 6,488 | | | $ | 7,119 | |
| Fixed-maturity securities, trading, at fair value | Fixed-maturity securities, trading, at fair value | 393 | | | — | | Fixed-maturity securities, trading, at fair value | 340 | | | 303 | |
| Short-term investments, at fair value | Short-term investments, at fair value | 1,177 | | | 1,225 | | Short-term investments, at fair value | 1,650 | | | 810 | |
| Other invested assets (includes $24 and $31, at fair value) | 130 | | | 181 | | |
| Other invested assets (includes $26 and $30, at fair value) | | Other invested assets (includes $26 and $30, at fair value) | 146 | | | 133 | |
| Total investments | Total investments | 8,480 | | | 9,608 | | Total investments | 8,624 | | | 8,365 | |
| Cash | Cash | 131 | | | 120 | | Cash | 114 | | | 107 | |
| Premiums receivable, net of commissions payable | Premiums receivable, net of commissions payable | 1,178 | | | 1,372 | | Premiums receivable, net of commissions payable | 1,417 | | | 1,298 | |
| Deferred acquisition costs | Deferred acquisition costs | 142 | | | 131 | | Deferred acquisition costs | 155 | | | 147 | |
| Salvage and subrogation recoverable | Salvage and subrogation recoverable | 385 | | | 801 | | Salvage and subrogation recoverable | 266 | | | 257 | |
| Financial guaranty variable interest entities’ assets, at fair value | 236 | | | 260 | | |
| Assets of consolidated investment vehicles (includes $5,151 and $4,902, at fair value) | 5,336 | | | 5,271 | | |
| Financial guaranty variable interest entities’ assets (includes $411 and $413, at fair value) | | Financial guaranty variable interest entities’ assets (includes $411 and $413, at fair value) | 414 | | | 416 | |
| Assets of consolidated investment vehicles (includes $4,978 and $5,363, at fair value) | | Assets of consolidated investment vehicles (includes $4,978 and $5,363, at fair value) | 5,055 | | | 5,493 | |
| Goodwill and other intangible assets | Goodwill and other intangible assets | 166 | | | 175 | | Goodwill and other intangible assets | 6 | | | 163 | |
| Other assets (includes $129 and $132, at fair value) | 606 | | | 470 | | |
| Assets held for sale | | Assets held for sale | 221 | | | — | |
| Other assets (includes $141 and $148, at fair value) | | Other assets (includes $141 and $148, at fair value) | 580 | | | 597 | |
| Total assets | Total assets | $ | 16,660 | | | $ | 18,208 | | Total assets | $ | 16,852 | | | $ | 16,843 | |
| Liabilities | Liabilities | | | | Liabilities | | | |
| Unearned premium reserve | Unearned premium reserve | $ | 3,596 | | | $ | 3,716 | | Unearned premium reserve | $ | 3,648 | | | $ | 3,620 | |
| Loss and loss adjustment expense reserve | Loss and loss adjustment expense reserve | 882 | | | 869 | | Loss and loss adjustment expense reserve | 349 | | | 296 | |
| Long-term debt | Long-term debt | 1,675 | | | 1,673 | | Long-term debt | 1,677 | | | 1,675 | |
| Credit derivative liabilities, at fair value | Credit derivative liabilities, at fair value | 195 | | | 156 | | Credit derivative liabilities, at fair value | 58 | | | 163 | |
| Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $238 and $269, without recourse $13 and $20) | 251 | | | 289 | | |
| Liabilities of consolidated investment vehicles (includes $4,209 and $3,849, at fair value) | 4,447 | | | 4,436 | | |
Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $687 and $702, without recourse $12 and $13) | | Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $687 and $702, without recourse $12 and $13) | 699 | | | 715 | |
| Liabilities of consolidated investment vehicles (includes $4,326 and $4,431, at fair value) | | Liabilities of consolidated investment vehicles (includes $4,326 and $4,431, at fair value) | 4,460 | | | 4,625 | |
| Liabilities held for sale | | Liabilities held for sale | 50 | | | — | |
| Other liabilities | Other liabilities | 440 | | | 569 | | Other liabilities | 456 | | | 457 | |
| Total liabilities | Total liabilities | 11,486 | | | 11,708 | | Total liabilities | 11,397 | | | 11,551 | |
| | Commitments and contingencies (Note 13) | | |
| Redeemable noncontrolling interests (Note 8) | 21 | | | 22 | | |
| | Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | |
| Shareholders’ equity | Shareholders’ equity | | Shareholders’ equity | |
| Common shares ($0.01 par value, 500,000,000 shares authorized; 60,719,431 and 67,518,424 shares issued and outstanding) | 1 | | | 1 | | |
| Common shares ($0.01 par value, 500,000,000 shares authorized; 58,850,144 and 59,013,040 shares issued and outstanding) | | Common shares ($0.01 par value, 500,000,000 shares authorized; 58,850,144 and 59,013,040 shares issued and outstanding) | 1 | | | 1 | |
| Retained earnings | Retained earnings | 5,579 | | | 5,990 | | Retained earnings | 5,732 | | | 5,577 | |
| Accumulated other comprehensive income (loss), net of tax of $(100) and $60 | (652) | | | 300 | | |
| Accumulated other comprehensive income (loss), net of tax of $(78) and $(84) | | Accumulated other comprehensive income (loss), net of tax of $(78) and $(84) | (458) | | | (515) | |
| Deferred equity compensation | Deferred equity compensation | 1 | | | 1 | | Deferred equity compensation | 1 | | | 1 | |
| Total shareholders’ equity attributable to Assured Guaranty Ltd. | Total shareholders’ equity attributable to Assured Guaranty Ltd. | 4,929 | | | 6,292 | | Total shareholders’ equity attributable to Assured Guaranty Ltd. | 5,276 | | | 5,064 | |
| Nonredeemable noncontrolling interests (Note 8) | Nonredeemable noncontrolling interests (Note 8) | 224 | | | 186 | | Nonredeemable noncontrolling interests (Note 8) | 179 | | | 228 | |
| Total shareholders’ equity | Total shareholders’ equity | 5,153 | | | 6,478 | | Total shareholders’ equity | 5,455 | | | 5,292 | |
| Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 16,660 | | | $ | 18,208 | | |
| Total liabilities and shareholders’ equity | | Total liabilities and shareholders’ equity | $ | 16,852 | | | $ | 16,843 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in millions except share data)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues | Revenues | | | | | | | | Revenues | | | | | | | |
| Net earned premiums | Net earned premiums | $ | 89 | | | $ | 102 | | | $ | 385 | | | $ | 307 | | Net earned premiums | $ | 85 | | | $ | 82 | | | $ | 166 | | | $ | 296 | |
| Net investment income | Net investment income | 67 | | | 66 | | | 191 | | | 204 | | Net investment income | 89 | | | 62 | | | 170 | | | 124 | |
| Asset management fees | Asset management fees | 16 | | | 20 | | | 71 | | | 65 | | Asset management fees | 27 | | | 21 | | | 53 | | | 55 | |
| Net realized investment gains (losses) | Net realized investment gains (losses) | (14) | | | 3 | | | (39) | | | 4 | | Net realized investment gains (losses) | (9) | | | (28) | | | (11) | | | (25) | |
| Fair value gains (losses) on credit derivatives | Fair value gains (losses) on credit derivatives | (48) | | | 21 | | | (42) | | | (31) | | Fair value gains (losses) on credit derivatives | 91 | | | 9 | | | 106 | | | 6 | |
| Fair value gains (losses) on committed capital securities | Fair value gains (losses) on committed capital securities | 1 | | | (3) | | | 12 | | | (28) | | Fair value gains (losses) on committed capital securities | 1 | | | 10 | | | (15) | | | 11 | |
| Fair value gains (losses) on financial guaranty variable interest entities | Fair value gains (losses) on financial guaranty variable interest entities | 11 | | | 5 | | | 27 | | | 18 | | Fair value gains (losses) on financial guaranty variable interest entities | (3) | | | 10 | | | (8) | | | 16 | |
| Fair value gains (losses) on consolidated investment vehicles | Fair value gains (losses) on consolidated investment vehicles | 8 | | | 16 | | | 25 | | | 53 | | Fair value gains (losses) on consolidated investment vehicles | 6 | | | 3 | | | 64 | | | 17 | |
| Foreign exchange gains (losses) on remeasurement | Foreign exchange gains (losses) on remeasurement | (80) | | | (27) | | | (181) | | | (22) | | Foreign exchange gains (losses) on remeasurement | 28 | | | (71) | | | 48 | | | (101) | |
| Fair value gains (losses) on trading securities | Fair value gains (losses) on trading securities | (8) | | | — | | | (30) | | | — | | Fair value gains (losses) on trading securities | 40 | | | (18) | | | 38 | | | (22) | |
| Other income (loss) | Other income (loss) | (1) | | | 9 | | | 12 | | | 15 | | Other income (loss) | 5 | | | 10 | | | 32 | | | 13 | |
| Total revenues | Total revenues | 41 | | | 212 | | | 431 | | | 585 | | Total revenues | 360 | | | 90 | | | 643 | | | 390 | |
| Expenses | Expenses | | | | | | | | Expenses | | | | | | | |
| Loss and loss adjustment expenses (benefit) | Loss and loss adjustment expenses (benefit) | (75) | | | (68) | | | (29) | | | (54) | | Loss and loss adjustment expenses (benefit) | 55 | | | (11) | | | 59 | | | 46 | |
| Interest expense | Interest expense | 20 | | | 23 | | | 60 | | | 67 | | Interest expense | 22 | | | 20 | | | 43 | | | 40 | |
| Loss on extinguishment of debt | — | | | 175 | | | — | | | 175 | | |
| Amortization of deferred acquisition costs | Amortization of deferred acquisition costs | 4 | | | 3 | | | 11 | | | 10 | | Amortization of deferred acquisition costs | 3 | | | 3 | | | 6 | | | 7 | |
| Employee compensation and benefit expenses | Employee compensation and benefit expenses | 57 | | | 59 | | | 189 | | | 173 | | Employee compensation and benefit expenses | 70 | | | 59 | | | 152 | | | 132 | |
| Other operating expenses | Other operating expenses | 37 | | | 38 | | | 120 | | | 135 | | Other operating expenses | 71 | | | 41 | | | 126 | | | 83 | |
| Total expenses | Total expenses | 43 | | | 230 | | | 351 | | | 506 | | Total expenses | 221 | | | 112 | | | 386 | | | 308 | |
| Income (loss) before income taxes and equity in earnings (losses) of investees | Income (loss) before income taxes and equity in earnings (losses) of investees | (2) | | | (18) | | | 80 | | | 79 | | Income (loss) before income taxes and equity in earnings (losses) of investees | 139 | | | (22) | | | 257 | | | 82 | |
| Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | (20) | | | 23 | | | (31) | | | 66 | | Equity in earnings (losses) of investees | 5 | | | — | | | 7 | | | (11) | |
| Income (loss) before income taxes | Income (loss) before income taxes | (22) | | | 5 | | | 49 | | | 145 | | Income (loss) before income taxes | 144 | | | (22) | | | 264 | | | 71 | |
| Less: Provision (benefit) for income taxes | Less: Provision (benefit) for income taxes | (27) | | | (15) | | | (6) | | | 8 | | Less: Provision (benefit) for income taxes | 18 | | | 3 | | | 41 | | | 21 | |
| Net income (loss) | Net income (loss) | 5 | | | 20 | | | 55 | | | 137 | | Net income (loss) | 126 | | | (25) | | | 223 | | | 50 | |
| Less: Noncontrolling interests | Less: Noncontrolling interests | (6) | | | 3 | | | 25 | | | 11 | | Less: Noncontrolling interests | 1 | | | 22 | | | 17 | | | 31 | |
| Net income (loss) attributable to Assured Guaranty Ltd. | Net income (loss) attributable to Assured Guaranty Ltd. | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Net income (loss) attributable to Assured Guaranty Ltd. | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| | Earnings per share: | Earnings per share: | | Earnings per share: | |
| Basic | Basic | $ | 0.18 | | | $ | 0.22 | | | $ | 0.47 | | | $ | 1.67 | | Basic | $ | 2.09 | | | $ | (0.74) | | | $ | 3.46 | | | $ | 0.29 | |
| Diluted | Diluted | $ | 0.18 | | | $ | 0.22 | | | $ | 0.46 | | | $ | 1.66 | | Diluted | $ | 2.06 | | | $ | (0.74) | | | $ | 3.40 | | | $ | 0.29 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in millions)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) | Net income (loss) | $ | 5 | | | $ | 20 | | | $ | 55 | | | $ | 137 | | Net income (loss) | $ | 126 | | | $ | (25) | | | $ | 223 | | | $ | 50 | |
| Change in net unrealized gains (losses) on: | Change in net unrealized gains (losses) on: | | Change in net unrealized gains (losses) on: | |
Investments with no credit impairment, net of tax provision (benefit) of $(39), $(8), $(139) and $(18) | (277) | | | (66) | | | (857) | | | (134) | | |
| Investments with credit impairment, net of tax provision (benefit) of $1, $(2), $(18) and $3 | 2 | | | (6) | | | (81) | | | 12 | | |
Investments with no credit impairment, net of tax provision (benefit) of $(6), $(37), $8 and $(100) | | Investments with no credit impairment, net of tax provision (benefit) of $(6), $(37), $8 and $(100) | (30) | | | (242) | | | 59 | | | (580) | |
| Investments with credit impairment, net of tax provision (benefit) of $(3), $(10), $(2) and $(19) | | Investments with credit impairment, net of tax provision (benefit) of $(3), $(10), $(2) and $(19) | (10) | | | (44) | | | (5) | | | (83) | |
| Change in net unrealized gains (losses) on investments | Change in net unrealized gains (losses) on investments | (275) | | | (72) | | | (938) | | | (122) | | Change in net unrealized gains (losses) on investments | (40) | | | (286) | | | 54 | | | (663) | |
| Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | (3) | | | 2 | | | (1) | | | (1) | | Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | 2 | | | 2 | | | 1 | | | 2 | |
| Other, net of tax | Other, net of tax | (4) | | | (1) | | | (13) | | | (1) | | Other, net of tax | — | | | (8) | | | 2 | | | (9) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | (282) | | | (71) | | | (952) | | | (124) | | Other comprehensive income (loss) | (38) | | | (292) | | | 57 | | | (670) | |
| Comprehensive income (loss) | Comprehensive income (loss) | (277) | | | (51) | | | (897) | | | 13 | | Comprehensive income (loss) | 88 | | | (317) | | | 280 | | | (620) | |
| Less: Comprehensive income (loss) attributable to noncontrolling interests | Less: Comprehensive income (loss) attributable to noncontrolling interests | (6) | | | 3 | | | 25 | | | 11 | | Less: Comprehensive income (loss) attributable to noncontrolling interests | 1 | | | 22 | | | 17 | | | 31 | |
| Comprehensive income (loss) attributable to Assured Guaranty Ltd. | Comprehensive income (loss) attributable to Assured Guaranty Ltd. | $ | (271) | | | $ | (54) | | | $ | (922) | | | $ | 2 | | Comprehensive income (loss) attributable to Assured Guaranty Ltd. | $ | 87 | | | $ | (339) | | | $ | 263 | | | $ | (651) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(dollars in millions, except share data)
For the Three Months Ended SeptemberJune 30, 20222023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | | |
| | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity |
| Balance at June 30, 2022 | 62,475,739 | | | | $ | 1 | | | $ | 5,672 | | | $ | (370) | | | $ | 1 | | | $ | 5,304 | | | $ | 243 | | | $ | 5,547 | |
| Net income (loss) | — | | | | — | | | 11 | | | — | | | — | | | 11 | | | (6) | | | 5 | |
Dividends ($0.25 per share) | — | | | | — | | | (16) | | | — | | | — | | | (16) | | | — | | | (16) | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 23 | | | 23 | |
| Common shares repurchases | (1,790,395) | | | | — | | | (97) | | | — | | | — | | | (97) | | | — | | | (97) | |
| Share-based compensation | 34,087 | | | | — | | | 9 | | | — | | | — | | | 9 | | | — | | | 9 | |
| Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (36) | | | (36) | |
| Other comprehensive loss | — | | | | — | | | — | | | (282) | | | — | | | (282) | | | — | | | (282) | |
| Balance at September 30, 2022 | 60,719,431 | | | | $ | 1 | | | $ | 5,579 | | | $ | (652) | | | $ | 1 | | | $ | 4,929 | | | $ | 224 | | | $ | 5,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | | |
| | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity |
| As of March 31, 2023 | 59,274,112 | | | | $ | 1 | | | $ | 5,638 | | | $ | (420) | | | $ | 1 | | | $ | 5,220 | | | $ | 195 | | | $ | 5,415 | |
| Net income | — | | | | — | | | 125 | | | — | | | — | | | 125 | | | 1 | | | 126 | |
| Dividends ($0.28 per share) | — | | | | — | | | (17) | | | — | | | — | | | (17) | | | — | | | (17) | |
| Common shares repurchases | (453,942) | | | | — | | | (24) | | | — | | | — | | | (24) | | | — | | | (24) | |
| Share-based compensation | 29,974 | | | | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | |
| Reclassification to liabilities | — | | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 17 | | | 17 | |
| Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (18) | | | (18) | |
| Other comprehensive loss | — | | | | — | | | — | | | (38) | | | — | | | (38) | | | — | | | (38) | |
| As of June 30, 2023 | 58,850,144 | | | | $ | 1 | | | $ | 5,732 | | | $ | (458) | | | $ | 1 | | | $ | 5,276 | | | $ | 179 | | | $ | 5,455 | |
For the Three Months Ended SeptemberJune 30, 20212022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | | |
| | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity |
| Balance at June 30, 2021 | 74,112,554 | | | | $ | 1 | | | $ | 6,056 | | | $ | 445 | | | $ | 1 | | | $ | 6,503 | | | $ | 49 | | | $ | 6,552 | |
| Net income | — | | | | — | | | 17 | | | — | | | — | | | 17 | | | 3 | | | 20 | |
| Dividends ($0.22 per share) | — | | | | — | | | (16) | | | — | | | — | | | (16) | | | — | | | (16) | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 25 | | | 25 | |
| Common shares repurchases | (2,918,993) | | | | — | | | (140) | | | — | | | — | | | (140) | | | — | | | (140) | |
| Share-based compensation | 48,379 | | | | — | | | 7 | | | — | | | — | | | 7 | | | — | | | 7 | |
| Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other comprehensive loss | — | | | | — | | | — | | | (71) | | | — | | | (71) | | | — | | | (71) | |
| Balance at September 30, 2021 | 71,241,940 | | | | $ | 1 | | | $ | 5,924 | | | $ | 374 | | | $ | 1 | | | $ | 6,300 | | | $ | 75 | | | $ | 6,375 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | | |
| | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity |
| As of March 31, 2022 | 65,043,547 | | | | $ | 1 | | | $ | 5,878 | | | $ | (78) | | | $ | 1 | | | $ | 5,802 | | | $ | 193 | | | $ | 5,995 | |
| Net income (loss) | — | | | | — | | | (47) | | | — | | | — | | | (47) | | | 22 | | | (25) | |
| Dividends ($0.25 per share) | — | | | | — | | | (16) | | | — | | | — | | | (16) | | | — | | | (16) | |
| Common shares repurchases | (2,605,947) | | | | — | | | (151) | | | — | | | — | | | (151) | | | — | | | (151) | |
| Share-based compensation | 38,139 | | | | — | | | 8 | | | — | | | — | | | 8 | | | — | | | 8 | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 35 | | | 35 | |
| Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
| Other comprehensive loss | — | | | | — | | | — | | | (292) | | | — | | | (292) | | | — | | | (292) | |
| As of June 30, 2022 | 62,475,739 | | | | $ | 1 | | | $ | 5,672 | | | $ | (370) | | | $ | 1 | | | $ | 5,304 | | | $ | 243 | | | $ | 5,547 | |
Assured Guaranty Ltd.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) - (Continued)
(dollars in millions, except share data)
For the NineSix Months Ended SeptemberJune 30, 20222023
| | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | |
| | | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity | | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | 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 | | |
| As of December 31, 2022 | | As of December 31, 2022 | 59,013,040 | | | | $ | 1 | | | $ | 5,577 | | | $ | (515) | | | $ | 1 | | | $ | 5,064 | | | $ | 228 | | | $ | 5,292 | |
| Net income | Net income | — | | | | — | | | 30 | | | — | | | — | | | 30 | | | 26 | | | 56 | | Net income | — | | | | — | | | 206 | | | — | | | — | | | 206 | | | 17 | | | 223 | |
Dividends ($0.75 per share) | — | | | | — | | | (49) | | | — | | | (49) | | | — | | | (49) | | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 63 | | | 63 | | |
Dividends ($0.56 per share) | | Dividends ($0.56 per share) | — | | | | — | | | (35) | | | — | | | — | | | (35) | | | — | | | (35) | |
| Common shares repurchases | Common shares repurchases | (7,134,565) | | | | — | | | (403) | | | — | | | (403) | | | — | | | (403) | | Common shares repurchases | (490,311) | | | | — | | | (26) | | | — | | | — | | | (26) | | | — | | | (26) | |
| Share-based compensation | Share-based compensation | 335,572 | | | | — | | | 11 | | | — | | | — | | | 11 | | | — | | | 11 | | Share-based compensation | 327,415 | | | | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | |
| Reclassification to liabilities | | Reclassification to liabilities | — | | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
| Contributions | | Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 20 | | | 20 | |
| Distributions | Distributions | — | | | | — | | | — | | | — | | | — | | | (51) | | | (51) | | Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (70) | | | (70) | |
| Other comprehensive loss | — | | | | | — | | | (952) | | | — | | | (952) | | | — | | | (952) | | |
| Balance at September 30, 2022 | 60,719,431 | | | | $ | 1 | | | $ | 5,579 | | | $ | (652) | | | $ | 1 | | | $ | 4,929 | | | $ | 224 | | | $ | 5,153 | | |
| Other comprehensive income | | Other comprehensive income | — | | | | — | | | — | | | 57 | | | — | | | 57 | | | — | | | 57 | |
| As of June 30, 2023 | | As of June 30, 2023 | 58,850,144 | | | | $ | 1 | | | $ | 5,732 | | | $ | (458) | | | $ | 1 | | | $ | 5,276 | | | $ | 179 | | | $ | 5,455 | |
For the NineSix Months Ended SeptemberJune 30, 20212022
| | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | | | Shareholders’ Equity Attributable to Assured Guaranty Ltd. | |
| | | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Deferred
Equity Compensation | | Total | | Nonredeemable Noncontrolling Interests | |
Shareholders’ Equity | | Common Shares Outstanding | | | Common
Shares
Par Value | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | 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 | | |
| As of December 31, 2021 | | As of December 31, 2021 | 67,518,424 | | | | $ | 1 | | | $ | 5,990 | | | $ | 300 | | | $ | 1 | | | $ | 6,292 | | | $ | 186 | | | $ | 6,478 | |
| Net income | Net income | — | | | | — | | | 126 | | | — | | | — | | | 126 | | | 11 | | | 137 | | Net income | — | | | | — | | | 19 | | | — | | | — | | | 19 | | | 32 | | | 51 | |
| Dividends ($0.66 per share) | — | | | | — | | | (50) | | | — | | | — | | | (50) | | | — | | | (50) | | |
| Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 34 | | | 34 | | |
| Dividends ($0.50 per share) | | Dividends ($0.50 per share) | — | | | | — | | | (33) | | | — | | | — | | | (33) | | | — | | | (33) | |
| Common shares repurchases | Common shares repurchases | (6,793,058) | | | | — | | | (305) | | | — | | | — | | | (305) | | | — | | | (305) | | Common shares repurchases | (5,344,170) | | | | — | | | (306) | | | — | | | — | | | (306) | | | — | | | (306) | |
| Share-based compensation | Share-based compensation | 488,102 | | | | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | | Share-based compensation | 301,485 | | | | — | | | 2 | | | — | | | — | | | 2 | | | — | | | 2 | |
| Contributions | | Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 40 | | | 40 | |
| Distributions | Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (11) | | | (11) | | Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (15) | | | (15) | |
| Other comprehensive loss | Other comprehensive loss | — | | | | — | | | — | | | (124) | | | — | | | (124) | | | — | | | (124) | | Other comprehensive loss | — | | | | — | | | — | | | (670) | | | — | | | (670) | | | — | | | (670) | |
| Balance at September 30, 2021 | 71,241,940 | | | | $ | 1 | | | $ | 5,924 | | | $ | 374 | | | $ | 1 | | | $ | 6,300 | | | $ | 75 | | | $ | 6,375 | | |
| As of June 30, 2022 | | As of June 30, 2022 | 62,475,739 | | | | $ | 1 | | | $ | 5,672 | | | $ | (370) | | | $ | 1 | | | $ | 5,304 | | | $ | 243 | | | $ | 5,547 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Net cash flows provided by (used in) operating activities | Net cash flows provided by (used in) operating activities | $ | (1,848) | | | $ | (1,792) | | Net cash flows provided by (used in) operating activities | $ | 436 | | | $ | (1,794) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Fixed-maturity securities, available-for-sale: | Fixed-maturity securities, available-for-sale: | | | | Fixed-maturity securities, available-for-sale: | | | |
| Purchases | Purchases | (279) | | | (1,025) | | Purchases | (290) | | | (180) | |
| Sales | Sales | 560 | | | 222 | | Sales | 694 | | | 353 | |
| Maturities and paydowns | Maturities and paydowns | 585 | | | 757 | | Maturities and paydowns | 298 | | | 389 | |
| Short-term investments with original maturities of over three months: | Short-term investments with original maturities of over three months: | | Short-term investments with original maturities of over three months: | |
| Purchases | Purchases | (42) | | | — | | Purchases | (13) | | | (28) | |
| Sales | | Sales | 4 | | | — | |
| Maturities and paydowns | Maturities and paydowns | 23 | | | 32 | | Maturities and paydowns | 15 | | | 9 | |
| Net sales (purchases) of short-term investments with original maturities of less than three months | Net sales (purchases) of short-term investments with original maturities of less than three months | 64 | | | 125 | | Net sales (purchases) of short-term investments with original maturities of less than three months | (845) | | | 379 | |
| Sales of fixed-maturity securities, trading | Sales of fixed-maturity securities, trading | 121 | | | — | | Sales of fixed-maturity securities, trading | — | | | 68 | |
| Paydowns of financial guaranty variable interest entities’ assets | Paydowns of financial guaranty variable interest entities’ assets | 74 | | | 45 | | Paydowns of financial guaranty variable interest entities’ assets | 14 | | | 44 | |
| Purchases of other invested assets | Purchases of other invested assets | (11) | | | (44) | | Purchases of other invested assets | (15) | | | (8) | |
| Return of capital from and sales of other invested assets | 35 | | | 61 | | |
| Sales and return of capital of other invested assets | | Sales and return of capital of other invested assets | 11 | | | 34 | |
| Other | Other | (2) | | | (4) | | Other | (1) | | | (2) | |
| Net cash flows provided by (used in) investing activities | Net cash flows provided by (used in) investing activities | 1,128 | | | 169 | | Net cash flows provided by (used in) investing activities | (128) | | | 1,058 | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| Dividends paid | Dividends paid | (49) | | | (51) | | Dividends paid | (35) | | | (33) | |
| Repurchases of common shares | Repurchases of common shares | (400) | | | (305) | | Repurchases of common shares | (26) | | | (303) | |
| Net paydowns of financial guaranty variable interest entities’ liabilities | Net paydowns of financial guaranty variable interest entities’ liabilities | (92) | | | (38) | | Net paydowns of financial guaranty variable interest entities’ liabilities | (14) | | | (65) | |
| Issuance of long-term debt, net of issuance costs | — | | | 889 | | |
| Redemptions and purchases of debt, including make-whole | — | | | (620) | | |
| Other | Other | (6) | | | 7 | | Other | (15) | | | (7) | |
| Cash flows from consolidated investment vehicles: | Cash flows from consolidated investment vehicles: | | Cash flows from consolidated investment vehicles: | |
| Proceeds from issuance of collateralized loan obligations | Proceeds from issuance of collateralized loan obligations | 1,372 | | | 2,079 | | Proceeds from issuance of collateralized loan obligations | — | | | 1,372 | |
| Repayment of collateralized loan obligations | Repayment of collateralized loan obligations | (373) | | | (365) | | Repayment of collateralized loan obligations | (1) | | | (372) | |
| Proceeds from issuance of warehouse financing debt | Proceeds from issuance of warehouse financing debt | 882 | | | 1,008 | | Proceeds from issuance of warehouse financing debt | — | | | 791 | |
| Repayment of warehouse financing debt | Repayment of warehouse financing debt | (758) | | | (1,061) | | Repayment of warehouse financing debt | (166) | | | (744) | |
| Borrowings under credit facilities | 46 | | | — | | |
| Borrowing (payment) under credit facilities | | Borrowing (payment) under credit facilities | (4) | | | 1 | |
| Contributions from noncontrolling interests to consolidated investment vehicles | Contributions from noncontrolling interests to consolidated investment vehicles | 52 | | | 33 | | Contributions from noncontrolling interests to consolidated investment vehicles | — | | | 35 | |
| Distributions to noncontrolling interests from consolidated investment vehicles | Distributions to noncontrolling interests from consolidated investment vehicles | (19) | | | (10) | | Distributions to noncontrolling interests from consolidated investment vehicles | (72) | | | (16) | |
| Net cash flows provided by (used in) financing activities | Net cash flows provided by (used in) financing activities | 655 | | | 1,566 | | Net cash flows provided by (used in) financing activities | (333) | | | 659 | |
| Effect of foreign exchange rate changes | Effect of foreign exchange rate changes | (6) | | | (1) | | Effect of foreign exchange rate changes | 2 | | | (2) | |
| Increase (decrease) in cash and cash equivalents and restricted cash | Increase (decrease) in cash and cash equivalents and restricted cash | (71) | | | (58) | | Increase (decrease) in cash and cash equivalents and restricted cash | (23) | | | (79) | |
| Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 342 | | | 298 | | Cash and cash equivalents and restricted cash at beginning of period | 207 | | | 342 | |
| Cash and cash equivalents and restricted cash at end of period | Cash and cash equivalents and restricted cash at end of period | $ | 271 | | | $ | 240 | | Cash and cash equivalents and restricted cash at end of period | $ | 184 | | | $ | 263 | |
(continued on next page)
Assured Guaranty Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited) - (Continued)
(in millions)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Supplemental cash flow information | Supplemental cash flow information | | | | Supplemental cash flow information | | | |
| Income taxes paid (received) | Income taxes paid (received) | $ | 97 | | | $ | 1 | | Income taxes paid (received) | $ | 2 | | | $ | 97 | |
| Interest paid on long-term debt | Interest paid on long-term debt | 47 | | | 50 | | Interest paid on long-term debt | 41 | | | 38 | |
| | Supplemental disclosure of non-cash activities: | Supplemental disclosure of non-cash activities: | | Supplemental disclosure of non-cash activities: | |
| Puerto Rico Plan Consideration (see Note 3) | | Puerto Rico Plan Consideration (see Note 3) | |
| Fixed-maturity securities, available-for-sale, received as salvage | Fixed-maturity securities, available-for-sale, received as salvage | $ | 610 | | | $ | — | | Fixed-maturity securities, available-for-sale, received as salvage | $ | 1 | | | $ | 610 | |
| Fixed-maturity securities, available-for-sale, ceded to a reinsurer | Fixed-maturity securities, available-for-sale, ceded to a reinsurer | 27 | | | — | | Fixed-maturity securities, available-for-sale, ceded to a reinsurer | — | | | 27 | |
| Fixed-maturity securities, trading, received as salvage | Fixed-maturity securities, trading, received as salvage | 550 | | | — | | Fixed-maturity securities, trading, received as salvage | — | | | 183 | |
| Fixed-maturity securities, trading, ceded to a reinsurer | Fixed-maturity securities, trading, ceded to a reinsurer | 6 | | | — | | Fixed-maturity securities, trading, ceded to a reinsurer | — | | | 6 | |
| Debt securities of financial guaranty variable interest entities received as salvage | Debt securities of financial guaranty variable interest entities received as salvage | 54 | | | — | | Debt securities of financial guaranty variable interest entities received as salvage | — | | | 54 | |
| Contributions from noncontrolling interests | Contributions from noncontrolling interests | 32 | | | 1 | | Contributions from noncontrolling interests | 20 | | | 26 | |
| Distributions to noncontrolling interests | Distributions to noncontrolling interests | 53 | | | 1 | | Distributions to noncontrolling interests | 20 | | | 20 | |
| | | As of | | As of |
| | September 30, 2022 | | September 30, 2021 | | June 30, 2023 | | June 30, 2022 |
| Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | | | | Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | | | |
| Cash | Cash | $ | 131 | | | $ | 101 | | Cash | $ | 114 | | | $ | 138 | |
| Restricted cash (included in other assets) | Restricted cash (included in other assets) | 1 | | | 1 | | Restricted cash (included in other assets) | 1 | | | — | |
| Cash and cash equivalents of consolidated investment vehicles (Note 8) | 139 | | | 138 | | |
| Cash and cash equivalents of consolidated investment vehicles (See Note 8) | | Cash and cash equivalents of consolidated investment vehicles (See Note 8) | 49 | | | 125 | |
| Cash (included in assets held for sale) | | Cash (included in assets held for sale) | 20 | | | — | |
| Cash and cash equivalents and restricted cash at the end of period | Cash and cash equivalents and restricted cash at the end of period | $ | 271 | | | $ | 240 | | Cash and cash equivalents and restricted cash at the end of period | $ | 184 | | | $ | 263 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.statements.-
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 wholly-owned operating subsidiaries, credit protection products to the United States (U.S.) and internationalnon-U.S. public finance (including infrastructure) and structured finance markets, as well asmarkets. Assured Guaranty also participates in the asset management services.business, as described below.
Insurance
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 (collectively, debt service), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia.Europe. The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposuresexposure`s written in financial guaranty form.
ThroughAsset Management
Until July 1, 2023, the Company served as an investment advisor to collateralized loan obligations (CLOs) and opportunity funds, as well as certain legacy hedge and opportunity funds subject to an orderly wind-down, through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM),. Beginning July 1, 2023, the Company significantly increased its participationparticipates in the asset management business through its ownership interest in Sound Point Capital Management, LP (Sound Point) as described below.
On July 1, 2023, Assured Guaranty contributed to Sound Point most of its asset management business, other than that conducted by Assured Healthcare Partners LLC (AssuredIM Contributed Business), as contemplated by the transaction agreement entered into with Sound Point on April 5, 2023 (Transaction Agreement). In addition, in accordance with the completion on Octoberterms of a letter agreement (Letter Agreement), effective July 1, 2019,2023 Assured Guaranty Municipal Corp. and Assured Guaranty Corp. (collectively, the U.S. Insurance Subsidiaries) (i) engaged Sound Point as their sole alternative credit manager, and (ii) transitioned to Sound Point the management of certain existing alternative investments and related commitments. The Letter Agreement also provides that, in the first two years of Sound Point’s engagement, the U.S. Insurance Subsidiaries would, subject to regulatory approval, make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the alternative investments and commitments transitioned from AssuredIM, will total $1 billion. See Note 7, Investments. Assured Guaranty received, subject to certain potential post-closing adjustments, common interests in Sound Point representing a 30% participation percentage in Sound Point, and certain other interests in related Sound Point entities (the transactions contemplated under the Transaction Agreement and the Letter Agreement, the Sound Point Transaction).
In July 2023, Assured Guaranty sold all of its acquisitionequity interests in Assured Healthcare Partners LLC (AHP), which manages healthcare funds, to an entity owned and controlled by the managing partner of AHP (AHP Transaction). In connection with the AHP Transaction, the Company agreed to remain a strategic investor in certain AHP investment vehicles, is retaining certain carried interest in AHP entities and received other consideration.
Assets and Liabilities Held For Sale
As of June 30, 2023, the AssuredIM assets and liabilities subject to the Sound Point Transaction and the AHP Transaction were classified as held for sale. The results of all of the outstanding equity interestsAssuredIM entities that are classified as held for sale are reported in BlueMountain Capitalthe Asset Management LLC (BlueMountain, now knownsegment. See Note 2, Segment Information. The Company also designated certain other assets and liabilities supporting the Insurance segment as Assured Investment Management LLC)held for sale in the first quarter of 2023 and its associated entities. AssuredIM is a diversified asset manager that serves as investment advisorexpects the sale 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 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients.be completed in 2024.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
A disposal group is measured at the lower of carrying amount or fair value less any costs associated with the transaction. The Company assessed the disposal groups for impairment and determined no impairment existed as of June 30, 2023. Upon classification of the disposal group as held for sale, the Company ceased amortizing held for sale intangibles. Each of the components held for sale will be accounted for as dispositions of businesses.
The Company is still evaluating the effect of the Sound Point Transaction and the AHP Transaction on its third quarter of 2023 financial statements. The table below shows the components of assets and liabilities held for sale.
Assets and Liabilities Held For Sale
As of June 30, 2023
| | | | | |
| (in millions) |
| Assets | |
| Short-term investments | $ | 1 | |
| Cash | 20 | |
| Goodwill and other intangible assets | 156 | |
| Other assets | |
| Deferred tax assets | 3 | |
| Other | 41 | |
| Total assets held for sale | $ | 221 | |
| Liabilities | |
| Other liabilities | $ | 50 | |
| Total liabilities held for sale | $ | 50 | |
Revenues and expenses attributable to all businesses held for sale relate primarily to the AssuredIM entities in the asset management segment, which results are presented in Note 2, Segment Information. Substantially all of the entities in the asset management segment are held for sale.
Upon closing of the Sound Point Transaction and the AHP Transaction the Company will deconsolidate the corresponding AssuredIM management companies. The Company will account for its investment in Sound Point as an equity method investment. In light of the Sound Point Transaction and the AHP Transaction, the Company is evaluating whether it will continue to consolidate each of its consolidated investment vehicles (CIVs).
The Company recognized expenses of $24 million and $31 million during the three-month period ended June 30, 2023 (second quarter 2023) and the six-month period ended June 30, 2023 (six months 2023), respectively, associated with the Sound Point Transaction and AHP Transaction.
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In management’s opinion, all material adjustments necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, including its consolidated variable interest entities (VIEs), are reflected in the periods presented and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As discussed in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, the nine month period ended September 30, 2022 include two out-of period adjustments, totaling $6.9 million in net income attributable to AGL. Management has determined these misstatements are not material to prior periods or to the financial statements taken as a whole.
These unaudited interim condensed consolidated financial statements are as of SeptemberJune 30, 20222023 and cover second quarter 2023, the three-month period ended SeptemberJune 30, 2022 (third(second quarter 2022), six months 2023 and the three-monthsix-month period ended September 30, 2021 (third quarter 2021), the nine-month period ended SeptemberJune 30, 2022 (nine(six months 2022) and the nine-month period ended September 30, 2021 (nine months 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, but does not include all
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current year’speriod’s presentation.
The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs).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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021,2022 filed with the U.S. Securities and Exchange Commission (SEC).
The Company’s principal insurance subsidiaries are:
•Assured Guaranty Municipal Corp. (AGM), domiciled in New York;
•Assured Guaranty Corp. (AGC), domiciled in Maryland;
•Assured Guaranty UK Limited (AGUK), organized in the U.K.;
•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.
TheUntil July 2023, the Company’s principal asset management subsidiaries are:were:
•Assured Investment Management LLC, organized in Delaware;
•Assured Investment Management (London) LLP, organized in the U.K.; and
•Assured Healthcare Partners LLC, organized in Delaware.
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 the first quarter of 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, theThe U.S. Insurance Subsidiaries),Subsidiaries jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by AssuredIM (AssuredIM Funds). Effective July 1, 2023, the AssuredIM Funds are managed by Sound Point or AHP. Following the closing of the Sound Point Transaction, AGAS has also begun to invest in funds managed by Sound Point.
AGL directly or indirectly owns several holding companies, two of which - Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (collectively,(AGMH and, together with AGUS, the U.S. Holding Companies) - have public debt outstanding.
Recent Accounting Standards Adopted
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects 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 London 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 may be applied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022 (the Reference Rate Transition Period).
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies the scope of relief 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 beginning 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 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 Company has identified insurance contracts, derivatives and other financial instruments that are directly or indirectly influenced by LIBOR, and will be applying the accounting relief as relevant contract modifications are made during the Reference Rate Transition Period. There was no impact to the Company’s consolidated financial statements upon the initial adoption of these ASUs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Recent Accounting Standards Not Yet Adopted
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The amendments in this ASU:
•improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows,
•simplify and improve the accounting for certain market-based options or 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 certain specialty (non-financial guaranty) insurance contracts. In November 2020, the FASB deferred the effective dateadoption of this ASU toon January 1, 2023 with early adoption permitted. If early adoption is elected, there is transition relief allowing for the transition date to be either the beginning of the prior period presented or the beginning of the earliest period presented. If early adoption isdid not elected, the transition date is required to be the beginning of the earliest period presented. The Company does not currently expect this ASU to have a materialany effect on itsthe Company’s consolidated financial statements.
2. Segment Information
The Company reports its results of operations in two segments: Insurance and Asset Management, separate from its Corporate division and the effects of consolidating FG VIEs and CIVs, which is consistent with the manner in which the Company’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. TheAs of June 30, 2023, the Asset Management segment consistsconsisted of AssuredIM, which providesprovided asset management services to third-party investors as well as to the U.S. Insurance Subsidiaries and AGAS. Beginning in July 2023, the Company participates in the asset management business through its investment in Sound Point as described in Note 1, Business and Basis of Presentation.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 segmentssegment results 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’ 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 losseslosses/recoveries associated with theirthe financial guaranty policies associated with the FG VIEs’ debt are eliminated whereas the(the reconciliation tables below present the FG VIEs and related eliminations in “Other”“other”,) and (ii) CIVs are consolidated by AGUS, a U.S. holding company, whereas in(in the reconciliation tables below, the CIVs and related eliminations of the Insurance segment’s “equity in earnings (losses) of investees” associated with AGAS’ interest in CIVs are presented in “Other.“other.”) In addition, under GAAP, reimbursable fund expenses are shown as a component of asset management fees and included in total revenues, whereas in the Asset Management segment in the tables below, theythese expenses are netted in “segment expenses”.
The Company analyzes the operating performance of each segment using “segment adjusted operating income (loss).” Results for each segment include specifically identifiable expenses as well as intersegment expense allocations, as applicable, based on time studies and other cost allocation methodologies based on headcount or other metrics. Segment adjusted operating income is defined as “net income (loss) attributable to AGL,”AGL”, adjusted for the following items:
•Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
•Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments.
•Elimination of fair value gains (losses) on the Company’s committed capital securities (CCS) that are recognized in net income.
•Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and loss adjustment expense (LAE) reserves that are recognized in net income.
•Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
The Company does not report assets by reportable segment as the CODM does not use assets to assess performance and allocate resources.resources based on assets.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table presents information for the Company’s operating segments. Intersegment revenues include transactions between and among the segments, the corporate division and other.
Segment Information
| | | Third Quarter | | Second Quarter |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | Insurance | | Asset Management | | Insurance | | Asset Management | | Insurance | | Asset Management | | Insurance | | Asset Management |
| | (in millions) | | (in millions) |
| Third-party revenues | Third-party revenues | | $ | 145 | | | $ | 13 | | | $ | 187 | | | $ | 17 | | Third-party revenues | | $ | 221 | | | $ | 19 | | | $ | 137 | | | $ | 16 | |
| Intersegment revenues | Intersegment revenues | | 2 | | | 8 | | | 3 | | | 2 | | Intersegment revenues | | 3 | | | 11 | | | 2 | | | 12 | |
| Segment revenues | Segment revenues | | 147 | | | 21 | | | 190 | | | 19 | | Segment revenues | | 224 | | | 30 | | | 139 | | | 28 | |
| Segment expenses | Segment expenses | | (16) | | | 24 | | | (22) | | | 29 | | Segment expenses | | 110 | | | 33 | | | 41 | | | 28 | |
| Segment equity in earnings (losses) of investees | Segment equity in earnings (losses) of investees | | (11) | | | — | | | 33 | | | — | | Segment equity in earnings (losses) of investees | | 5 | | | — | | | (34) | | | — | |
| Less: Segment provision (benefit) for income taxes | Less: Segment provision (benefit) for income taxes | | (7) | | | — | | | 31 | | | (3) | | Less: Segment provision (benefit) for income taxes | | 13 | | | (1) | | | 9 | | | — | |
| Segment adjusted operating income (loss) | Segment adjusted operating income (loss) | | $ | 159 | | | $ | (3) | | | $ | 214 | | | $ | (7) | | Segment adjusted operating income (loss) | | $ | 106 | | | $ | (2) | | | $ | 55 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months |
| | 2023 | | 2022 |
| | Insurance | | Asset Management | | Insurance | | Asset Management |
| | (in millions) |
| Third-party revenues | | $ | 409 | | | $ | 44 | | | $ | 413 | | | $ | 46 | |
| Intersegment revenues | | 5 | | | 27 | | | 4 | | | 21 | |
| Segment revenues | | 414 | | | 71 | | | 417 | | | 67 | |
| Segment expenses | | 189 | | | 75 | | | 163 | | | 67 | |
| Segment equity in earnings (losses) of investees | | 35 | | | — | | | (35) | | | — | |
| Less: Segment provision (benefit) for income taxes | | 37 | | | (1) | | | 31 | | | — | |
| Segment adjusted operating income (loss) | | $ | 223 | | | $ | (3) | | | $ | 188 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months |
| | 2022 | | 2021 |
| | Insurance | | Asset Management | | Insurance | | Asset Management |
| | (in millions) |
| Third-party revenues | | $ | 558 | | | $ | 59 | | | $ | 544 | | | $ | 54 | |
| Intersegment revenues | | 6 | | | 29 | | | 7 | | | 6 | |
| Segment revenues | | 564 | | | 88 | | | 551 | | | 60 | |
| Segment expenses | | 147 | | | 91 | | | 131 | | | 82 | |
| Segment equity in earnings (losses) of investees | | (46) | | | — | | | 100 | | | — | |
| Less: Segment provision (benefit) for income taxes | | 24 | | | — | | | 75 | | | (6) | |
| Segment adjusted operating income (loss) | | $ | 347 | | | $ | (3) | | | $ | 445 | | | $ | (16) | |
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The tables below present a reconciliation of significant components of segment information to the comparable consolidated amounts.
Reconciliation of Segment Information to Consolidated Information
Three Months Ended June 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | $ | 224 | | | $ | 110 | | | $ | 5 | | | $ | 13 | | | $ | — | | | $ | 106 | |
| Asset Management | 30 | | | 33 | | | — | | | (1) | | | — | | | (2) | |
| Total segments | 254 | | | 143 | | | 5 | | | 12 | | | — | | | 104 | |
| Corporate division | 2 | | | 60 | | | — | | | (8) | | | — | | | (50) | |
| Other | (3) | | | 19 | | | — | | | (5) | | | 1 | | | (18) | |
| Subtotal | 253 | | | 222 | | | 5 | | | (1) | | | 1 | | | 36 | |
| Reconciling items: | | | | | | | | | | | |
| Realized gains (losses) on investments | (9) | | | — | | | — | | | — | | | — | | | (9) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 89 | | | (1) | | | — | | | — | | | — | | | 90 | |
| Fair value gains (losses) on CCS | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 26 | | | — | | | — | | | — | | | — | | | 26 | |
| Tax effect | — | | | — | | | — | | | 19 | | | — | | | (19) | |
| Total consolidated | $ | 360 | | | $ | 221 | | | $ | 5 | | | $ | 18 | | | $ | 1 | | | $ | 125 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of Segment Information to Consolidated Information
Three Months Ended SeptemberJune 30, 2022
| | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| | | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | | | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| | | (in millions) | | (in millions) |
| Segments: | Segments: | | Segments: | |
| Insurance | Insurance | $ | 147 | | | $ | (16) | | | $ | (11) | | | $ | (7) | | | $ | — | | | $ | 159 | | Insurance | $ | 139 | | | $ | 41 | | | $ | (34) | | | $ | 9 | | | $ | — | | | $ | 55 | |
| Asset Management | Asset Management | 21 | | | 24 | | | — | | | — | | | — | | | (3) | | Asset Management | 28 | | | 28 | | | — | | | — | | | — | | | — | |
| Total segments | Total segments | 168 | | | 8 | | | (11) | | | (7) | | | — | | | 156 | | Total segments | 167 | | | 69 | | | (34) | | | 9 | | | — | | | 55 | |
| Corporate division | Corporate division | 1 | | | 34 | | | — | | | (3) | | | — | | | (30) | | Corporate division | 1 | | | 36 | | | — | | | — | | | — | | | (35) | |
| Other | Other | 13 | | | 2 | | | (9) | | | 1 | | | (6) | | | 7 | | Other | 7 | | | 7 | | | 34 | | | 2 | | | 22 | | | 10 | |
| Subtotal | Subtotal | 182 | | | 44 | | | (20) | | | (9) | | | (6) | | | 133 | | Subtotal | 175 | | | 112 | | | — | | | 11 | | | 22 | | | 30 | |
| Reconciling items: | Reconciling items: | | Reconciling items: | |
| Realized gains (losses) on investments | Realized gains (losses) on investments | (14) | | | — | | | — | | | — | | | — | | | (14) | | Realized gains (losses) on investments | (28) | | | — | | | — | | | — | | | — | | | (28) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (50) | | | (1) | | | — | | | — | | | — | | | (49) | | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 6 | | | — | | | — | | | — | | | — | | | 6 | |
| Fair value gains (losses) on CCS | Fair value gains (losses) on CCS | 1 | | | — | | | — | | | — | | | — | | | 1 | | Fair value gains (losses) on CCS | 10 | | | — | | | — | | | — | | | — | | | 10 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (78) | | | — | | | — | | | — | | | — | | | (78) | | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (73) | | | — | | | — | | | — | | | — | | | (73) | |
| Tax effect | Tax effect | — | | | — | | | — | | | (18) | | | — | | | 18 | | Tax effect | — | | | — | | | — | | | (8) | | | — | | | 8 | |
| Total consolidated | Total consolidated | $ | 41 | | | $ | 43 | | | $ | (20) | | | $ | (27) | | | $ | (6) | | | $ | 11 | | Total consolidated | $ | 90 | | | $ | 112 | | | $ | — | | | $ | 3 | | | $ | 22 | | | $ | (47) | |
Reconciliation of Segment Information to Consolidated Information
ThreeSix Months Ended SeptemberJune 30, 20212023
| | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| | | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | | | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| | | (in millions) | | (in millions) |
| Segments: | Segments: | | Segments: | |
| Insurance | Insurance | $ | 190 | | | $ | (22) | | | $ | 33 | | | $ | 31 | | | $ | — | | | $ | 214 | | Insurance | $ | 414 | | | $ | 189 | | | $ | 35 | | | $ | 37 | | | $ | — | | | $ | 223 | |
| Asset Management | Asset Management | 19 | | | 29 | | | — | | | (3) | | | — | | | (7) | | Asset Management | 71 | | | 75 | | | — | | | (1) | | | — | | | (3) | |
| Total segments | Total segments | 209 | | | 7 | | | 33 | | | 28 | | | — | | | 207 | | Total segments | 485 | | | 264 | | | 35 | | | 36 | | | — | | | 220 | |
| Corporate division | Corporate division | 1 | | | 211 | | | 1 | | | (40) | | | — | | | (169) | | Corporate division | 4 | | | 108 | | | — | | | (10) | | | — | | | (94) | |
| Other | Other | 18 | | | 10 | | | (11) | | | (2) | | | 3 | | | (4) | | Other | 32 | | | 15 | | | (28) | | | (6) | | | 17 | | | (22) | |
| Subtotal | Subtotal | 228 | | | 228 | | | 23 | | | (14) | | | 3 | | | 34 | | Subtotal | 521 | | | 387 | | | 7 | | | 20 | | | 17 | | | 104 | |
| Reconciling items: | Reconciling items: | | Reconciling items: | |
| Realized gains (losses) on investments | Realized gains (losses) on investments | 3 | | | — | | | — | | | — | | | — | | | 3 | | Realized gains (losses) on investments | (11) | | | — | | | — | | | — | | | — | | | (11) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 11 | | | 2 | | | — | | | — | | | — | | | 9 | | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 102 | | | (1) | | | — | | | — | | | — | | | 103 | |
| Fair value gains (losses) on CCS | Fair value gains (losses) on CCS | (3) | | | — | | | — | | | — | | | — | | | (3) | | Fair value gains (losses) on CCS | (15) | | | — | | | — | | | — | | | — | | | (15) | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (27) | | | — | | | — | | | — | | | — | | | (27) | | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 46 | | | — | | | — | | | — | | | — | | | 46 | |
| Tax effect | Tax effect | — | | | — | | | — | | | (1) | | | — | | | 1 | | Tax effect | — | | | — | | | — | | | 21 | | | — | | | (21) | |
| Total consolidated | Total consolidated | $ | 212 | | | $ | 230 | | | $ | 23 | | | $ | (15) | | | $ | 3 | | | $ | 17 | | Total consolidated | $ | 643 | | | $ | 386 | | | $ | 7 | | | $ | 41 | | | $ | 17 | | | $ | 206 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of Segment Information to Consolidated Information
NineSix Months Ended SeptemberJune 30, 2022
| | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| | | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | | | Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| | | (in millions) | | (in millions) |
| Segments: | Segments: | | Segments: | |
| Insurance | Insurance | $ | 564 | | | $ | 147 | | | $ | (46) | | | $ | 24 | | | $ | — | | | $ | 347 | | Insurance | $ | 417 | | | $ | 163 | | | $ | (35) | | | $ | 31 | | | $ | — | | | $ | 188 | |
| Asset Management | Asset Management | 88 | | | 91 | | | — | | | — | | | — | | | (3) | | Asset Management | 67 | | | 67 | | | — | | | — | | | — | | | — | |
| Total segments | Total segments | 652 | | | 238 | | | (46) | | | 24 | | | — | | | 344 | | Total segments | 484 | | | 230 | | | (35) | | | 31 | | | — | | | 188 | |
| Corporate division | Corporate division | 3 | | | 104 | | | — | | | (3) | | | — | | | (98) | | Corporate division | 2 | | | 70 | | | — | | | — | | | — | | | (68) | |
| Other | Other | 34 | | | 14 | | | 15 | | | 3 | | | 25 | | | 7 | | Other | 21 | | | 12 | | | 24 | | | 2 | | | 31 | | | — | |
| Subtotal | Subtotal | 689 | | | 356 | | | (31) | | | 24 | | | 25 | | | 253 | | Subtotal | 507 | | | 312 | | | (11) | | | 33 | | | 31 | | | 120 | |
| Reconciling items: | Reconciling items: | | Reconciling items: | |
| Realized gains (losses) on investments | Realized gains (losses) on investments | (39) | | | — | | | — | | | — | | | — | | | (39) | | Realized gains (losses) on investments | (25) | | | — | | | — | | | — | | | — | | | (25) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (51) | | | (5) | | | — | | | — | | | — | | | (46) | | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (1) | | | (4) | | | — | | | — | | | — | | | 3 | |
| Fair value gains (losses) on CCS | Fair value gains (losses) on CCS | 12 | | | — | | | — | | | — | | | 12 | | Fair value gains (losses) on CCS | 11 | | | — | | | — | | | — | | | — | | | 11 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (180) | | | — | | | — | | | — | | | — | | | (180) | | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (102) | | | — | | | — | | | — | | | — | | | (102) | |
| Tax effect | Tax effect | — | | | — | | | — | | | (30) | | | — | | | 30 | | Tax effect | — | | | — | | | — | | | (12) | | | — | | | 12 | |
| Total consolidated | Total consolidated | $ | 431 | | | $ | 351 | | | $ | (31) | | | $ | (6) | | | $ | 25 | | | $ | 30 | | Total consolidated | $ | 390 | | | $ | 308 | | | $ | (11) | | | $ | 21 | | | $ | 31 | | | $ | 19 | |
Reconciliation of Segment Information to Consolidated Information
Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | $ | 551 | | | $ | 131 | | | $ | 100 | | | $ | 75 | | | $ | — | | | $ | 445 | |
| Asset Management | 60 | | | 82 | | | — | | | (6) | | | — | | | (16) | |
| Total segments | 611 | | | 213 | | | 100 | | | 69 | | | — | | | 429 | |
| Corporate division | 1 | | | 279 | | | 1 | | | (45) | | | — | | | (232) | |
| Other | 66 | | | 21 | | | (35) | | | (1) | | | 11 | | | — | |
| Subtotal | 678 | | | 513 | | | 66 | | | 23 | | | 11 | | | 197 | |
| Reconciling items: | | | | | | | | | | | |
| Realized gains (losses) on investments | 4 | | | — | | | — | | | — | | | — | | | 4 | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (48) | | | (7) | | | — | | | — | | | — | | | (41) | |
| Fair value gains (losses) on CCS | (28) | | | — | | | — | | | — | | | — | | | (28) | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (21) | | | — | | | — | | | — | | | — | | | (21) | |
| Tax effect | — | | | — | | | — | | | (15) | | | — | | | 15 | |
| Total consolidated | $ | 585 | | | $ | 506 | | | $ | 66 | | | $ | 8 | | | $ | 11 | | | $ | 126 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Outstanding Exposure
The Company sells credit protection primarily in financial guaranty insurance form. Until 2009, theThe Company may also soldsell credit protection by issuing policies that guaranteedguarantee payment obligations under credit default swaps (CDS). The Company’s contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for its financial guaranty insurance contracts. The Company has not entered into any new CDS in order to sell credit protection in the U.S. since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributed to the Company not entering into such new CDS in the U.S. since 2009. The Company has, however, acquired or reinsured portfolios since 2009 that include financial guaranty contracts in credit derivative form.
The Company seeks to limit its exposure to losses by underwriting obligations that it views to 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 exposures. The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies or providing reinsurance on a portfolio of insurance or reassuming a portfolio of reinsurance it had previously ceded;insurance; in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction. The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, generally requires subordination or collateral to protect it from loss. Reinsurance may be used in order to reduce net exposure to certain insured transactions.
Public finance obligations insured by the Company primarily consist of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, healthcare facilities and government office buildings. The Company also includes within public finance obligations similar obligations issued by territorialU.S. 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Some of these VIEs are consolidated as described in Note 8, Financial Guaranty Variable Interest 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 writes specialty insurance and reinsurancebusiness that is consistent with its risk profile and benefits from its underwriting experience and other types of financial guarantees not subject to insurance accounting guidance.guaranties.
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 of 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 generally reflect an approach similar to that employed by the rating agencies, except that the Company’s internal credit ratings focus on future performance rather than lifetime performance.
The Company 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’AA or their current internal rating. Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect its internal ratings.
The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector. Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
every quarter, although the Company may also review a rating in response to developments impacting a credit when a ratings review is not scheduled. For assumed exposures, the Company may use the ceding company’s credit ratings of transactions where it is impractical for it to assign its own rating.
Exposures identified as BIG are subjected to further review to determine the probability of a loss. See Note 4, Expected Loss to be Paid (Recovered), for additional information.. Surveillance personnel then assign each BIG transaction to one of the three BIG surveillance categories described below based upon whether a future loss is expected and whether a claim has been paid. The Company uses the tax-equivalentpre-tax book yield of the relevant subsidiary’s investment portfolio to calculate the present value of projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG surveillance category to a transaction. For financial statement measurement purposes, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss.
More extensive monitoring and intervention are employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. For purposes of determining the appropriate surveillance category, the Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will in the future pay claims on that transaction that will not be fully reimbursed. The three BIG surveillance categories are:
•BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
•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.
Impact of COVID-19 Pandemic
The emergence and continuation of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Due to the nature of the Company’s business, COVID-19 and its global impact, directly and indirectly affected certain sectors in the insured portfolio.
Shortly after the pandemic reached the U.S. through early 2021 the Company’s surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio 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 these supplemental procedures. However, the Company is still monitoring those sectors it identified as most at risk for any developments related to COVID-19. The Company 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
The Company measures its financial guaranty exposure in terms of (i) gross and net par outstanding and (ii) gross and net debt service.
The Company typically 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 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 had expected losses to be paid, (loss mitigation securities), in order to mitigate the economic effect of insured losses.losses (Loss Mitigation Securities). The Company excludes amounts
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
attributable to loss mitigation securitiesLoss Mitigation Securities from par and debt service outstanding and instead reports loss mitigation securitiesLoss Mitigation Securities in the investment portfolio, because theportfolio. The Company manages such securities as investments and not insurance exposure. As of both SeptemberJune 30, 20222023 and December 31, 2021,2022, the Company excluded from net par outstanding of $1.3 billion, primarily attributable to loss mitigation securities.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 (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 principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity.
The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates and assumptions for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract.
Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio
Debt Service and Par Outstanding
| | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| | | (in millions) | | (in millions) |
| Debt Service | Debt Service | | Debt Service | |
| Public finance | Public finance | $ | 347,776 | | | $ | 347,608 | | | $ | 357,694 | | | $ | 357,314 | | Public finance | $ | 375,955 | | | $ | 375,751 | | | $ | 359,899 | | | $ | 359,703 | |
| Structured finance | Structured finance | 9,118 | | | 9,093 | | | 10,076 | | | 10,046 | | Structured finance | 11,190 | | | 11,165 | | | 10,273 | | | 10,248 | |
| Total financial guaranty | Total financial guaranty | $ | 356,894 | | | $ | 356,701 | | | $ | 367,770 | | | $ | 367,360 | | Total financial guaranty | $ | 387,145 | | | $ | 386,916 | | | $ | 370,172 | | | $ | 369,951 | |
| | Par Outstanding | Par Outstanding | | Par Outstanding | |
| Public finance | Public finance | $ | 219,052 | | | $ | 218,905 | | | $ | 227,507 | | | $ | 227,164 | | Public finance | $ | 234,136 | | | $ | 233,981 | | | $ | 224,254 | | | $ | 224,099 | |
| Structured finance | Structured finance | 8,191 | | | 8,166 | | | 9,258 | | | 9,228 | | Structured finance | 10,057 | | | 10,032 | | | 9,184 | | | 9,159 | |
| Total financial guaranty | Total financial guaranty | $ | 227,243 | | | $ | 227,071 | | | $ | 236,765 | | | $ | 236,392 | | Total financial guaranty | $ | 244,193 | | | $ | 244,013 | | | $ | 233,438 | | | $ | 233,258 | |
In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $893 million$2.0 billion of public finance direct gross par and $741 million$1.3 billion of structured finance direct gross par as of SeptemberJune 30, 2022.2023. These commitments are contingent on the satisfaction of all conditions set forth in themthe guaranties and may expire unused or be canceled
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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��June 30, 20222023
| | | | | Public Finance
U.S. | | Public Finance
Non-U.S. | | Structured Finance
U.S | | Structured Finance
Non-U.S | | Total | | | Public Finance
U.S. | | Public Finance
Non-U.S. | | Structured Finance
U.S | | Structured Finance
Non-U.S | | Total |
Rating
Category | Rating
Category | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | Rating
Category | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % |
| | | | (dollars in millions) | | | (dollars in millions) |
| AAA | AAA | | $ | 259 | | | 0.1 | % | | $ | 1,879 | | | 4.6 | % | | $ | 794 | | | 10.7 | % | | $ | 432 | | | 60.3 | % | | $ | 3,364 | | | 1.5 | % | AAA | | $ | 212 | | | 0.1 | % | | $ | 2,038 | | | 4.3 | % | | $ | 884 | | | 10.0 | % | | $ | 474 | | | 39.3 | % | | $ | 3,608 | | | 1.5 | % |
| AA | AA | | 16,451 | | | 9.3 | | | 3,454 | | | 8.4 | | | 4,522 | | | 60.7 | | | 11 | | | 1.5 | | | 24,438 | | | 10.8 | | AA | | 17,452 | | | 9.4 | | | 3,442 | | | 7.2 | | | 4,580 | | | 51.9 | | | 12 | | | 1.0 | | | 25,486 | | | 10.5 | |
| A | A | | 96,052 | | | 54.0 | | | 8,491 | | | 20.7 | | | 510 | | | 6.8 | | | 170 | | | 23.7 | | | 105,223 | | | 46.3 | | A | | 100,267 | | | 53.8 | | | 11,005 | | | 23.1 | | | 1,684 | | | 19.1 | | | 613 | | | 50.9 | | | 113,569 | | | 46.5 | |
| BBB | BBB | | 60,893 | | | 34.2 | | | 26,777 | | | 65.2 | | | 487 | | | 6.5 | | | 104 | | | 14.5 | | | 88,261 | | | 38.9 | | BBB | | 64,852 | | | 34.8 | | | 30,147 | | | 63.2 | | | 611 | | | 6.9 | | | 106 | | | 8.8 | | | 95,716 | | | 39.2 | |
| BIG | BIG | | 4,187 | | | 2.4 | | | 462 | | | 1.1 | | | 1,136 | | | 15.3 | | | — | | | — | | | 5,785 | | | 2.5 | | BIG | | 3,540 | | | 1.9 | | | 1,026 | | | 2.2 | | | 1,068 | | | 12.1 | | | — | | | — | | | 5,634 | | | 2.3 | |
| Total net par outstanding | Total net par outstanding | | $ | 177,842 | | | 100.0 | % | | $ | 41,063 | | | 100.0 | % | | $ | 7,449 | | | 100.0 | % | | $ | 717 | | | 100.0 | % | | $ | 227,071 | | | 100.0 | % | Total net par outstanding | | $ | 186,323 | | | 100.0 | % | | $ | 47,658 | | | 100.0 | % | | $ | 8,827 | | | 100.0 | % | | $ | 1,205 | | | 100.0 | % | | $ | 244,013 | | | 100.0 | % |
Financial Guaranty Portfolio by Internal Rating
As of December 31, 20212022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | % |
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
As of September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | BIG Net Par Outstanding | | Net Par |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | | (in millions) | | | | |
| Public finance: | | | | | | | | | |
| U.S. public finance | $ | 2,029 | | | $ | 124 | | | $ | 2,034 | | | $ | 4,187 | | | $ | 177,842 | |
| Non-U.S. public finance | 425 | | | — | | | 37 | | | 462 | | | 41,063 | |
| Public finance | 2,454 | | | 124 | | | 2,071 | | | 4,649 | | | 218,905 | |
| Structured finance: | | | | | | | | | |
| U.S. RMBS | 17 | | | 39 | | | 973 | | | 1,029 | | | 2,006 | |
| Other structured finance | — | | | 35 | | | 72 | | | 107 | | | 6,160 | |
| Structured finance | 17 | | | 74 | | | 1,045 | | | 1,136 | | | 8,166 | |
| Total | $ | 2,471 | | | $ | 198 | | | $ | 3,116 | | | $ | 5,785 | | | $ | 227,071 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Public Finance
U.S. | | Public Finance
Non-U.S. | | Structured Finance
U.S | | Structured Finance
Non-U.S | | Total |
Rating
Category | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % | | Net Par
Outstanding | | % |
| | | (dollars in millions) |
| AAA | | $ | 222 | | | 0.1 | % | | $ | 1,967 | | | 4.4 | % | | $ | 926 | | | 11.2 | % | | $ | 469 | | | 50.4 | % | | $ | 3,584 | | | 1.5 | % |
| AA | | 16,241 | | | 9.1 | | | 3,497 | | | 7.9 | | | 4,633 | | | 56.3 | | | 12 | | | 1.3 | | | 24,383 | | | 10.5 | |
| A | | 96,807 | | | 53.9 | | | 9,271 | | | 20.9 | | | 1,075 | | | 13.1 | | | 340 | | | 36.5 | | | 107,493 | | | 46.1 | |
| BBB | | 62,570 | | | 34.8 | | | 28,747 | | | 64.6 | | | 479 | | | 5.8 | | | 110 | | | 11.8 | | | 91,906 | | | 39.4 | |
| BIG | | 3,796 | | | 2.1 | | | 981 | | | 2.2 | | | 1,115 | | | 13.6 | | | — | | | — | | | 5,892 | | | 2.5 | |
| Total net par outstanding | | $ | 179,636 | | | 100.0 | % | | $ | 44,463 | | | 100.0 | % | | $ | 8,228 | | | 100.0 | % | | $ | 931 | | | 100.0 | % | | $ | 233,258 | | | 100.0 | % |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
As of December 31, 2021June 30, 2023
| | | | BIG Net Par Outstanding | | Net Par | | BIG Net Par Outstanding | | Net Par |
| | | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding | | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | | | (in millions) | | | | | | | | | | (in millions) | | | | |
| Public finance: | Public finance: | | Public finance: | |
| U.S. public finance | U.S. public finance | $ | 1,765 | | | $ | 116 | | | $ | 3,491 | | | $ | 5,372 | | | $ | 177,219 | | U.S. public finance | $ | 1,289 | | | $ | 931 | | | $ | 1,320 | | | $ | 3,540 | | | $ | 186,323 | |
| Non-U.S. public finance | Non-U.S. public finance | 556 | | | — | | | 44 | | | 600 | | | 49,945 | | Non-U.S. public finance | 1,026 | | | — | | | — | | | 1,026 | | | 47,658 | |
| Public finance | Public finance | 2,321 | | | 116 | | | 3,535 | | | 5,972 | | | 227,164 | | Public finance | 2,315 | | | 931 | | | 1,320 | | | 4,566 | | | 233,981 | |
| Structured finance: | Structured finance: | | | | | | | | | | Structured finance: | | | | | | | | | |
| U.S. RMBS | U.S. RMBS | 121 | | | 24 | | | 1,120 | | | 1,265 | | | 2,391 | | U.S. RMBS | 11 | | | 37 | | | 922 | | | 970 | | | 1,863 | |
| Other structured finance | Other structured finance | 1 | | | 41 | | | 77 | | | 119 | | | 6,837 | | Other structured finance | — | | | 31 | | | 67 | | | 98 | | | 8,169 | |
| Structured finance | Structured finance | 122 | | | 65 | | | 1,197 | | | 1,384 | | | 9,228 | | Structured finance | 11 | | | 68 | | | 989 | | | 1,068 | | | 10,032 | |
| Total | Total | $ | 2,443 | | | $ | 181 | | | $ | 4,732 | | | $ | 7,356 | | | $ | 236,392 | | Total | $ | 2,326 | | | $ | 999 | | | $ | 2,309 | | | $ | 5,634 | | | $ | 244,013 | |
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
As of December 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 | $ | 2,364 | | | $ | 108 | | | $ | 1,324 | | | $ | 3,796 | | | $ | 179,636 | |
| Non-U.S. public finance | 981 | | | — | | | — | | | 981 | | | 44,463 | |
| Public finance | 3,345 | | | 108 | | | 1,324 | | | 4,777 | | | 224,099 | |
| Structured finance: | | | | | | | | | |
| U.S. RMBS | 18 | | | 39 | | | 953 | | | 1,010 | | | 1,956 | |
| Other structured finance | — | | | 34 | | | 71 | | | 105 | | | 7,203 | |
| Structured finance | 18 | | | 73 | | | 1,024 | | | 1,115 | | | 9,159 | |
| Total | $ | 3,363 | | | $ | 181 | | | $ | 2,348 | | | $ | 5,892 | | | $ | 233,258 | |
Financial Guaranty Portfolio
BIG Net Par Outstanding and Number of Risks
As of SeptemberJune 30, 20222023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 2,465 | | | $ | 6 | | | $ | 2,471 | | | 110 | | | 1 | | | 111 | |
| Category 2 | | 187 | | | 11 | | | 198 | | | 17 | | | 2 | | | 19 | |
| Category 3 | | 3,075 | | | 41 | | | 3,116 | | | 117 | | | 8 | | | 125 | |
| Total BIG | | $ | 5,727 | | | $ | 58 | | | $ | 5,785 | | | 244 | | | 11 | | | 255 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 1 | | $ | 2,320 | | | $ | 6 | | | $ | 2,326 | | | 107 | | | 1 | | | 108 | |
| BIG 2 | | 989 | | | 10 | | | 999 | | | 16 | | | 2 | | | 18 | |
| BIG 3 | | 2,269 | | | 40 | | | 2,309 | | | 109 | | | 8 | | | 117 | |
| Total BIG | | $ | 5,578 | | | $ | 56 | | | $ | 5,634 | | | 232 | | | 11 | | | 243 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio
BIG Net Par Outstanding and Number of Risks
As of December 31, 20212022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Par Outstanding | | Number of Risks (2) |
| Description | | Financial
Guaranty
Insurance (1) | | Credit
Derivatives | | Total | | Financial
Guaranty
Insurance (1) | | Credit
Derivatives | | Total |
| | | (dollars in millions) |
| BIG: | | | | | | | | | | | | |
| Category 1 | | $ | 2,429 | | | $ | 14 | | | $ | 2,443 | | | 117 | | | 2 | | | 119 | |
| Category 2 | | 177 | | | 4 | | | 181 | | | 16 | | | 1 | | | 17 | |
| Category 3 | | 4,687 | | | 45 | | | 4,732 | | | 129 | | | 8 | | | 137 | |
| Total BIG | | $ | 7,293 | | | $ | 63 | | | $ | 7,356 | | | 262 | | | 11 | | | 273 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 1 | | $ | 3,357 | | | $ | 6 | | | $ | 3,363 | | | 122 | | | 1 | | | 123 | |
| BIG 2 | | 171 | | | 10 | | | 181 | | | 14 | | | 2 | | | 16 | |
| BIG 3 | | 2,307 | | | 41 | | | 2,348 | | | 111 | | | 10 | | | 121 | |
| Total BIG | | $ | 5,835 | | | $ | 57 | | | $ | 5,892 | | | 247 | | | 13 | | | 260 | |
_____________________
(1)Includes FG VIEs.
(2)A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Exposure to Puerto Rico
The Company had insured exposure to general obligation bondsobligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) as well as its general obligation bonds aggregating $1.3 billion and various obligations of its related authorities and public corporations aggregating $2.1$1.4 billion net par outstanding as of SeptemberJune 30, 2022, a decrease of $1.5 billion from the $3.6 billion net par outstanding as of2023 and December 31, 2021.2022, respectively. 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 its outstanding Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR)., each of which has continued to make timely debt service payments.
On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA established a seven-member Financial Oversight and Management Board (the FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under Chapter 9 of the United States Bankruptcy Code (Bankruptcy Code).Code.
After over five years of negotiations, on March 15, 2022, a substantial portion of the Company’s Puerto Rico exposure was resolved in 2022 in accordance with threefour orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico): related to the Company’s exposure to all insured Puerto Rico credits experiencing payment default in 2022 except Puerto Rico Electric Power Authority (PREPA) (2022 Puerto Rico Resolutions). As a result of the 2022 Puerto Rico Resolutions, during 2022 the Company’s obligations under its insurance policies covering debt of the Puerto Rico Convention Center District Authority (PRCCDA) and Puerto Rico Infrastructure Authority (PRIFA) were extinguished, and its insurance exposure to Puerto Rico general obligations (GO) bonds, Public Buildings Authority (PBA) bonds and Puerto Rico Highway and Transportation Authority (PRHTA) bonds was greatly reduced.
•On January 18, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirmingUnder 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 Company received cash, new general obligation bonds (New GO Bonds) and contingent value instruments (CVIs). The GO/PBAIn connection with the Modified Fifth Amended Title III Plan restructured approximately $35 billion of debt (includingAdjustment for PRHTA (HTA Plan) and related arrangements, the Company received cash and new bonds backed by toll revenues (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds) from the PRHTA and CVIs from the Commonwealth. Cash, New Recovery Bonds and CVIs received pursuant to the 2022 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 entitiesResolutions are collectively referred to as wellPlan Consideration.
Plan Consideration is reported in either cash, investments or FG VIEs’ assets as $50 billion in pension obligations (none of the pension obligations are insured by the Company), and the Company believes its terms are consistent with the terms of the settlement embodied in a revised plan support agreement (PSA) for GO and PBA entered into by AGM and AGC on February 22, 2021, with certain other stakeholders, the Commonwealth, and the FOMB (GO/PBA PSA).described below.
•On January 20,Investments and cash. Plan Consideration received in respect of bondholders whose principal of bonds insured by the Company were accelerated against the Commonwealth and became due and payable under the 2022 the Federal District Court of Puerto Rico acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifyingResolutions are reported in Cash and Investments. See Note 7, Investments, for the debtfair value of the Puerto Rico Convention Center District Authority (PRCCDA).New Recovery Bonds and CVIs remaining as of June 30, 2023.
•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 the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO and PBA was greatly reduced.
On October 12, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the amended plan of adjustment for the Puerto Rico Highways and Transportation Authority (PRHTA) filed by the FOMB with the Federal District Court of Puerto Rico on September 6, 2022 (HTA Plan). The HTA Plan restructures approximately $6.4 billion of debt (including the PRHTA bonds insured by the Company), and the Company believes its terms are consistent with the terms of the settlement embodied in the PRHTA PSA entered into on May 5, 2021, by AGM and AGC and certain other stakeholders, the Commonwealth, and the FOMB (the HTA PSA). The FOMB will set the effective date of the HTA Plan (HTA Effective Date) and, as of November 7, 2022, the expected HTA Effective Date had not yet been announced.
The Company is continuing its efforts to resolve the one remaining Puerto Rico insured exposure that is in payment default, the Puerto Rico Electric Power Authority (PREPA). Economic, political and legal developments, including inflation, increases in the cost of petroleum products and developments related to the COVID-19 pandemic, may impact any resolution of the Company’s PREPA insured exposure and the value of the consideration the Company has received in connection with the March Puerto Rico Resolutions or has received or may receive in the future in connection with the HTA PSA or HTA Plan or
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
any future resolutions•FG VIEs’ assets. Plan Consideration received in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Plan Consideration that constitute distributions under the HTA Plan or the GO/PBA Plan are reported in FG VIEs’ assets. The Company’s PREPAinsurance policy continues to guarantee principal and interest coming due on the legacy insured exposures. The impactbonds in accordance with the terms of developments relating to Puerto Rico during any quarter or year could be materialsuch insurance policy on the originally scheduled legacy bond interest and principal payment dates to the Company’s resultsextent that distributions of operations and shareholders’ equity.
Puerto Rico GO and PBA
As of September 30, 2022,Plan Consideration are insufficient to pay or prepay such amounts. On July 28, 2023, the Company had remaining $25directed the trustee to notify certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds of its intent to satisfy on August 31, 2023 its obligations under the legacy insured bonds with respect to $108 million of insured net par outstanding as of GO bondsJuly 28, 2023 and, $4following payment of such obligations, AGC and AGM will receive the New Recovery Bonds and/or CVIs with notional amounts and maturity values totaling $94 million as of insured net par outstanding of PBA bonds.
UnderJuly 28, 2023 held as collateral with respect to the GO/PBA Plan and in connection with its direct exposure the Company received (including amounts received in connection with the second election described further below, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
•$605 million of new recovery bonds (see Note 7, Investments andcustodial trusts. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the facefair value of current interest bondsNew Recovery Bonds remaining as of June 30, 2023.
The Company has sold a portion of the New Recovery Bonds and CVIs and may sell in the maturityfuture any New Recovery Bonds or CVIs it continues to hold. The fair value of capital appreciation bonds, netany New Recovery Bonds and CVIs that the Company retains will fluctuate from their date of ceded reinsurance,acquisition. Any gains or losses on sales of New Recovery Bonds and
•$258 million of contingent CVIs in the investment portfolio are reported as realized gains and losses on investments and fair value instruments (CVIs) (see Note 7, Investmentsgains (losses) on trading securities, respectively, rather than loss 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.LAE.
The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time. Substantially all of the CVIs are reported in investments, rather than FG VIEs’ assets.
The Company has sold mostis continuing its efforts to resolve the one remaining Puerto Rico insured exposure that is in payment default, PREPA. Economic, political and legal developments, including inflation and increases in the cost of petroleum products, may impact any resolution of the new recovery bondsCompany’s PREPA insured exposure and CVIs it received on March 15, 2022, and may sell in the future any new recovery bonds or CVIs it continues to hold. The fair value of any new recovery bondsremaining consideration received in connection with the 2022 Puerto Rico Resolutions or CVIsany future resolutions of the Company retains will fluctuate. Any gainsCompany’s PREPA insured exposures. The impact of developments relating to Puerto Rico during any quarter or losses on salesyear could be material to the Company’s results of new recovery bondsoperations and CVIs relative to their values on March 15, 2022, were and will be reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.shareholders’ equity.
In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of payments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the principal of all GO bondsPuerto Rico Par and PBA bonds insured by the Company was accelerated against the Commonwealth and became due and payable as of March 15, 2022. Insured holders of noncallable insured bonds covered by the GO/PBA Plan (representing $102 million of net par outstanding as of December 31, 2021) were permitted to elect either: (i) to receive on March 15, 2022, 100% of the then outstanding principal amount of insured bonds plus accrued interest; or (ii) to receive custody receipts that represent an interest in the legacy insurance policy plus cash, new recovery bonds and CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan. For those who made the second 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. As of September 30, 2022, the net insured par outstanding under the legacy GO and PBA insurance policies was $29 million, and constituted all of the Company’s remaining net par exposure to the GO and PBA bonds it had insured.Debt Service Schedules
PRCCDAAll Puerto Rico exposures are internally rated BIG. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and PRIFAvarious obligations of its related authorities and public corporations.
As of September 30, 2022, the Company had no insured net par outstanding of PRCCDA or PRIFA obligations remaining. Under the PRCCDA ModificationPuerto Rico
Gross Par 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).Gross Debt Service Outstanding
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Par Outstanding | | Gross Debt Service Outstanding |
| As of | | As of |
| | June 30, 2023 | | December 31, 2022 | | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 1,365 | | | $ | 1,378 | | | $ | 1,849 | | | $ | 1,899 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
PRHTAPuerto Rico
Net Par Outstanding
As of September 30, | | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Defaulted Puerto Rico Exposures | | | |
| PREPA | $ | 720 | | | $ | 720 | |
| Total Defaulted | 720 | | | 720 | |
| Resolved Puerto Rico Exposures | | | |
| PRHTA (Transportation revenue) (1) | 293 | | | 298 | |
| PRHTA (Highway revenue) (1) | 182 | | | 182 | |
Commonwealth of Puerto Rico - GO (1) | 25 | | | 25 | |
| PBA (1) | 4 | | | 4 | |
| Total Resolved | 504 | | | 509 | |
| Other Puerto Rico Exposures | | | |
| MFA (2) | 124 | | | 131 | |
| PRASA and U of PR (2) | 1 | | | 1 | |
| Total Other | 125 | | | 132 | |
| Total net exposure to Puerto Rico | $ | 1,349 | | | $ | 1,361 | |
____________________
(1) Resolved pursuant to the 2022 Puerto Rico Resolutions.
(2) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company had $1.2 billion of insured net par outstanding that is covered by the HTA PSA: $771 million insured net par outstanding of PRHTA (transportation revenue) bonds and $418 million insured net par outstanding of PRHTA (highway revenue) bonds. The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on taxes on crude oil, unfinished oil and derivative products. The highway revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls.Company.
The HTA PSA provides for payments to AGM and AGC consisting of: (i) cash; (ii) newfollowing table shows the scheduled amortization of the insured general obligation 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 a disclosure statement, solicitation and voting process, and a plan confirmation hearing. On September 6, 2022, the FOMB filed an amended HTA Plan with the Federal District Court of Puerto Rico whichand various obligations of its related authorities and public corporations. The Company guarantees payment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company believeswould only be required to be consistent withpay the HTA PSA,shortfall between the debt service due in any given period and on October 12, 2022, the court approved the amended HTA Plan. The HTA Plan, similar to the GO/PBA Plan, provides an option for holders of noncallable bonds insuredamount paid by the Company (representing $788 million of net par outstanding as of September 30, 2022) to elect to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds, and insured bondholders representing $451 million net par outstanding as of September 30, 2022 have elected this option. The FOMB will set the effective date of the HTA Plan (HTA Effective Date) and, as of November 7, 2022, the expected HTA Effective Date had not yet been announced.obligors.
During third quarter 2022, the Company received, pursuant to the GO/PBA PlanAmortization Schedule of Puerto Rico
Net Par Outstanding and the termsNet Debt Service Outstanding
As of the HTA PSA, $147 million of cash and $672 million original notional of CVI. The Company has sold a portion of those CVIs. On the HTA Effective Date, the Company also expects to receive additional recoveries in the form of cash and Toll Bonds.June 30, 2023
| | | | | | | | | | | |
| Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| (in millions) |
| 2023 (July 1 - September 30) | $ | 124 | | | $ | 154 | |
| 2023 (October 1 - December 31) | — | | | 3 | |
| Subtotal 2023 | 124 | | | 157 | |
| 2024 | 110 | | | 170 | |
| 2025 | 94 | | | 149 | |
| 2026 | 149 | | | 200 | |
| 2027 | 124 | | | 168 | |
| 2028-2032 | 378 | | | 528 | |
| 2033-2037 | 240 | | | 309 | |
| 2038-2041 | 130 | | | 148 | |
| Total | $ | 1,349 | | | $ | 1,829 | |
PREPA
As of SeptemberJune 30, 2022,2023, the Company had $720 million insured net par outstanding of PREPA obligations. The Company believes that the PREPA obligations are secured by a lien on the revenues of the electric system. On May 3, 2019, AGM and
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
AGC entered into a restructuring support agreement with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that the mediation would terminate on June 1, 2022. Judge Swain has since extended the term of such mediation several times, most recently on September 8, 2022July 25, 2023 extending the term to September 16, 2022. After mediation terminated, Judge Swain issued an order on September 29, 2022 that (i) directs theOctober 30, 2023. The FOMB to fileinitially filed a plan of adjustment and disclosure statement byfor PREPA with the Federal District Court of Puerto Rico on December 1,16, 2022, (ii) setsand filed an amended version on February 9, 2023 (FOMB PREPA Plan). The Company expects that a scheduleconfirmation hearing for litigating bondholders’ lien status, and (iii) directs a new round of mediationthe FOMB PREPA Plan will be held in fourth quarter 2023 or first quarter 2024. The FOMB PREPA Plan would split bondholders into two groups: one that would terminatesettle litigation regarding whether that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s current and future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. The Federal District Court of Puerto Rico approved the PREPA disclosure statement on December 31, 2022,February 28, 2023, which allowed bondholder solicitation on the FOMB PREPA Plan to begin.
On March 22, 2023, the Federal District Court of Puerto Rico held that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control but granting discretiondid not have a lien in future revenues until deposited in those funds. The Federal District Court of Puerto Rico also held, however, that PREPA bondholders do have recourse under the PREPA trust agreement in the form of an unsecured net revenue claim. At that time, the Federal District Court of Puerto Rico declined to value the unsecured net revenue claim or the method for its determination. The ultimate value of the claim, according to the mediation teamFederal District Court of Puerto Rico, should be determined through a claim estimation proceeding.
On June 6-8, 2023, the Federal District Court of Puerto Rico held a claim estimation proceeding and, on June 26, 2023, issued an opinion and order estimating the unsecured net revenue claim to further extendbe $2.4 billion as of July 3, 2017. This estimate included a determination that PREPA’s discounted cash flows, using FOMB’s base-case incremental net revenues over a 100-year collection period and a discount rate of 7%, would be $3.0 billion, and should be reduced by an additional 20% for “risk of success in achieving the mediation deadlineprojected cash flow through the actions of a receiver and other equitable remedies appropriate”. PREPA bondholders had sought an unsecured net revenue claim of approximately $8.5 billion.
The Company expects to January 31, 2023 based on its assessmentappeal portions of the progressMarch 22, 2023 decision, including the lien scope ruling and the need for a claim estimation proceeding, as well as the June 26, 2023 claim estimate ruling, upon final adjudication by the Federal District Court of Puerto Rico of all claims and counterclaims in the mediation process.PREPA lien challenge proceedings.
The last revised fiscal plan for PREPA was certified by the FOMB on May 27, 2021.June 23, 2023 (2023 PREPA Fiscal Plan). In the 2023 PREPA Fiscal Plan, FOMB asserts that, other than for pension claims, PREPA’s debt capacity is $2.5 billion, of which approximately $1.4 billion is allocated to settling creditors. The remaining $1.1 billion is allocated pro rata to (i) non-settling bondholders, and (ii) general unsecured creditors (GUCs). The Federal District Court of Puerto Rico extended to August 11, 2023 the deadline for FOMB to file a further amended FOMB PREPA Plan based on the 2023 PREPA Fiscal Plan. The Company believes that a further revised FOMB PREPA Plan would provide for reduced payments to bondholders since lower projected PREPA revenues are included in the 2023 PREPA Fiscal Plan than had been previously anticipated. Since the Federal District Court of Puerto Rico’s estimated unsecured net revenue claim exceeds the $1.1 billion available to non-settling bondholders and GUCs under the 2023 PREPA Fiscal Plan, the unsecured net revenue claim may be subject to further impairment. The 2023 PREPA Fiscal Plan contemplates that non-settling bondholders will receive at least 12.5% of their allowed claim in the form of restructuring bonds, as well as two CVIs allocated based on their allowed claim.
PRHTA
As of June 30, 2023, the Company had $475 million of insured net par outstanding of PRHTA bonds: $293 million insured net par outstanding of PRHTA (transportation revenue) bonds and $182 million insured net par outstanding of PRHTA (highway revenue) bonds. PRHTA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds that constitute distributions under the HTA Plan.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico GO and PBA
As of June 30, 2023, the Company had remaining $25 million of insured net par outstanding of GO bonds and $4 million of insured net par outstanding of PBA bonds. GO/PBA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New GO Bonds and CVIs that constitute distributions under the GO/PBA Plan.
Other Puerto Rico ExposuresGross Par and Gross Debt Service Outstanding
All debt service payments for the Company’s remaining Puerto Rico exposures have been made in full by the obligors as of the date of this filing. Such exposures comprise:
MFA. As of September 30, 2022, the Company had $131 million insured net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues.
U of PR. As of September 30, 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, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.
PRASA. As of September 30, 2022, the Company had $1 million insured net par outstanding of PRASA obligations. The Company’s insured PRASA obligations are secured by a lien on the gross revenues of the water and sewer system. | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Par Outstanding | | Gross Debt Service Outstanding |
| As of | | As of |
| | June 30, 2023 | | December 31, 2022 | | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 1,365 | | | $ | 1,378 | | | $ | 1,849 | | | $ | 1,899 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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, and related matters, and the Company is a party to a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to Puerto Rico obligations which the Company insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.Net Par Outstanding
A number of legal actions involving the Company and relating to PRCCDA and PRIFA, as well as claims related | | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Defaulted Puerto Rico Exposures | | | |
| PREPA | $ | 720 | | | $ | 720 | |
| Total Defaulted | 720 | | | 720 | |
| Resolved Puerto Rico Exposures | | | |
| PRHTA (Transportation revenue) (1) | 293 | | | 298 | |
| PRHTA (Highway revenue) (1) | 182 | | | 182 | |
Commonwealth of Puerto Rico - GO (1) | 25 | | | 25 | |
| PBA (1) | 4 | | | 4 | |
| Total Resolved | 504 | | | 509 | |
| Other Puerto Rico Exposures | | | |
| MFA (2) | 124 | | | 131 | |
| PRASA and U of PR (2) | 1 | | | 1 | |
| Total Other | 125 | | | 132 | |
| Total net exposure to Puerto Rico | $ | 1,349 | | | $ | 1,361 | |
____________________
(1) Resolved pursuant to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022 in connection with the consummation of the March Puerto Rico Resolutions.
(2) All other proceedings remain stayed pendingdebt service on these insured exposures have been paid to date without any insurance claim being made on the Court’s determination on plans of adjustment or other proceedings related to PRHTA and PREPA.Company.
Remaining Stayed Proceedings. The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico proceedingsand various obligations of its related authorities and public corporations. The Company guarantees payment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in whichcertain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company is involved remain stayed:would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.
•On June 26, 2017, AGM and AGC filed a complaint in the Federal District CourtAmortization Schedule of Puerto Rico to compel the FOMB to certify the PREPA RSA for implementation under Title VI
Net Par Outstanding and Net Debt Service Outstanding
As of PROMESA. On July 21, 2017, considering its PREPA Title III petition on July 2, 2017, the FOMB filed a notice of stay under PROMESA.June 30, 2023
| | | | | | | | | | | |
| Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| (in millions) |
| 2023 (July 1 - September 30) | $ | 124 | | | $ | 154 | |
| 2023 (October 1 - December 31) | — | | | 3 | |
| Subtotal 2023 | 124 | | | 157 | |
| 2024 | 110 | | | 170 | |
| 2025 | 94 | | | 149 | |
| 2026 | 149 | | | 200 | |
| 2027 | 124 | | | 168 | |
| 2028-2032 | 378 | | | 528 | |
| 2033-2037 | 240 | | | 309 | |
| 2038-2041 | 130 | | | 148 | |
| Total | $ | 1,349 | | | $ | 1,829 | |
•On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the
automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14,
2017, but on August 8, 2018, the United States Court of Appeals for the First Circuit vacated and remanded the court’s decision. On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver.
•As of June 30, 2023, the Company had $720 million insured net par outstanding of PREPA obligations. The Company believes that the PREPA obligations are secured by a lien on the revenues of the electric system. On May 20,3, 2019, the FOMBAGM and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court of Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters, which include this proceeding, through November 30, 2019, with a mandatory mediation element; Judge Swain extended the stay through December 31, 2019, and subsequently extended the stay again pending further order of the court on the understanding that these issues will be resolved in other proceedings.
•On September 30, 2019, certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims (Fuel Line Lenders) filed an amended adversary complaint against the FOMB and other parties, including AGC and AGM, seeking subordination of PREPA bondholder claims to Fuel Line Lenders’ claims. On November 12, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Federal District Court of Puerto Rico issued an order to that effect. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.
•On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. On November 7, 2019, the court granted a motion to intervene by AGC and AGM. On November 13, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Federal District Court of Puerto Rico issued an order to that effect. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
AGC entered into a restructuring support agreement with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
•On January 16, 2020, the FOMB, on behalfApril 8, 2022, Judge Laura Taylor Swain of the PRHTA, brought an adversary proceeding in the Federal District Court of Puerto Rico against AGMissued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims. Considering the PSA, on May 25, 2021,Brendan Shannon. Judge Swain stayedalso entered a separate order establishing the participationterms and conditions of AGMmediation, including that the mediation would terminate on June 1, 2022. Judge Swain has since extended the term of such mediation several times, most recently on July 25, 2023 extending the term to October 30, 2023. The FOMB initially filed a plan of adjustment and AGC.disclosure statement for PREPA with the Federal District Court of Puerto Rico on December 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan). The Company expects that a confirmation hearing for the FOMB PREPA Plan will be held in fourth quarter 2023 or first quarter 2024. The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation regarding whether that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s current and future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. The Federal District Court of Puerto Rico approved the PREPA disclosure statement on February 28, 2023, which allowed bondholder solicitation on the FOMB PREPA Plan to begin.
•On July 1, 2019,March 22, 2023, the FOMB initiated an adversary proceeding against U.S. Bank National Association, asFederal District Court of Puerto Rico held that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee for PREPA’s bonds, objecting to and challenging the validity, enforceability, and extenthad control but did not have a lien in future revenues until deposited in those funds. The Federal District Court of prepetition security interests securing those bonds and seeking other relief. On September 30, 2022, the FOMB filed an amended complaint against the trustee (i) objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing PREPA’s bonds and (ii) arguingPuerto Rico also held, however, that PREPA bondholders’bondholders do have recourse was limitedunder the PREPA trust agreement in the form of an unsecured net revenue claim. At that time, the Federal District Court of Puerto Rico declined to certain deposit accounts held byvalue the trustee. On October 7, 2022,unsecured net revenue claim or the court approvedmethod for its determination. The ultimate value of the claim, according to the Federal District Court of Puerto Rico, should be determined through a stipulation permitting AGM and AGC to intervene as defendants.claim estimation proceeding.
On June 6-8, 2023, the Federal District Court of Puerto Rico Parheld a claim estimation proceeding and, Debt Service Scheduleson June 26, 2023, issued an opinion and order estimating the unsecured net revenue claim to be $2.4 billion as of July 3, 2017. This estimate included a determination that PREPA’s discounted cash flows, using FOMB’s base-case incremental net revenues over a 100-year collection period and a discount rate of 7%, would be $3.0 billion, and should be reduced by an additional 20% for “risk of success in achieving the projected cash flow through the actions of a receiver and other equitable remedies appropriate”. PREPA bondholders had sought an unsecured net revenue claim of approximately $8.5 billion.
All Puerto Rico exposures are internally rated BIG. The following tables showCompany expects to appeal portions of the Company’s insured exposure to general obligation bondsMarch 22, 2023 decision, including the lien scope ruling and the need for a claim estimation proceeding, as well as the June 26, 2023 claim estimate ruling, upon final adjudication by the Federal District Court of Puerto Rico of all claims and various obligations of its related authorities and public corporations.counterclaims in the PREPA lien challenge proceedings.
The last revised fiscal plan for PREPA was certified by the FOMB on June 23, 2023 (2023 PREPA Fiscal Plan). In the 2023 PREPA Fiscal Plan, FOMB asserts that, other than for pension claims, PREPA’s debt capacity is $2.5 billion, of which approximately $1.4 billion is allocated to settling creditors. The remaining $1.1 billion is allocated pro rata to (i) non-settling bondholders, and (ii) general unsecured creditors (GUCs). The Federal District Court of Puerto Rico extended to August 11, 2023 the deadline for FOMB to file a further amended FOMB PREPA Plan based on the 2023 PREPA Fiscal Plan. The Company believes that a further revised FOMB PREPA Plan would provide for reduced payments to bondholders since lower projected PREPA revenues are included in the 2023 PREPA Fiscal Plan than had been previously anticipated. Since the Federal District Court of Puerto Rico’s estimated unsecured net revenue claim exceeds the $1.1 billion available to non-settling bondholders and GUCs under the 2023 PREPA Fiscal Plan, the unsecured net revenue claim may be subject to further impairment. The 2023 PREPA Fiscal Plan contemplates that non-settling bondholders will receive at least 12.5% of their allowed claim in the form of restructuring bonds, as well as two CVIs allocated based on their allowed claim.
PRHTA
As of June 30, 2023, the Company had $475 million of insured net par outstanding of PRHTA bonds: $293 million insured net par outstanding of PRHTA (transportation revenue) bonds and $182 million insured net par outstanding of PRHTA (highway revenue) bonds. PRHTA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds that constitute distributions under the HTA Plan.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico GO and PBA
As of June 30, 2023, the Company had remaining $25 million of insured net par outstanding of GO bonds and $4 million of insured net par outstanding of PBA bonds. GO/PBA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New GO Bonds and CVIs that constitute distributions under the GO/PBA Plan.
Gross Par and Gross Debt Service Outstanding
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Par Outstanding | | Gross Debt Service Outstanding |
| As of | | As of |
| | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 2,088 | | | $ | 3,629 | | | $ | 2,944 | | | $ | 5,322 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Par Outstanding | | Gross Debt Service Outstanding |
| As of | | As of |
| | June 30, 2023 | | December 31, 2022 | | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 1,365 | | | $ | 1,378 | | | $ | 1,849 | | | $ | 1,899 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico
Net Par Outstanding
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
| | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | | |
Commonwealth of Puerto Rico - GO (1) | $ | 25 | | | $ | 1,097 | |
| PBA (1) | 4 | | | 122 | |
| Total GO/PBA Plan | 29 | | | 1,219 | |
| PRHTA (Transportation revenue) | 771 | | | 799 | |
| PRHTA (Highway revenue) | 418 | | | 457 | |
| PRCCDA (2) | — | | | 152 | |
| Total HTA PSA | 1,189 | | | 1,408 | |
| PRIFA (2) | — | | | 16 | |
| Total Subject to a Plan or Support Agreement | 1,218 | | | 2,643 | |
| Other Puerto Rico Exposures | | | |
| PREPA | 720 | | | 748 | |
| MFA (3) | 131 | | | 179 | |
| PRASA and U of PR (3) | 2 | | | 2 | |
| Total Other Puerto Rico Exposures | 853 | | | 929 | |
| Total net exposure to Puerto Rico | $ | 2,071 | | | $ | 3,572 | |
| | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Defaulted Puerto Rico Exposures | | | |
| PREPA | $ | 720 | | | $ | 720 | |
| Total Defaulted | 720 | | | 720 | |
| Resolved Puerto Rico Exposures | | | |
| PRHTA (Transportation revenue) (1) | 293 | | | 298 | |
| PRHTA (Highway revenue) (1) | 182 | | | 182 | |
Commonwealth of Puerto Rico - GO (1) | 25 | | | 25 | |
| PBA (1) | 4 | | | 4 | |
| Total Resolved | 504 | | | 509 | |
| Other Puerto Rico Exposures | | | |
| MFA (2) | 124 | | | 131 | |
| PRASA and U of PR (2) | 1 | | | 1 | |
| Total Other | 125 | | | 132 | |
| Total net exposure to Puerto Rico | $ | 1,349 | | | $ | 1,361 | |
____________________
(1)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 Resolved 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.2022 Puerto Rico Resolutions.
(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) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees paymentspayment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.
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 SeptemberJune 30, 20222023
| | | Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization | | Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| | (in millions) | | (in millions) |
| 2022 (October 1 - December 31) | $ | — | | | $ | 3 | | |
| | 2023 (January 1 - March 31) | — | | | 49 | | |
| 2023 (April 1 - June 30) | — | | | 2 | | |
| 2023 (July 1 - September 30) | 2023 (July 1 - September 30) | 181 | | | 230 | | 2023 (July 1 - September 30) | $ | 124 | | | $ | 154 | |
| 2023 (October 1 - December 31) | 2023 (October 1 - December 31) | — | | | 3 | | 2023 (October 1 - December 31) | — | | | 3 | |
| Subtotal 2023 | Subtotal 2023 | 181 | | | 284 | | Subtotal 2023 | 124 | | | 157 | |
| 2024 | 2024 | 149 | | | 243 | | 2024 | 110 | | | 170 | |
| 2025 | 2025 | 151 | | | 237 | | 2025 | 94 | | | 149 | |
| 2026 | 2026 | 170 | | | 249 | | 2026 | 149 | | | 200 | |
| 2027-2031 | 637 | | | 934 | | |
| 2032-2036 | 577 | | | 732 | | |
| 2037-2041 | 201 | | | 237 | | |
| 2042 | 5 | | | 5 | | |
| 2027 | | 2027 | 124 | | | 168 | |
| 2028-2032 | | 2028-2032 | 378 | | | 528 | |
| 2033-2037 | | 2033-2037 | 240 | | | 309 | |
| 2038-2041 | | 2038-2041 | 130 | | | 148 | |
| Total | Total | $ | 2,071 | | | $ | 2,924 | | Total | $ | 1,349 | | | $ | 1,829 | |
Exposure to the U.S. Virgin IslandsPREPA
As of SeptemberJune 30, 2022,2023, the Company had $183$720 million insured net par outstanding of PREPA obligations. The Company believes that the PREPA obligations are secured by a lien on the revenues of the electric system. On May 3, 2019, AGM and
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
AGC entered into a restructuring support agreement with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022.
On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that the mediation would terminate on June 1, 2022. Judge Swain has since extended the term of such mediation several times, most recently on July 25, 2023 extending the term to October 30, 2023. The FOMB initially filed a plan of adjustment and disclosure statement for PREPA with the Federal District Court of Puerto Rico on December 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan). The Company expects that a confirmation hearing for the FOMB PREPA Plan will be held in fourth quarter 2023 or first quarter 2024. The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation regarding whether that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s current and future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. The Federal District Court of Puerto Rico approved the PREPA disclosure statement on February 28, 2023, which allowed bondholder solicitation on the FOMB PREPA Plan to begin.
On March 22, 2023, the Federal District Court of Puerto Rico held that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control but did not have a lien in future revenues until deposited in those funds. The Federal District Court of Puerto Rico also held, however, that PREPA bondholders do have recourse under the PREPA trust agreement in the form of an unsecured net revenue claim. At that time, the Federal District Court of Puerto Rico declined to value the unsecured net revenue claim or the method for its determination. The ultimate value of the claim, according to the U.S. Virgin IslandsFederal District Court of Puerto Rico, should be determined through a claim estimation proceeding.
On June 6-8, 2023, the Federal District Court of Puerto Rico held a claim estimation proceeding and, its related authorities (USVI)on June 26, 2023, issued an opinion and order estimating the unsecured net revenue claim to be $2.4 billion as of July 3, 2017. This estimate included a determination that PREPA’s discounted cash flows, using FOMB’s base-case incremental net revenues over a 100-year collection period and a discount rate of 7%, would be $3.0 billion, and should be reduced by an additional 20% for “risk of success in achieving the projected cash flow through the actions of a receiver and other equitable remedies appropriate”. PREPA bondholders had sought an unsecured net revenue claim of approximately $8.5 billion.
The Company expects to appeal portions of the March 22, 2023 decision, including the lien scope ruling and the need for a claim estimation proceeding, as well as the June 26, 2023 claim estimate ruling, upon final adjudication by the Federal District Court of Puerto Rico of all claims and counterclaims in the PREPA lien challenge proceedings.
The last revised fiscal plan for PREPA was certified by the FOMB on June 23, 2023 (2023 PREPA Fiscal Plan). In the 2023 PREPA Fiscal Plan, FOMB asserts that, other than for pension claims, PREPA’s debt capacity is $2.5 billion, of which it rated $47 million BIG (down from $469 million BIGapproximately $1.4 billion is allocated to settling creditors. The remaining $1.1 billion is allocated pro rata to (i) non-settling bondholders, and (ii) general unsecured creditors (GUCs). The Federal District Court of Puerto Rico extended to August 11, 2023 the deadline for FOMB to file a further amended FOMB PREPA Plan based on the 2023 PREPA Fiscal Plan. The Company believes that a further revised FOMB PREPA Plan would provide for reduced payments to bondholders since lower projected PREPA revenues are included in the 2023 PREPA Fiscal Plan than had been previously anticipated. Since the Federal District Court of Puerto Rico’s estimated unsecured net revenue claim exceeds the $1.1 billion available to non-settling bondholders and GUCs under the 2023 PREPA Fiscal Plan, the unsecured net revenue claim may be subject to further impairment. The 2023 PREPA Fiscal Plan contemplates that non-settling bondholders will receive at least 12.5% of their allowed claim in the form of restructuring bonds, as well as two CVIs allocated based on their allowed claim.
PRHTA
As of December 31, 2021). In nine months 2022, $256June 30, 2023, the Company had $475 million of insured net par outstanding of USVIPRHTA bonds: $293 million insured net par outstanding of PRHTA (transportation revenue) bonds were legally defeased and $134$182 million insured net par outstanding of PRHTA (highway revenue) bonds. PRHTA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds that constitute distributions under the HTA Plan.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico GO and PBA
As of June 30, 2023, the Company had remaining $25 million of insured net par outstanding of USVIGO bonds were upgraded to investment grade. The remaining $47and $4 million of BIG USVIinsured net par outstanding consisted of bondsPBA bonds. GO/PBA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New GO Bonds and CVIs that constitute distributions under the GO/PBA Plan.
Other Puerto Rico Exposures
All debt service payments for the Company’s remaining Puerto Rico exposures of $125 million insured net par outstanding have been made in full by the obligors as of the Virgin Islands Water and Power Authoritydate of this filing. These exposures consist primarily of $124 million net par outstanding of MFA bonds, which are secured by a net revenue pledge of the electric system. The USVI continues to benefit from the federal responselien on local tax revenues.
Puerto Rico Litigation
Currently, there are numerous legal actions relating to the 2017 hurricanesdefault by the Commonwealth and COVID-19, has seen improvement in the tourism sector, recently took actions to addresscertain of its pension shortfalls, and has made itsinstrumentalities on debt service payments, and related matters, and the Company is a party to date.a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to Puerto Rico obligations which the Company insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.
Specialty InsuranceA number of legal actions involving the Company and Reinsurance Exposurerelating to the Commonwealth, PRCCDA and PRIFA, as well as claims related to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022, and all remaining legal actions involving the Company and relating to PRHTA were resolved on December 6, 2022, which together comprised the consummation of the 2022 Puerto Rico Resolutions. Except for one proceeding related to PREPA, all proceedings involving the Company and relating to the default by the Commonwealth or its instrumentalities remain stayed pending the Federal District Court of Puerto Rico's determination on plans of adjustment or other proceedings.
The following Puerto Rico proceeding in which the Company also provides specialty insuranceis involved is no longer stayed:
•On July 1, 2019, the FOMB initiated an adversary proceeding against U.S. Bank National Association, as trustee for PREPA’s bonds, objecting to and reinsurance on transactions with risk profiles similar tochallenging the validity, enforceability, and extent of prepetition security interests securing those of its structured finance exposures written in financial guaranty form. As of bothbonds and seeking other relief. On September 30, 2022, the FOMB filed an amended complaint against the trustee (i) objecting to and December 31, 2021, gross exposurechallenging the validity, enforceability, and extent of $144 millionprepetition security interests securing PREPA’s bonds and net exposure(ii) arguing that PREPA bondholders’ recourse was limited to certain deposit accounts held by the trustee. On October 7, 2022, the court approved a stipulation permitting AGM and AGC to intervene as defendants. Summary judgment motions were filed by plaintiffs and defendants on October 24, 2022. As noted above, on March 22, 2023, the Federal District Court of $84 millionPuerto Rico granted in part and denied in part each party’s cross-motions for summary judgment. The Federal District Court of aircraft residual value insurance was BIG. All other exposuresPuerto Rico found that the PREPA bondholders had perfected liens only in revenues that had been deposited in the table below are investment-grade quality.sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. The Federal District Court of Puerto Rico also held that the PREPA bondholders do have recourse under the trust agreement in the form of an unsecured net revenue claim, but declined to value the unsecured net revenue claim. On April 13, 2023, the court issued an order proposing procedures to estimate the value of the unsecured net revenue claim arising from the Trustee’s ability to exercise remedies to obtain specific performance of PREPA’s covenants to fund the sinking fund, which must be done under the Bankruptcy Code for purposes of allowance. The order also set a discovery and expert report schedule, and directed the parties to engage in good faith mediation. A claim estimation hearing was held June 6-8, 2023, and in a June 26, 2023 opinion, the court estimated the PREPA bondholders’ allowed unsecured net revenue claim to be $2.4 billion, which the court calculated by largely adopting the conclusions in the FOMB’s expert report. On May 3, 2023, the court denied PREPA bondholders’ request to certify their interlocutory appeal of the finding that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. On May 15, 2023, the FOMB filed its motion to dismiss the Trustee’s and bondholders’ counterclaims. Unless mediation or a confirmed plan of adjustment leads to an acceptable outcome, AGM and AGC expect to appeal portions of the court’s decision, including the lien scope ruling and the result of the claim estimation proceeding, upon final adjudication by the court.
Specialty Insurance and Reinsurance Exposure
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following Puerto Rico proceedings in which the Company is involved remain stayed:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 | | As of December 31, 2021 |
| | Gross Exposure | | Net Exposure | | Gross Exposure | | Net Exposure |
| | (in millions) |
| Life insurance transactions (1) | | $ | 1,301 | | | $ | 969 | | | $ | 1,250 | | | $ | 871 | |
| Aircraft residual value insurance policies | | 355 | | | 200 | | | 355 | | | 200 | |
| Total | | $ | 1,656 | | | $ | 1,169 | | | $ | 1,605 | | | $ | 1,071 | |
____________________
(1) The life insurance transactions’ net exposure is projected•On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court of Puerto Rico to reach $1.1 billion by June 30, 2024.
•On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the
automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14,
2017, but on August 8, 2018, the United States Court of Appeals for the First Circuit vacated and remanded the court’s decision. On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver. Following termination of mediation without a resolution and the filing of a motion to dismiss PREPA’s Title III case or to lift the automatic stay to allow for the appointment of a receiver, the court effectively stayed this matter until termination of the plan confirmation process.
•On May 20, 2019, the FOMB and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court of Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. Relatedly, on January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court of Puerto Rico against AGM and AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims. These matters are currently stayed. On October 12, 2022, the court entered an order and judgment confirming the amended plan of adjustment for PRHTA filed by the FOMB with the court on September 6, 2022 (HTA Confirmation Order), and which provides that these adversary proceeding must be dismissed with prejudice within five business days of the HTA Confirmation Order becoming a final order, which should occur after all appeals of the HTA Confirmation Order have been resolved.
•On September 30, 2019, certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims (Fuel Line Lenders) filed an amended adversary complaint against the FOMB and other parties, including AGC and AGM, seeking subordination of PREPA bondholder claims to Fuel Line Lenders’ claims. On November 12, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.
•On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. On November 7, 2019, the court granted a motion to intervene by AGC and AGM. On November 13, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Specialty Business
Guarantee
The Company also guarantees specialty business with risk profiles similar to those of its structured finance exposures written in financial guaranty form.
Specialty Insurance, Reinsurance and Guaranties
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2023 | | As of December 31, 2022 |
| | Gross Exposure | | Net Exposure | | Gross Exposure | | Net Exposure |
| | (in millions) |
| Life insurance transactions (1) | | $ | 1,326 | | | $ | 992 | | | $ | 1,314 | | | $ | 986 | |
| Aircraft residual value insurance policies | | 355 | | | 200 | | | 355 | | | 200 | |
| Other guaranties | | 1,643 | | | 1,643 | | | 228 | | | 228 | |
____________________
(1) The life insurance transactions net exposure is projected to reach $1.1 billion in 2025.
As of both June 30, 2023 and December 31, 2022, gross exposure of $144 million and net exposure of $84 million of aircraft residual value insurance was internally rated BIG. All other exposures in the table above are rated investment-grade.
On March 31, 2022, theThe Company’s subsidiary, AGRO, entered intoalso guarantees other specialty business included in other guaranties in the table above, including an agreement (internally rated AA) which guarantees the receiptexcess-of-loss guaranty of a minimum rental income fromamount of billed rent on a multifamily and commercialdiversified portfolio of real estate portfolio. The minimum rental income guaranteed by AGRO is significantly below current annual rental income, and further protective provisions are triggered when rental 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.properties with an internal rating of AA. This guaranty matures in 2042. The Company’s maximum potential exposure under the guaranteethis guaranty was $232 million$1.6 billion as of SeptemberJune 30, 2022.2023. The Company accounts for the guaranteesuch guaranties in accordance with Accounting Standards Codification (ASC) 460, Guarantees.
4. Expected Loss to be Paid (Recovered)
Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and
LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying
collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted estimates of all possible scenarios.
Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to it.the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s surveillance and risk management activities.functions. Expected loss to be paid (recovered) is important in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts.
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. Insured obligations with expected losses that were purchased by the Company are referred to as Loss Mitigation Securities and are recorded in the investment portfolio at fair value, excluding the value of the Company’s insurance. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 7, Investments, and Note 9, Fair Value Measurement.
Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.
In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. The insured portfolio includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary models are: (1) insurance, as
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of these accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio.
Loss Estimation Process
The Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
assumptions, scenarios and the probabilities they assign to those scenarios based on actual developments during the period and their view of future performance.
The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such financial guaranties. As a result, the Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the life of most contracts.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities. 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 reporting period in the Company’s loss estimates for municipalpublic finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables.
Net economic loss development (benefit) over a reporting period may be attributable to a number of interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates and dispute resolution. Actual losses will ultimately depend on future events, or transaction performance and may be influenced by many
interrelatedor other factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to
considerable volatility and may not reflect the Company’s ultimate claims paid.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which usesresults in an acceleration of cash outflows but reduces projected future losses.overall losses paid.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit)
by Accounting Model
| | | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) | | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of | | Third Quarter | | Nine Months | | As of | | Second Quarter | | Six Months |
| Accounting Model | Accounting Model | | September 30, 2022 | | December 31, 2021 | | 2022 | | 2021 | | 2022 | | 2021 | Accounting Model | | June 30, 2023 | | December 31, 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | (in millions) | | | (in millions) |
| Insurance (see Note 5) | Insurance (see Note 5) | | $ | 695 | | | $ | 364 | | | $ | (67) | | | $ | (82) | | | $ | (137) | | | $ | (91) | | Insurance (see Note 5) | | $ | 262 | | | $ | 205 | | | $ | 62 | | | $ | (26) | | | $ | 68 | | | $ | (70) | |
FG VIEs (see Note 8) | FG VIEs (see Note 8) | | 28 | | | 42 | | | (6) | | | (10) | | | (16) | | | (17) | | FG VIEs (see Note 8) | | 295 | | | 314 | | | (14) | | | (6) | | | (9) | | | (10) | |
| Credit derivatives (see Note 6) | Credit derivatives (see Note 6) | | 4 | | | 5 | | | 1 | | | (2) | | | 5 | | | 7 | | Credit derivatives (see Note 6) | | 3 | | | 3 | | | 1 | | | — | | | 1 | | | 4 | |
| Total | Total | | $ | 727 | | | $ | 411 | | | $ | (72) | | | $ | (94) | | | $ | (148) | | | $ | (101) | | Total | | $ | 560 | | | $ | 522 | | | $ | 49 | | | $ | (32) | | | $ | 60 | | | $ | (76) | |
____________________
(1) The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated.
The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts, which are accounted for under one of the following accounting models: insurance, derivative and FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 2.98%3.73% to 4.18%5.37% with a weighted average of 3.97%4.34% as of SeptemberJune 30, 20222023 and 0.00%3.82% to 1.98%4.69% with a weighted average of 1.02%4.08% as of December 31, 2021.2022. Expected losses to be paid for U.S. dollar denominated transactions represented approximately 99.3%98.3% and 97.2%98.5% of the total as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Net Expected Loss to be Paid (Recovered)
Roll Forward
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Net expected loss to be paid (recovered), beginning of period | Net expected loss to be paid (recovered), beginning of period | $ | 442 | | | $ | 466 | | | $ | 411 | | | $ | 529 | | Net expected loss to be paid (recovered), beginning of period | $ | 517 | | | $ | 432 | | | $ | 522 | | | $ | 411 | |
| Economic loss development (benefit) due to: | Economic loss development (benefit) due to: | | Economic loss development (benefit) due to: | |
| Accretion of discount | Accretion of discount | 3 | | | 2 | | | 8 | | | 5 | | Accretion of discount | 4 | | | 3 | | | 9 | | | 5 | |
| Changes in discount rates | Changes in discount rates | (25) | | | (1) | | | (114) | | | (34) | | Changes in discount rates | (6) | | | (42) | | | 4 | | | (89) | |
| Changes in timing and assumptions | Changes in timing and assumptions | (50) | | | (95) | | | (42) | | | (72) | | Changes in timing and assumptions | 51 | | | 7 | | | 47 | | | 8 | |
| Total economic loss development (benefit) | Total economic loss development (benefit) | (72) | | | (94) | | | (148) | | | (101) | | Total economic loss development (benefit) | 49 | | | (32) | | | 60 | | | (76) | |
| Net (paid) recovered losses (1) | Net (paid) recovered losses (1) | 357 | | | (173) | | | 464 | | | (229) | | Net (paid) recovered losses (1) | (6) | | | 42 | | | (22) | | | 107 | |
| Net expected loss to be paid (recovered), end of period | Net expected loss to be paid (recovered), end of period | $ | 727 | | | $ | 199 | | | $ | 727 | | | $ | 199 | | Net expected loss to be paid (recovered), end of period | $ | 560 | | | $ | 442 | | | $ | 560 | | | $ | 442 | |
____________________
(1) In third quarterNet (paid) recovered losses in 2022 include the Companynet amounts received from the Commonwealth, pursuant to the GO/PBA Plan and the termsportion of the HTA PSA, $147 million of cash2022 Puerto Rico Resolutions related to PRCCDA, PRIFA and $672 million original notional of CVI.GO/PBA exposures, as described in Note 3, Outstanding Exposure.
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2022 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 210 | | | $ | 24 | | | $ | 392 | | | $ | 626 | |
| Non-U.S. public finance | | 7 | | | (2) | | | 1 | | | 6 | |
| Public finance | | 217 | | | 22 | | | 393 | | | 632 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 179 | | | (95) | | | (32) | | | 52 | |
| Other structured finance | | 46 | | | 1 | | | (4) | | | 43 | |
| Structured finance | | 225 | | | (94) | | | (36) | | | 95 | |
| Total | | $ | 442 | | | $ | (72) | | | $ | 357 | | | $ | 727 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| | | Third Quarter 2021 | | Second Quarter 2023 |
| Sector | Sector | | Net Expected Loss to be Paid (Recovered) as of June 30, 2021 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2021 | Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2023 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | | (in millions) | | | (in millions) |
| Public finance: | Public finance: | | Public finance: | |
| U.S. public finance | U.S. public finance | | $ | 221 | | | (29) | | | $ | (201) | | | $ | (9) | | U.S. public finance | | $ | 380 | | | $ | 57 | | | $ | (4) | | | $ | 433 | |
| Non-U.S. public finance | Non-U.S. public finance | | 22 | | | (2) | | | (1) | | | 19 | | Non-U.S. public finance | | 13 | | | (3) | | | — | | | 10 | |
| Public finance | Public finance | | 243 | | | (31) | | | (202) | | | 10 | | Public finance | | 393 | | | 54 | | | (4) | | | 443 | |
| Structured finance: | Structured finance: | | | | | | | | | Structured finance: | | | | | | | | |
| U.S. RMBS | U.S. RMBS | | 178 | | | (65) | | | 29 | | | 142 | | U.S. RMBS | | 82 | | | (9) | | | — | | | 73 | |
| Other structured finance | Other structured finance | | 45 | | | 2 | | | — | | | 47 | | Other structured finance | | 42 | | | 4 | | | (2) | | | 44 | |
| Structured finance | Structured finance | | 223 | | | (63) | | | 29 | | | 189 | | Structured finance | | 124 | | | (5) | | | (2) | | | 117 | |
| Total | Total | | $ | 466 | | | $ | (94) | | | $ | (173) | | | $ | 199 | | Total | | $ | 517 | | | $ | 49 | | | $ | (6) | | | $ | 560 | |
| | | Nine Months 2022 | | Second Quarter 2022 |
| Sector | 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 September 30, 2022 | Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 |
| | | | (in millions) | | | (in millions) |
| Public finance: | Public finance: | | Public finance: | |
| U.S. public finance | U.S. public finance | | $ | 197 | | | $ | (16) | | | $ | 445 | | | $ | 626 | | U.S. public finance | | $ | 181 | | | $ | 8 | | | $ | 21 | | | $ | 210 | |
| Non-U.S. public finance | Non-U.S. public finance | | 12 | | | (6) | | | — | | | 6 | | Non-U.S. public finance | | 10 | | | (2) | | | (1) | | | 7 | |
| Public finance | Public finance | | 209 | | | (22) | | | 445 | | | 632 | | Public finance | | 191 | | | 6 | | | 20 | | | 217 | |
| Structured finance: | Structured finance: | | | | | | | | | Structured finance: | | | | | | | | |
| U.S. RMBS | U.S. RMBS | | 150 | | | (127) | | | 29 | | | 52 | | U.S. RMBS | | 195 | | | (39) | | | 23 | | | 179 | |
| Other structured finance | Other structured finance | | 52 | | | 1 | | | (10) | | | 43 | | Other structured finance | | 46 | | | 1 | | | (1) | | | 46 | |
| Structured finance | Structured finance | | 202 | | | (126) | | | 19 | | | 95 | | Structured finance | | 241 | | | (38) | | | 22 | | | 225 | |
| Total | Total | | $ | 411 | | | $ | (148) | | | $ | 464 | | | $ | 727 | | Total | | $ | 432 | | | $ | (32) | | | $ | 42 | | | $ | 442 | |
| | | Nine Months 2021 | | Six Months 2023 |
| Sector | 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 September 30, 2021 | Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | | (in millions) | | | (in millions) |
| Public finance: | Public finance: | | Public finance: | |
| U.S. public finance | U.S. public finance | | $ | 305 | | | $ | (13) | | | $ | (301) | | | $ | (9) | | U.S. public finance | | $ | 403 | | | $ | 58 | | | $ | (28) | | | $ | 433 | |
| Non-U.S. public finance | Non-U.S. public finance | | 36 | | | (15) | | | (2) | | | 19 | | Non-U.S. public finance | | 9 | | | 1 | | | — | | | 10 | |
| Public finance | Public finance | | 341 | | | (28) | | | (303) | | | 10 | | Public finance | | 412 | | | 59 | | | (28) | | | 443 | |
| Structured finance: | Structured finance: | | | | | | | | | Structured finance: | | | | | | | | |
| U.S. RMBS | U.S. RMBS | | 148 | | | (82) | | | 76 | | | 142 | | U.S. RMBS | | 66 | | | (4) | | | 11 | | | 73 | |
| Other structured finance | Other structured finance | | 40 | | | 9 | | | (2) | | | 47 | | Other structured finance | | 44 | | | 5 | | | (5) | | | 44 | |
| Structured finance | Structured finance | | 188 | | | (73) | | | 74 | | | 189 | | Structured finance | | 110 | | | 1 | | | 6 | | | 117 | |
| Total | Total | | $ | 529 | | | $ | (101) | | | $ | (229) | | | $ | 199 | | Total | | $ | 522 | | | $ | 60 | | | $ | (22) | | | $ | 560 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 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 June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 197 | | | $ | (40) | | | $ | 53 | | | $ | 210 | |
| Non-U.S. public finance | | 12 | | | (4) | | | (1) | | | 7 | |
| Public finance | | 209 | | | (44) | | | 52 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 150 | | | (32) | | | 61 | | | 179 | |
| Other structured finance | | 52 | | | — | | | (6) | | | 46 | |
| Structured finance | | 202 | | | (32) | | | 55 | | | 225 | |
| Total | | $ | 411 | | | $ | (76) | | | $ | 107 | | | $ | 442 | |
____________________
(1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in other assets.“other assets”.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The tables above include (a)(i) net LAE paid of $5 million, $5$7 million, $25$8 million and $15$20 million for thirdsecond quarter 2023, second quarter 2022, third quarter 2021, ninesix months 2023 and six months 2022 and nine months 2021, respectively, and (b)(ii) net expected LAE to be paid of $11 million as of Septemberboth June 30, 20222023 and $26 million as of December 31, 2021. Ceded expected loss and LAE to be recovered (paid) was $(2) million as of September 30, 2022 and $10 million as of December 31, 2021.2022.
Selected U.S. Public Finance Transactions
The primary componentslargest component of public finance expected losslosses to be paid (recovered) and/orand economic loss development (benefit) as of September 30, 2022 and for the three and nine months ended 2022are U.S. exposures, including Puerto Rico exposures, which are discussed below.
The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $2.1 billion net par outstanding as of September 30, 2022, all of which was BIG. On 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. On July 8, 2022, the Company received from the Commonwealth, pursuant to the GO/PBA Plan and the terms of the HTA PSA, additional cash and CVIs. On the HTA Effective Date, the Company also expects to receive additional recoveries in the form of cash and Toll Bonds. For additional information regarding the Company’s Puerto Rico exposure, see “Exposure to Puerto Rico” in Note 3, Outstanding Exposure.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the Bankruptcy Code became effective. As of September 30, 2022, the Company’s net par outstanding subject to the plan consisted of $96 million of pension obligation bonds. As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth.
The Company insures a large integrated healthcare system with net par of $820 million which was downgraded to BIG in third quarter 2022 due to its weak operating results and liquidity position.
The Company projects its total net expected loss to be paid across its troubled U.S. public finance exposures as of September 30, 2022, including those mentioned above, to be $626 million, compared with $197 million as of December 31, 2021. The economic loss development for U.S. public finance transactions was $24 million during third quarter 2022 and was primarily attributable to healthcare and Puerto Rico exposures, partially offset by the effect of changes in discount rates. The economic benefit for U.S. public finance transactions was $16 million during nine months 2022, which was primarily attributable to changes in discount rates and higher projected revenues for certain exposures, partially offset by healthcare and Puerto Rico exposures. 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.
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.(e.g., payment priorities and tranching) of the RMBS and any expected representation 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.
Each period the Company makes a judgment as to whether to changereviews the assumptions it uses to make RMBS loss projections basedwith consideration of updates on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general, and, togeneral. To the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a more prolonged trend. The assumptions that the Company uses to project RMBS losses are shown in the sections below.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Economic Loss Development (Benefit)
U.S. RMBS
| | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| First lien U.S. RMBS | First lien U.S. RMBS | $ | (38) | | | (10) | | | $ | (34) | | | $ | 1 | | First lien U.S. RMBS | $ | — | | | $ | (14) | | | $ | — | | | $ | 4 | |
| Second lien U.S. RMBS | Second lien U.S. RMBS | (57) | | | (55) | | | (93) | | | (83) | | Second lien U.S. RMBS | (9) | | | (25) | | | (4) | | | (36) | |
First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime
The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
are one of the primary drivers of loss projections in this portfolio. In order to determineproject the number of defaults resultingarising from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third-party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories.
First Lien U.S. RMBS Liquidation Rates
| | | As of | | As of |
| | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| Current but recently delinquent | Current but recently delinquent | | | | Current but recently delinquent | | | |
| Alt-A and Prime | Alt-A and Prime | 20% | | 20% | Alt-A and Prime | 20% | | 20% |
| Option ARM | Option ARM | 20 | | 20 | Option ARM | 20% | | 20% |
| Subprime | Subprime | 20 | | 20 | Subprime | 20% | | 20% |
| 30 – 59 Days Delinquent | 30 – 59 Days Delinquent | | 30 – 59 Days Delinquent | |
| Alt-A and Prime | Alt-A and Prime | 35 | | 35 | Alt-A and Prime | 35% | | 35% |
| Option ARM | Option ARM | 35 | | 35 | Option ARM | 35% | | 35% |
| Subprime | Subprime | 30 | | 30 | Subprime | 30% | | 30% |
| 60 – 89 Days Delinquent | 60 – 89 Days Delinquent | | 60 – 89 Days Delinquent | |
| Alt-A and Prime | Alt-A and Prime | 40 | | 40 | Alt-A and Prime | 40% | | 40% |
| Option ARM | Option ARM | 45 | | 45 | Option ARM | 45% | | 45% |
| Subprime | Subprime | 40 | | 40 | Subprime | 40% | | 40% |
| 90+ Days Delinquent | 90+ Days Delinquent | | 90+ Days Delinquent | |
| Alt-A and Prime | Alt-A and Prime | 55 | | 55 | Alt-A and Prime | 55% | | 55% |
| Option ARM | Option ARM | 60 | | 60 | Option ARM | 60% | | 60% |
| Subprime | Subprime | 45 | | 45 | Subprime | 45% | | 45% |
| Bankruptcy | Bankruptcy | | Bankruptcy | |
| Alt-A and Prime | Alt-A and Prime | 45 | | 45 | Alt-A and Prime | 45% | | 45% |
| Option ARM | Option ARM | 50 | | 50 | Option ARM | 50% | | 50% |
| Subprime | Subprime | 40 | | 40 | Subprime | 40% | | 40% |
| Foreclosure | Foreclosure | | Foreclosure | |
| Alt-A and Prime | Alt-A and Prime | 60 | | 60 | Alt-A and Prime | 60% | | 60% |
| Option ARM | Option ARM | 65 | | 65 | Option ARM | 65% | | 65% |
| Subprime | Subprime | 55 | | 55 | Subprime | 55% | | 55% |
| Real Estate Owned | Real Estate Owned | | Real Estate Owned | |
| All | All | 100 | | 100 | All | 100% | | 100% |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
While the Company uses the liquidation rates above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a conditional default rate (CDR) curve. The start of that CDR curve is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximatelyresults in the amountprojection of the defaults that were calculatedare expected to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.
In the most heavily weighted scenario (the base scenario), after the 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to a final CDR of 5% of the plateau CDR. In the base scenario, the Company assumes the final CDR will be reached 1.00one year after the 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
trend after the first 36-month period represent defaults attributable to borrowers that are currently performing or are projected to re-perform.
Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. The Company assumes in the base scenario that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base scenario that the recent levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18-month period, declining to 40% in the base scenario over 2.5 years.
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Key Assumptions in Base Scenario Expected Loss Estimates
First Lien U.S. RMBS
| | | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average |
| Alt-A and Prime: | Alt-A and Prime: | | | | | | | | Alt-A and Prime: | | | | | | | |
| Plateau CDR | Plateau CDR | 1.3 | % | - | 12.1% | | 5.6% | | 0.9 | % | - | 11.6% | | 5.9% | Plateau CDR | 0.7 | % | - | 10.3% | | 3.9% | | 1.6 | % | - | 11.5% | | 5.1% |
| Final CDR | Final CDR | 0.1 | % | - | 0.6% | | 0.3% | | 0.0 | % | - | 0.6% | | 0.3% | Final CDR | 0.0 | % | - | 0.5% | | 0.2% | | 0.1 | % | - | 0.6% | | 0.3% |
| Initial loss severity: | Initial loss severity: | | | | Initial loss severity: | | | |
| 2005 and prior | 2005 and prior | 50% | | 60% | | 2005 and prior | 50% | | 50% | |
| 2006 | 2006 | 50% | | 60% | | 2006 | 50% | | 50% | |
| 2007+ | 2007+ | 50% | | 60% | | 2007+ | 50% | | 50% | |
| Option ARM: | Option ARM: | | | | Option ARM: | | | |
| Plateau CDR | Plateau CDR | 1.8 | % | - | 9.5% | | 4.7% | | 1.8 | % | - | 11.9% | | 5.6% | Plateau CDR | 0.0 | % | - | 9.6% | | 3.4% | | 2.0 | % | - | 7.7% | | 4.3% |
| Final CDR | Final CDR | 0.1 | % | - | 0.5% | | 0.2% | | 0.1 | % | - | 0.6% | | 0.3% | Final CDR | 0.0 | % | - | 0.5% | | 0.2% | | 0.1 | % | - | 0.4% | | 0.2% |
| Initial loss severity: | Initial loss severity: | | | | Initial loss severity: | | | |
| 2005 and prior | 2005 and prior | 50% | | 60% | | 2005 and prior | 50% | | 50% | |
| 2006 | 2006 | 50% | | 60% | | 2006 | 50% | | 50% | |
| 2007+ | 2007+ | 50% | | 60% | | 2007+ | 50% | | 50% | |
| Subprime: | Subprime: | | | | Subprime: | | | |
| Plateau CDR | Plateau CDR | 2.1 | % | - | 9.3% | | 5.8% | | 2.9 | % | - | 10.0% | | 6.0% | Plateau CDR | 1.6 | % | - | 9.0% | | 4.9% | | 2.7 | % | - | 9.7% | | 5.6% |
| Final CDR | Final CDR | 0.1 | % | - | 0.5% | | 0.3% | | 0.1 | % | - | 0.5% | | 0.3% | Final CDR | 0.1 | % | - | 0.4% | | 0.2% | | 0.1 | % | - | 0.5% | | 0.3% |
| Initial loss severity: | Initial loss severity: | | | | Initial loss severity: | | | |
| 2005 and prior | 2005 and prior | 50% | | 60% | | 2005 and prior | 50% | | 50% | |
| 2006 | 2006 | 50% | | 60% | | 2006 | 50% | | 50% | |
| 2007+ | 2007+ | 50% | | 60% | | 2007+ | 50% | | 50% | |
The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary conditional prepayment rate (CPR) follows a pattern similar to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base scenario. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for December 31, 2021.2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes, in the base scenario, that 20% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans. In the first quarter of 2023, in light of recent volatility in interest rates, the mortgage market and home prices, the Company also began incorporating a 10% recovery of deferred principal balances in the most stressful scenario and a 50% recovery in the least stressful scenario. The effect on expected losses of this refinement in methodology was less than $1 million.
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien U.S. RMBS transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the plateau CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of SeptemberJune 30, 20222023 and December 31, 2021.
Total expected loss to be paid on all first lien U.S. RMBS was $110 million and $167 million as of September 30, 2022 and December 31, 2021, respectively. The $38 million economic benefit in third quarter 2022 for first lien U.S. RMBS transactions was primarily attributable to the purchase of a loss mitigation security (see Note 7, Investments), changes in discount rates, a benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, and improved transaction performance, partially offset by lower excess spread. The $34 million economic benefit in nine months 2022 for first lien U.S. RMBS transactions was primarily attributable to changes in discount rates, the purchase of
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
a loss mitigation security, lower assumed initial severity, improved performance in certain transactions and a benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, partially offset by lower excess spread.2022.
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.London Interbank Offered Rate (LIBOR). An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. As previously announced by the ICE Benchmark Administration (IBA) and the Financial Conduct Authority, (FCA) have announced thatpublication of LIBOR will bewas discontinued after June 30, 2023. The Company believes that the reference to LIBOR in such floating rate RMBS debt has been, or will be, replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on the Secured Overnight Finance Rate (SOFR).
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of SeptemberJune 30, 20222023 as it used as of December 31, 2021,2022, increasing and decreasing the periods of stress from those used in the base scenario.scenario, but, as mentioned above, it updated the assumed recovery for deferred principal balances for the most stressful and least stressful scenarios (to 10% and 50%, respectively) compared to December 31, 2022 (when 20% was assumed in all scenarios). In the Company’s most stressful scenario where 10% of deferred principal balances were recovered, loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 16 months, expected loss to be paid would increase from current projections by approximately $13$22 million for all first lien U.S. RMBS transactions. In the Company’s least stressful scenario where 50% of deferred principal balances are assumed to be recovered, the CDR plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over eight months), expected loss to be paid would decrease from current projections by approximately $8$31 million for all first lien U.S. RMBS transactions.
Second Lien U.S. RMBS Loss Projections
Second lien U.S. RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the prepayment speeds of the collateral, the interest rate environment and assumptions about loss severity.
The Company estimates the amount of loans that will default over the next several years by first calculating expected liquidation rates for delinquent loans, and applying liquidation rates to currently delinquent loans in order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults).
Similar to first lien U.S. RMBS transactions, the Company then calculates a CDR that will cause the targeted amount of liquidations to occur during the plateau period.
Prior to third quarter 2022, forFor the base scenario, the CDR (the plateau CDR) wasis held constant for six36 months. Once the plateau period had ended,ends, the CDR wasis assumed to gradually trend down in uniform increments for one year to its final long-term steady state CDR. (The long-term steady state CDR was calculated as the constant CDR that would have yielded the amount(5% of losses originally expected at underwriting, subject to a floor.) In the base scenario, the time over which the CDR trended down to its final CDR was 28 months. Therefore, the total stress period for second lien transactions was 34 months.
The Company has observed lower than expected default rates and longer liquidation timelines due to significant home price appreciation and special servicing activity which now favors modifications and foreclosure actions rather than charge-offs at 180 days delinquent. In the third quarter 2022, the Company extended the time over which a portion of the delinquent loans default from six months to 36 months in the base scenario (conforming to the methodology used for first lien U.S. RMBS transactions)original plateau). After the plateau period, as with first lien U.S. RMBS transactions, the CDR trends down over one year to 5% of the plateau CDR. These changes in the shape of the CDR curve result in a longer period of stress defaults (48 months in the base scenario), but at lower default levels leading to lower overall levels of expected losses.
HELOC loans generally permitted the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. A substantial number of loans in the Company’s insured transactions had been modified to extend the interest-only period to 15 years (mostly
Assured Guaranty Ltd.
Notes to 2022-2023)Condensed Consolidated Financial Statements (Unaudited), and there was uncertainty regardingContinued
years. The majority of the performance of thesemodified loans as theyhad reset to full amortization.fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years.
Recently, the Company has observed the performance of the modified loans that have finally reset to full amortization (which represent the majority of extended loans), and noted low levels of delinquency, even with substantial increases in
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
monthly payments. This observed performance lowers the level of uncertainty regarding this modified cohort as the remainder continue to reset.
When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of SeptemberJune 30, 20222023 and December 31, 2021,2022, that it will generally recover 2% of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time. A second lien on the borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual recoveries of charged-off loans observed from period to period and reasonable expectations of future recoveries. In instances where the Company is able to obtain information on the lien status of charged-off loans, it assumes there will be a certain level of future recoveries of the balance of the charged-off loans where the second lien is still intact. The Company’s base scenario recovery assumption for charged-off loans is 30%, as shown in the table below, based on observed trends and reasonable expectations of future recoveries. Such recoveries are assumed to be received evenly over the next five years. IfIn the first quarter of 2023, in light of recent volatility in interest rates, the mortgage market and home prices, as with the first lien deferred principal balances detailed earlier, the Company also began incorporating a 10% recovery rate decreases to 20%,of charged-off loan balances in the most stressful scenario and a 50% recovery in the least stressful scenario. The effect on expected loss to be paid would increase from current projections by approximately $39 million. If the recovery rate increases to 40%, expected loss to be paid would decrease from current projections by approximately $39losses of this refinement in methodology was less than $1 million.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base scenario, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien U.S. RMBS transactions (in the base scenario), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is consistent with how the Company modeled the CPR as of December 31, 2021.2022. To the extent that prepayments differ from projected levels, it could materially change the Company’s projected excess spread and losses.losses could materially change.
In estimating expected losses, the Company modeled and probability weighted five scenarios, each with a different CDR curve applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate are the primary drivers behindof the amount of losses the collateral will likely suffer.
The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Key Assumptions in Base Scenario Expected Loss Estimates
HELOCs
| | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average |
| Plateau CDR | Plateau CDR | 0.4 | % | - | 7.6% | | 3.7% | | 6.5 | % | - | 39.6% | | 16.4% | Plateau CDR | 0.9 | % | - | 5.8% | | 3.0% | | 0.4 | % | - | 8.4% | | 3.5% |
| Final CDR trended down to | Final CDR trended down to | 0.0 | % | - | 0.4% | | 0.2% | | 1.0% | | Final CDR trended down to | 0.0 | % | - | 0.3% | | 0.1% | | 0.0 | % | - | 0.4% | | 0.2% |
| Liquidation rates: | Liquidation rates: | | Liquidation rates: | |
| Current but recently delinquent | Current but recently delinquent | 20% | | 20% | | Current but recently delinquent | 20% | | 20% | |
| 30 – 59 Days Delinquent | 30 – 59 Days Delinquent | 30 | | 30 | | 30 – 59 Days Delinquent | 30 | | 30 | |
| 60 – 89 Days Delinquent | 60 – 89 Days Delinquent | 40 | | 40 | | 60 – 89 Days Delinquent | 40 | | 40 | |
| 90+ Days Delinquent | 90+ Days Delinquent | 60 | | 60 | | 90+ Days Delinquent | 60 | | 60 | |
| Bankruptcy | Bankruptcy | 55 | | 55 | | Bankruptcy | 55 | | 55 | |
| Foreclosure | Foreclosure | 55 | | 55 | | Foreclosure | 55 | | 55 | |
| Real Estate Owned | Real Estate Owned | 100 | | 100 | | Real Estate Owned | 100 | | 100 | |
| Loss severity on future defaults | Loss severity on future defaults | 98% | | 98% | | Loss severity on future defaults | 98% | | 98% | |
| Projected future recoveries on previously charged-off loans | Projected future recoveries on previously charged-off loans | 30% | | 30% | | Projected future recoveries on previously charged-off loans | 30% | | 30% | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 $58 million as of September 30, 2022 and $17 million as of December 31, 2021. The economic benefit in third quarter 2022 was a benefit of $57 million, which was primarily driven by updates in the projected CDR curves, a benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, improved performance of certain transactions, and higher recoveries for secured charged-off loans. The economic benefit in nine months 2022 was $93 million, and was primarily due to improved performance of certain transactions, updates in the projected CDR curves, higher recoveries for secured charged-off loans, a benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, and changes in discount rates, partially offset by lower excess spread.
The Company updated its assumptions related to the CDR plateau and ramp-down during the third quarter 2022. The Company’s base scenario assumed a 36-month CDR plateau and a 12-month ramp-down (for a total stress period of 48 months), compared to a six-month CDR plateau and a 28-month ramp-down (for a total stress period of 34 months) as of December 31, 2021. The Company modeled scenarios with a longer period of elevated defaults and others with a shorter period of elevated defaults. In the Company’s most stressful scenario, assuming 10% recoveries on charged-off loans, increasing the CDR plateau to 42 months and increasing the ramp-down by four months to 16 months (for a total stress period of 58 months) would decrease the expected recovery by approximately $1$62 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, assuming 50% recoveries on charged-off loans, reducing the CDR plateau to 30 months and decreasing the length of the CDR ramp-down to eight months (for a total stress period of 38 months), and lowering the ultimate prepayment rate to 10% would increase the expected recovery by approximately $2$63 million for HELOC transactions.
Structured Finance Excluding U.S. RMBS
The Company projected that its total net expected loss to be paid across its troubled structured finance exposures, excluding U.S. RMBS, as of September 30, 2022 was $43 million. The largest component of these structured finance losses were student loan securitizations issued by private issuers with $49 million in BIG net par outstanding. In general, the projected losses of these student loan securitizations are due to: (i) the poor credit performance of private student loan collateralRecovery Litigation 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 September 30, 2022.
Recovery LitigationDispute Resolution
In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received in prior periods or prevent or reduce losses in the future. The impact, if any, of these and other proceedings on the amount of recoveries the Company ultimately receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements.
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding Exposure, for a discussion of the Company’s exposure to Puerto Rico and related recovery litigation being pursued by the Company.
5. Contracts Accounted for as Insurance
The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 6, Contracts Accounted for as Credit Derivatives, for amounts related to CDS and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Premiums
Net Earned Premiums
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Financial guaranty insurance: | Financial guaranty insurance: | | Financial guaranty insurance: | |
| Scheduled net earned premiums | Scheduled net earned premiums | 70 | | | 81 | | | $ | 219 | | | $ | 242 | | Scheduled net earned premiums | $ | 70 | | | $ | 70 | | | $ | 139 | | | $ | 149 | |
| Accelerations from refundings and terminations (1) | Accelerations from refundings and terminations (1) | 12 | | | 8 | | | 145 | | | 39 | | Accelerations from refundings and terminations (1) | 8 | | | 5 | | | 12 | | | 133 | |
| Accretion of discount on net premiums receivable | Accretion of discount on net premiums receivable | 6 | | | 13 | | | 18 | | | 24 | | Accretion of discount on net premiums receivable | 6 | | | 6 | | | 13 | | | 12 | |
| Financial guaranty insurance net earned premiums | Financial guaranty insurance net earned premiums | 88 | | | 102 | | | 382 | | | 305 | | Financial guaranty insurance net earned premiums | 84 | | | 81 | | | 164 | | | 294 | |
| Specialty net earned premiums | Specialty net earned premiums | 1 | | | — | | | 3 | | | 2 | | Specialty net earned premiums | 1 | | | 1 | | | 2 | | | 2 | |
| Net earned premiums | Net earned premiums | $ | 89 | | | $ | 102 | | | $ | 385 | | | $ | 307 | | Net earned premiums | $ | 85 | | | $ | 82 | | | $ | 166 | | | $ | 296 | |
____________________
(1) NineSix months 2022 accelerations includeincluded $104 million related to the March Puerto Rico Resolutions.PRCCDA, PRIFA and GO/PBA exposures. See Note 3, Outstanding Exposure for additional information.Exposure.
Gross Premium Receivable,
Net of Commissions Payable on Assumed Business
Roll Forward
| | | | Nine Months | | Six Months |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Beginning of year | Beginning of year | $ | 1,372 | | | $ | 1,372 | | Beginning of year | $ | 1,298 | | | $ | 1,372 | |
| Less: Specialty insurance premium receivable | Less: Specialty insurance premium receivable | 1 | | | 1 | | Less: Specialty insurance premium receivable | 1 | | | 1 | |
| Financial guaranty insurance premiums receivable | Financial guaranty insurance premiums receivable | 1,371 | | | 1,371 | | Financial guaranty insurance premiums receivable | 1,297 | | | 1,371 | |
| Gross written premiums on new business, net of commissions | Gross written premiums on new business, net of commissions | 232 | | | 270 | | Gross written premiums on new business, net of commissions | 171 | | | 137 | |
| Gross premiums received, net of commissions | Gross premiums received, net of commissions | (258) | | | (274) | | Gross premiums received, net of commissions | (120) | | | (180) | |
| Adjustments: | Adjustments: | | Adjustments: | |
| Changes in the expected term and debt service assumptions | Changes in the expected term and debt service assumptions | (5) | | | 6 | | Changes in the expected term and debt service assumptions | 9 | | | (4) | |
| Accretion of discount, net of commissions on assumed business | Accretion of discount, net of commissions on assumed business | 18 | | | 22 | | Accretion of discount, net of commissions on assumed business | 13 | | | 12 | |
| Foreign exchange gain (loss) on remeasurement | Foreign exchange gain (loss) on remeasurement | (181) | | | (22) | | Foreign exchange gain (loss) on remeasurement | 46 | | | (102) | |
| Expected recovery of premiums previously written off | — | | | 4 | | |
| Financial guaranty insurance premium receivable (1) | Financial guaranty insurance premium receivable (1) | 1,177 | | | 1,377 | | Financial guaranty insurance premium receivable (1) | 1,416 | | | 1,234 | |
| Specialty insurance premium receivable | Specialty insurance premium receivable | 1 | | | 1 | | Specialty insurance premium receivable | 1 | | | 1 | |
| September 30, | $ | 1,178 | | | $ | 1,378 | | |
| June 30, | | June 30, | $ | 1,417 | | | $ | 1,235 | |
Approximately 76%72% and 78%74% of gross premiums receivable, net of commissions payable, at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in the consumer price index,indices, changes in expected lives and new business.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance
Expected Future Premium Collections and Earnings
| | | | As of September 30, 2022 | | As of June 30, 2023 |
| | Future Gross Premiums
to be Collected (1) | | Future Net Premiums
to be Earned (2) | | Future Gross Premiums
to be Collected (1) | | Future Net Premiums
to be Earned (2) |
| | | (in millions) | | (in millions) |
| 2022 (October 1 - December 31) | $ | 27 | | | $ | 71 | | |
| 2023 | 105 | | | 271 | | |
| 2023 (July 1 - September 30) | | 2023 (July 1 - September 30) | $ | 51 | | | $ | 73 | |
| 2023 (October 1 - December 31) | | 2023 (October 1 - December 31) | 30 | | | 72 | |
| Subtotal 2023 | | Subtotal 2023 | 81 | | | 145 | |
| 2024 | 2024 | 82 | | | 256 | | 2024 | 121 | | | 276 | |
| 2025 | 2025 | 80 | | | 240 | | 2025 | 104 | | | 258 | |
| 2026 | 2026 | 78 | | | 224 | | 2026 | 101 | | | 241 | |
| 2027-2031 | 328 | | | 927 | | |
| 2032-2036 | 236 | | | 650 | | |
| 2037-2041 | 159 | | | 396 | | |
| After 2041 | 329 | | | 555 | | |
| 2027 | | 2027 | 97 | | | 227 | |
| 2028-2032 | | 2028-2032 | 404 | | | 947 | |
| 2033-2037 | | 2033-2037 | 270 | | | 633 | |
| 2038-2042 | | 2038-2042 | 187 | | | 386 | |
| After 2042 | | After 2042 | 374 | | | 536 | |
| Total | Total | $ | 1,423 | | | 3,590 | | Total | $ | 1,739 | | | 3,649 | |
| Future accretion | Future accretion | | | 248 | | Future accretion | | | 323 | |
| Total future net earned premiums | Total future net earned premiums | | $ | 3,838 | | Total future net earned premiums | | $ | 3,972 | |
____________________
(1) Net of assumed commissions payable.
(2) Net of reinsurance.
Selected Information for Financial Guaranty Insurance Policies
with Premiums Paid in Installments
| | | As of | | As of |
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (dollars in millions) | | (dollars in millions) |
| Premiums receivable, net of commissions payable | Premiums receivable, net of commissions payable | $ | 1,177 | | $ | 1,371 | Premiums receivable, net of commissions payable | $ | 1,416 | | $ | 1,297 |
| Deferred premium revenue | Deferred premium revenue | 1,618 | | 1,663 | Deferred premium revenue | 1,721 | | 1,663 |
| Weighted-average risk-free rate used to discount premiums | Weighted-average risk-free rate used to discount premiums | 1.7% | | 1.6% | Weighted-average risk-free rate used to discount premiums | 1.9% | | 1.8% |
| Weighted-average period of premiums receivable (in years) | Weighted-average period of premiums receivable (in years) | 12.9 | | 12.7 | Weighted-average period of premiums receivable (in years) | 12.4 | | 12.9 |
Losses and Recoveries
Loss reserves and salvage are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 2.98%3.73% to 4.18%5.37% with a weighted average of 3.97%4.36% as of SeptemberJune 30, 20222023 and 0.00%3.82% to 1.98%4.69% with a weighted average of 1.02%4.15% as of December 31, 2021.2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Reserve (Salvage) by Sector
| | | | | | | | | | | | | | |
| | As of |
| Sector | | September 30, 2022 | | December 31, 2021 |
| | | (in millions) |
| Public finance: | | | | |
| U.S. public finance | | $ | 549 | | | $ | 60 | |
| Non-U.S. public finance | | 1 | | | 1 | |
| Public finance | | 550 | | | 61 | |
| Structured finance: | | | | |
| U.S. RMBS | | (96) | | | (24) | |
| Other structured finance | | 41 | | | 42 | |
| Structured finance | | (55) | | | 18 | |
| Total | | $ | 495 | | | $ | 79 | |
Components of Net Reserve (Salvage)
| | | | | | | | | | | |
| As of |
| | September 30, 2022 | | December 31, 2021 |
| | (in millions) |
| Loss and LAE reserve | $ | 882 | | | $ | 869 | |
| Reinsurance recoverable on unpaid losses (1) | (3) | | | (5) | |
| Loss and LAE reserve, net | 879 | | | 864 | |
| Salvage and subrogation recoverable | (385) | | | (801) | |
| Salvage and subrogation reinsurance payable (2) | 1 | | | 16 | |
| Salvage and subrogation recoverable, net | (384) | | | (785) | |
| Net reserve (salvage) | $ | 495 | | | $ | 79 | |
____________________
(1) Reported in “other assets” on the condensed consolidated balance sheets.
(2) Reported in “other liabilities” on the condensed consolidated balance sheets. | | | | | | | | | | | | | | |
| | As of |
| Sector | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) |
| Public finance: | | | | |
| U.S. public finance | | $ | 105 | | | $ | 71 | |
| Non-U.S. public finance | | 1 | | | 1 | |
| Public finance | | 106 | | | 72 | |
| Structured finance: | | | | |
| U.S. RMBS | | (67) | | | (77) | |
| Other structured finance | | 41 | | | 42 | |
| Structured finance | | (26) | | | (35) | |
| Total | | $ | 80 | | | $ | 37 | |
The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid, which represents the claim payments made and recoveries received that have not yet been recognized in the statements of operations; (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received); and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).
Reconciliation of Net Expected Loss to be Paid (Recovered)
to Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
| | | | | |
| As of SeptemberJune 30, 20222023 |
| | (in millions) |
| Net expected loss to be paid (recovered) - financial guaranty insurance | $ | 691259 | |
| Contra-paid, net | 1822 | |
| Salvage and subrogation recoverable, net | 384266 | |
| Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance | (875)(343) | |
| Net expected loss to be expensed (present value) | $ | 218204 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
| | | | As of September 30, 2022 | | As of June 30, 2023 |
| | | (in millions) | | (in millions) |
| 2022 (October 1 - December 31) | $ | 3 | | |
| 2023 | 16 | | |
| 2023 (July 1 - September 30) | | 2023 (July 1 - September 30) | $ | 4 | |
| 2023 (October 1 - December 31) | | 2023 (October 1 - December 31) | 3 | |
| Subtotal 2023 | | Subtotal 2023 | 7 | |
| 2024 | 2024 | 17 | | 2024 | 14 | |
| 2025 | 2025 | 16 | | 2025 | 13 | |
| 2026 | 2026 | 20 | | 2026 | 17 | |
| 2027-2031 | 75 | | |
| 2032-2036 | 51 | | |
| 2037-2041 | 11 | | |
| After 2041 | 9 | | |
| 2027 | | 2027 | 15 | |
| 2028-2032 | | 2028-2032 | 61 | |
| 2033-2037 | | 2033-2037 | 50 | |
| 2038-2042 | | 2038-2042 | 13 | |
| After 2042 | | After 2042 | 14 | |
| Net expected loss to be expensed | Net expected loss to be expensed | 218 | | Net expected loss to be expensed | 204 | |
| Future accretion | Future accretion | 163 | | Future accretion | 30 | |
| Total expected future loss and LAE | Total expected future loss and LAE | $ | 381 | | Total expected future loss and LAE | $ | 234 | |
The following table presents the loss and LAE (benefit) reported in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.
Loss and LAE (Benefit) by Sector
| | | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| Sector | Sector | | 2022 | | 2021 | | 2022 | | 2021 | Sector | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Public finance: | Public finance: | | Public finance: | |
| U.S. public finance | U.S. public finance | | $ | 1 | | | $ | (23) | | | $ | 67 | | | $ | 7 | | U.S. public finance | $ | 56 | | | $ | 11 | | | $ | 52 | | | $ | 66 | |
| Non-U.S. public finance | Non-U.S. public finance | | — | | | — | | | — | | | (9) | | Non-U.S. public finance | — | | | — | | | — | | | — | |
| Public finance | Public finance | | 1 | | | (23) | | | 67 | | | (2) | | Public finance | 56 | | | 11 | | | 52 | | | 66 | |
| Structured finance: | Structured finance: | | | | | | | | | Structured finance: | | | | | | | |
| U.S. RMBS | U.S. RMBS | | (78) | | | (48) | | | $ | (97) | | | $ | (54) | | U.S. RMBS | (2) | | | (22) | | | $ | 4 | | | $ | (19) | |
| Other structured finance | Other structured finance | | 2 | | | 3 | | | 1 | | | 2 | | Other structured finance | 1 | | | — | | | 3 | | | (1) | |
| Structured finance | Structured finance | | (76) | | | (45) | | | (96) | | | (52) | | Structured finance | (1) | | | (22) | | | 7 | | | (20) | |
| Loss and LAE (Benefit) | | $ | (75) | | | $ | (68) | | | $ | (29) | | | $ | (54) | | |
| Loss and LAE (benefit) | | Loss and LAE (benefit) | $ | 55 | | | $ | (11) | | | $ | 59 | | | $ | 46 | |
The primary difference between net economic loss development and the amount reported as “loss and LAE” in the consolidated statements
Assured Guaranty Ltd.
Notes to FG VIEs; and (3) does not include estimated losses on credit derivatives. The difference between public finance loss expense and economic benefit in nine months 2022 was primarily attributable to the release of unearned premium reserve associated with extinguished Puerto Rico policies that previously had expected losses.Condensed Consolidated Financial Statements (Unaudited), Continued
The following tables provide information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of June 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross | | Net Total BIG |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
| Number of risks (1) | 107 | | | 16 | | | 109 | | | 232 | | | 232 | |
| Remaining weighted-average period (in years) | 9.2 | | 16.3 | | 7.2 | | 9.6 | | 9.7 |
| | | | | | | | | |
| Outstanding exposure: | | | | | | | | | |
| Par | $ | 2,326 | | | $ | 989 | | | $ | 2,280 | | | $ | 5,595 | | | $ | 5,578 | |
| Interest | 1,191 | | | 923 | | | 872 | | | 2,986 | | | 2,983 | |
| Total (2) | $ | 3,517 | | | $ | 1,912 | | | $ | 3,152 | | | $ | 8,581 | | | $ | 8,561 | |
| | | | | | | | | |
| Expected cash outflows (inflows) | $ | 110 | | | $ | 182 | | | $ | 1,702 | | | $ | 1,994 | | | $ | 1,982 | |
| Potential recoveries (3) | (296) | | | (79) | | | (1,329) | | | (1,704) | | | (1,693) | |
| Subtotal | (186) | | | 103 | | | 373 | | | 290 | | | 289 | |
| Discount | 49 | | | (23) | | | (56) | | | (30) | | | (30) | |
| Expected losses to be paid (recovered) | $ | (137) | | | $ | 80 | | | $ | 317 | | | $ | 260 | | | $ | 259 | |
| | | | | | | | | |
| Deferred premium revenue | $ | 106 | | | $ | 65 | | | $ | 151 | | | $ | 322 | | | $ | 322 | |
| Reserves (salvage) | $ | (163) | | | $ | 39 | | | $ | 202 | | | $ | 78 | | | $ | 77 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of September 30,December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross | | Net Total BIG |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
| Number of risks (1) | 110 | | | 17 | | | 117 | | | 244 | | | 244 | |
| Remaining weighted-average period (in years) | 11.4 | | 8.9 | | 8.0 | | 9.5 | | 9.6 |
| | | | | | | | | |
| Outstanding exposure: | | | | | | | | | |
| Par | $ | 2,471 | | | $ | 187 | | | $ | 3,093 | | | $ | 5,751 | | | $ | 5,727 | |
| Interest | 1,604 | | | 70 | | | 1,184 | | | 2,858 | | | 2,854 | |
| Total (2) | $ | 4,075 | | | $ | 257 | | | $ | 4,277 | | | $ | 8,609 | | | $ | 8,581 | |
| | | | | | | | | |
| Expected cash outflows (inflows) | $ | 77 | | | $ | 126 | | | $ | 3,133 | | | $ | 3,336 | | | $ | 3,324 | |
| Potential recoveries (3) | (374) | | | (81) | | | (2,027) | | | (2,482) | | | (2,470) | |
| Subtotal | (297) | | | 45 | | | 1,106 | | | 854 | | | 854 | |
| Discount | 35 | | | (14) | | | (184) | | | (163) | | | (163) | |
| Expected losses to be paid (recovered) | $ | (262) | | | $ | 31 | | | $ | 922 | | | $ | 691 | | | $ | 691 | |
| | | | | | | | | |
| Deferred premium revenue | $ | 110 | | | $ | 18 | | | $ | 203 | | | $ | 331 | | | $ | 331 | |
| Reserves (salvage) | $ | (294) | | | $ | 22 | | | $ | 763 | | | $ | 491 | | | $ | 491 | |
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2021
| | | | Gross | | Net Total BIG | | Gross | | Net Total BIG |
| | | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| | (dollars in millions) | | (dollars in millions) |
| Number of risks (1) | Number of risks (1) | 117 | | | 16 | | | 129 | | | 262 | | | 262 | | Number of risks (1) | 122 | | | 14 | | | 111 | | | 247 | | | 247 | |
| Remaining weighted-average period (in years) | Remaining weighted-average period (in years) | 7.6 | | 8.9 | | 8.9 | | 8.5 | | 8.5 | Remaining weighted-average period (in years) | 11.3 | | 8.7 | | 7.6 | | 9.8 | | 9.8 |
| | Outstanding exposure: | Outstanding exposure: | | | | Outstanding exposure: | | | |
| Par | Par | $ | 2,437 | | | $ | 177 | | | $ | 4,745 | | | $ | 7,359 | | | $ | 7,293 | | Par | $ | 3,363 | | | $ | 171 | | | $ | 2,318 | | | $ | 5,852 | | | $ | 5,835 | |
| Interest | Interest | 1,000 | | | 36 | | | 1,942 | | | 2,978 | | | 2,962 | | Interest | 2,177 | | | 77 | | | 894 | | | 3,148 | | | 3,144 | |
| Total (2) | Total (2) | $ | 3,437 | | | $ | 213 | | | $ | 6,687 | | | $ | 10,337 | | | $ | 10,255 | | Total (2) | $ | 5,540 | | | $ | 248 | | | $ | 3,212 | | | $ | 9,000 | | | $ | 8,979 | |
| | Expected cash outflows (inflows) | Expected cash outflows (inflows) | $ | 111 | | | $ | 40 | | | $ | 4,820 | | | $ | 4,971 | | | $ | 4,918 | | Expected cash outflows (inflows) | $ | 128 | | | $ | 121 | | | $ | 1,771 | | | $ | 2,020 | | | $ | 2,008 | |
| Potential recoveries (3) | Potential recoveries (3) | (656) | | | (10) | | | (3,829) | | | (4,495) | | | (4,430) | | Potential recoveries (3) | (294) | | | (79) | | | (1,364) | | | (1,737) | | | (1,725) | |
| Subtotal | Subtotal | (545) | | | 30 | | | 991 | | | 476 | | | 488 | | Subtotal | (166) | | | 42 | | | 407 | | | 283 | | | 283 | |
| Discount | Discount | 19 | | | (3) | | | (145) | | | (129) | | | (129) | | Discount | 35 | | | (13) | | | (104) | | | (82) | | | (82) | |
| Expected losses to be paid (recovered) | Expected losses to be paid (recovered) | $ | (526) | | | $ | 27 | | | $ | 846 | | | $ | 347 | | | $ | 359 | | Expected losses to be paid (recovered) | $ | (131) | | | $ | 29 | | | $ | 303 | | | $ | 201 | | | $ | 201 | |
| | Deferred premium revenue | Deferred premium revenue | $ | 85 | | | $ | 2 | | | $ | 350 | | | $ | 437 | | | $ | 435 | | Deferred premium revenue | $ | 170 | | | $ | 15 | | | $ | 160 | | | $ | 345 | | | $ | 345 | |
| Reserves (salvage) | Reserves (salvage) | $ | (549) | | | $ | 25 | | | $ | 584 | | | $ | 60 | | | $ | 74 | | Reserves (salvage) | $ | (174) | | | $ | 21 | | | $ | 186 | | | $ | 33 | | | $ | 33 | |
____________________
(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.
(2)Includes amounts related to FG VIEs.
(3)Represents expected inflows from future payments by obligors pursuant to restructuring agreements, settlements, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 contracts accounted for as insurance and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that relate to contracts 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, including CDS, 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 CDS may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. In certain credit derivative transactions, the Company also specifically agreed to pay if the obligor were to become bankrupt or if the reference obligation were restructured. Furthermore, in certain credit derivative transactions, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a credit derivative contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.
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 12.912.6 years and 13.212.8 years as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Credit Derivatives (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of September 30, 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 | | $ | 1,191 | | | $ | (99) | | | $ | 1,705 | | | $ | (72) | |
| Non-U.S. public finance | | 1,467 | | | (67) | | | 1,800 | | | (48) | |
| U.S. structured finance | | 347 | | | (25) | | | 400 | | | (32) | |
| Non-U.S. structured finance | | 112 | | | (3) | | | 135 | | | (2) | |
| Total | | $ | 3,117 | | | $ | (194) | | | $ | 4,040 | | | $ | (154) | |
____________________
(1) Expected loss to be paid was $4 million and $5 million as of September 30, 2022 and December 31, 2021, respectively.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Credit Derivatives (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2023 | | As of December 31, 2022 |
| Sector | | Net Par
Outstanding | | Net Fair Value Asset (Liability) | | Net Par
Outstanding | | Net Fair Value Asset (Liability) |
| | | (in millions) |
| U.S. public finance | | $ | 1,131 | | | $ | (17) | | | $ | 1,175 | | | $ | (79) | |
| Non-U.S. public finance | | 1,611 | | | (22) | | | 1,565 | | | (58) | |
| U.S. structured finance | | 336 | | | (16) | | | 342 | | | (22) | |
| Non-U.S. structured finance | | 127 | | | (2) | | | 121 | | | (3) | |
| Total | | $ | 3,205 | | | $ | (57) | | | $ | 3,203 | | | $ | (162) | |
____________________
(1) Expected loss to be paid was $3 million as of both June 30, 2023 and December 31, 2022.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
| | | | | As of September 30, 2022 | | As of December 31, 2021 | | | As of June 30, 2023 | | As of December 31, 2022 |
| Rating Category | Rating Category | | Net Par
Outstanding | | % of Total | | Net Par
Outstanding | | % of Total | Rating Category | | Net Par
Outstanding | | % of Total | | Net Par
Outstanding | | % of Total |
| | | | (dollars in millions) | | | (dollars in millions) |
| AAA | AAA | | $ | 1,166 | | | 37.4 | % | | $ | 1,503 | | | 37.2 | % | AAA | | $ | 1,307 | | | 40.8 | % | | $ | 1,260 | | | 39.3 | % |
| AA | AA | | 1,078 | | | 34.5 | | | 1,283 | | | 31.8 | | AA | | 1,048 | | | 32.7 | | | 1,064 | | | 33.2 | |
| A | A | | 245 | | | 7.9 | | | 514 | | | 12.7 | | A | | 228 | | | 7.1 | | | 232 | | | 7.2 | |
| BBB | BBB | | 570 | | | 18.3 | | | 677 | | | 16.7 | | BBB | | 566 | | | 17.7 | | | 590 | | | 18.5 | |
BIG | BIG | | 58 | | | 1.9 | | | 63 | | | 1.6 | | BIG | | 56 | | | 1.7 | | | 57 | | | 1.8 | |
| Credit derivative net par outstanding | Credit derivative net par outstanding | | $ | 3,117 | | | 100.0 | % | | $ | 4,040 | | | 100.0 | % | Credit derivative net par outstanding | | $ | 3,205 | | | 100.0 | % | | $ | 3,203 | | | 100.0 | % |
Fair Value Gains (Losses) on Credit Derivatives
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions) |
| Realized gains (losses) and other settlements | $ | (1) | | | $ | 1 | | | $ | (2) | | | $ | 4 | |
| Net unrealized gains (losses) | (47) | | | 20 | | | (40) | | | (35) | |
| Fair value gains (losses) on credit derivatives | $ | (48) | | | $ | 21 | | | $ | (42) | | | $ | (31) | |
During third quarter 2022, unrealized losses were generated primarily as a result of the wider asset spreads and decreased cost to buy protection on AGC, as the market cost of AGC’s credit protection decreased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company (or another comparable entity) would expect to receive on these transactions increased.
During third quarter 2021, unrealized gains were generated primarily as a result of the termination of several CDS policies, primarily trust preferred securities transactions.
During nine months 2022, unrealized losses were generated primarily as a result of the wider asset spreads, partially offset by the increased cost to buy protection on AGC, changes in discount rates, decreases in exposures and payment of amounts related to certain structured finance exposures.
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Realized gains (losses) and other settlements | $ | — | | | $ | — | | | $ | 1 | | | $ | (1) | |
| Net unrealized gains (losses) | 91 | | | 9 | | | 105 | | | 7 | |
| Fair value gains (losses) on credit derivatives | $ | 91 | | | $ | 9 | | | $ | 106 | | | $ | 6 | |
During nine months 2021, unrealized 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. These losses were partially offset by the price improvement of the underlying collateral and the termination of certain CDS policies.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date.
CDS Spread on AGC (in basis points)
| | | | As of September 30, 2022 | | As of December 31, 2021 | | As of September 30, 2021 | | As of December 31, 2020 | | As of June 30,
2023 | | As of December 31, 2022 | | As of June 30,
2022 | | As of December 31, 2021 |
| Five-year CDS spread | Five-year CDS spread | 70 | | 49 | | 61 | | 132 | Five-year CDS spread | 99 | | 63 | | 103 | | 49 |
| One-year CDS spread | One-year CDS spread | 28 | | 16 | | 20 | | 36 | One-year CDS spread | 39 | | 26 | | 41 | | 16 |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Fair Value of Credit Derivative Assets (Liabilities)
and Effect of AGC Credit Spread
| | | As of | | As of |
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) | | (in millions) |
| Fair value of credit derivatives before effect of AGC credit spread | Fair value of credit derivatives before effect of AGC credit spread | $ | (239) | | | $ | (225) | | Fair value of credit derivatives before effect of AGC credit spread | $ | (93) | | | $ | (207) | |
| Plus: Effect of AGC credit spread | Plus: Effect of AGC credit spread | 45 | | | 71 | | Plus: Effect of AGC credit spread | 36 | | | 45 | |
| Net fair value of credit derivatives | Net fair value of credit derivatives | $ | (194) | | | $ | (154) | | Net fair value of credit derivatives | $ | (57) | | | $ | (162) | |
The fair value of CDS contracts as of SeptemberJune 30, 2022,2023, 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
The majority of the investment portfolio comprises investment grade fixed-maturity securities managed by three outside managers. The Company has established investment guidelines for these investment managers regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.
The remainder of the investment portfolio primarily consists of (i) Loss Mitigation Securities; (ii) New Recovery Bonds and CVIs received in connection with the consummation of the 2022 Puerto Rico Resolutions; (iii) other investments including certain fixed-maturity and short-term securities, and (iv) 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.
Investment Portfolio
The investment portfolio consists of both externally and internally managed portfolios. The majority of the investment portfolio is managed by three outside managers and AssuredIM. The Company has established investment guidelines for its investment managers regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.
The internally managed portfolio primarily consists of the Company’s investments in: (i) loss mitigation securities; (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM; (iii) new recovery bonds and CVIs received in connection with the consummation of the March Puerto Rico Resolutions and the HTA PSA 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 $92 million as of September 30, 2022 related to certain of the Company’s alternative investments other than AssuredIM Funds.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Investment Portfolio
Carrying Value
| | | As of | | As of |
| | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) | | (in millions) |
| Fixed-maturity securities, available-for-sale (1): | Fixed-maturity securities, available-for-sale (1): | | Fixed-maturity securities, available-for-sale (1): | |
Externally managed | Externally managed | $ | 5,456 | | | $ | 6,843 | | Externally managed | $ | 5,551 | | | $ | 5,824 | |
| Loss mitigation securities and other | 744 | | | 818 | | |
| AssuredIM managed | 516 | | | 541 | | |
| Fixed-maturity securities - Puerto Rico (2) | 64 | | | — | | |
| Fixed-maturity securities - Puerto Rico, trading (3) | 393 | | | — | | |
| Loss Mitigation Securities | | Loss Mitigation Securities | 509 | | | 548 | |
| Puerto Rico, New Recovery Bonds (3) | | Puerto Rico, New Recovery Bonds (3) | 36 | | | 358 | |
| Other (4) | | Other (4) | 392 | | | 389 | |
| Fixed-maturity securities, trading - Puerto Rico, CVIs (3) | | Fixed-maturity securities, trading - Puerto Rico, CVIs (3) | 340 | | | 303 | |
Short-term investments (4)(5) | Short-term investments (4)(5) | 1,177 | | | 1,225 | | Short-term investments (4)(5) | 1,650 | | | 810 | |
| Other invested assets: | Other invested assets: | | Other invested assets: | |
Equity method investments | Equity method investments | 120 | | | 169 | | Equity method investments | 130 | | | 123 | |
| Other | Other | 10 | | | 12 | | Other | 16 | | | 10 | |
| Total | Total | $ | 8,480 | | | $ | 9,608 | | Total | $ | 8,624 | | | $ | 8,365 | |
____________________
(1) 8.3%7.5% and 7.5%7.4% of fixed-maturity securities were rated BIG as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, consisting primarily of loss mitigation securities. 1.8%Loss Mitigation Securities. 1.7% and 0.9%5.9% were not rated, as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
(2) Represents new recovery bonds received in connection with the consummationAs of the March Puerto Rico Resolutions. These securities are not rated.June 30, 2023 and December 31, 2022 amounts include $292 million and $305 million, respectively, of CLOs that had been managed by AssuredIM under an investment management agreement until June 20, 2023.
(3) Represents CVIs received in connection with the consummation of the March Puerto Rico Resolutions and the HTA PSA. These securities are not rated.
(4) As of June 30, 2023 and December 31, 2022 amounts include $221 million and $232 million, respectively, of municipal bonds that had been managed by AssuredIM under an investment management agreement until June 20, 2023.
(5) Weighted average credit rating of AAA as of both SeptemberJune 30, 20222023 and December 31, 2021,2022, based on the lower of the Moody’s Investors Service, Inc. (Moody’s) and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications.
(6) Excludes investments in AssuredIM Funds which are consolidated and accounted for as CIVs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval, which includes $510 million of investment capital (at fair value), and $991 million in unfunded commitments. See Note 1, Business and Basis of Presentation for a description of the Sound Point Transaction.
Of the $1.5 billion to be invested, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million in AssuredIM Funds. Adding inception-to-dateplus previously distributed gains the U.S. Insurance Subsidiaries may investof $114 million for a total of up to $810$864 million in AssuredIM Funds through AGAS.as of June 30, 2023. As of September 30, 2022, the U.S. Insurance Subsidiaries had totalJuly 1, 2023, AGAS commitments to funds previously managed by AssuredIM Funds of $755were $553 million of(of which $536 million represented net invested capital and $219$333 million was undrawn.funded with a net asset value (NAV) of $350 million). This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance and healthcare structured capital and municipal bonds.are managed by Sound Point or by AHP. As of SeptemberJune 30, 2022 and December 31, 2021,2023, all of the fair value of AGAS’ interest in AssuredIM Funds was $574 million and $543 million, respectively.
AssuredIM Funds,funds in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary,invests 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 presentedaccounted for as either redeemable or non-redeemable non-controlling interests.CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Accrued investment income, which is reported in “other assets,” was $72$73 million as of SeptemberJune 30, 20222023 and $69$71 million as of December 31, 2021.2022. In ninesix months 20222023 and ninesix months 2021,2022, 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 SeptemberJune 30, 20222023
| | Security Type | 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) | Security Type | | Percent
of
Total (1) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Weighted Average Credit Rating (2) |
| | | | (dollars in millions) | | | (dollars in millions) |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | | 43 | % | | $ | 3,264 | | | $ | (13) | | | $ | 23 | | | $ | (173) | | | $ | 3,101 | | | $ | (3) | | | AA- | Obligations of state and political subdivisions | | 42 | % | | $ | 2,973 | | | $ | (14) | | | $ | 27 | | | $ | (110) | | | $ | 2,876 | | | AA- |
| U.S. government and agencies | U.S. government and agencies | | 2 | | | 122 | | | — | | | 2 | | | (9) | | | 115 | | | — | | | AA+ | U.S. government and agencies | | 1 | | | 69 | | | — | | | 1 | | | (6) | | | 64 | | | AA+ |
| Corporate securities (3) | Corporate securities (3) | | 32 | | | 2,405 | | | (4) | | | — | | | (401) | | | 2,000 | | | (80) | | | A | Corporate securities (3) | | 33 | | | 2,330 | | | (6) | | | 3 | | | (261) | | | 2,066 | | | A |
| Mortgage-backed securities (4): | Mortgage-backed securities (4): | | | | | | Mortgage-backed securities (4): | | | |
| RMBS | RMBS | | 6 | | | 432 | | | (19) | | | 3 | | | (55) | | | 361 | | | (44) | | | BBB | RMBS | | 6 | | | 440 | | | (20) | | | 3 | | | (71) | | | 352 | | | BBB+ |
| Commercial mortgage-backed securities (CMBS) | Commercial mortgage-backed securities (CMBS) | | 4 | | | 291 | | | — | | | — | | | (11) | | | 280 | | | — | | | AAA | Commercial mortgage-backed securities (CMBS) | | 3 | | | 214 | | | — | | | — | | | (10) | | | 204 | | | AAA |
| Asset-backed securities: | Asset-backed securities: | | Asset-backed securities: | |
| CLOs | CLOs | | 6 | | | 445 | | | — | | | — | | | (31) | | | 414 | | | — | | | A+ | CLOs | | 7 | | | 468 | | | — | | | — | | | (14) | | | 454 | | | A+ |
| Other | Other | | 6 | | | 425 | | | (21) | | | 20 | | | (4) | | | 420 | | | (2) | | | CCC+ | Other | | 6 | | | 432 | | | (39) | | | 17 | | | (36) | | | 374 | | | CCC+ |
| Non-U.S. government securities | Non-U.S. government securities | | 1 | | | 122 | | | — | | | — | | | (33) | | | 89 | | | — | | | AA- | Non-U.S. government securities | | 2 | | | 118 | | | — | | | — | | | (20) | | | 98 | | | AA- |
| Total available-for-sale fixed-maturity securities | Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 7,506 | | | $ | (57) | | | $ | 48 | | | $ | (717) | | | $ | 6,780 | | | $ | (129) | | | A | Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 7,044 | | | $ | (79) | | | $ | 51 | | | $ | (528) | | | $ | 6,488 | | | 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, 20212022
| | Security Type | 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) | Security Type | | Percent
of
Total (1) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Weighted Average Credit Rating (2) |
| | | | (dollars in millions) | | | (dollars in millions) |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | | 43 | % | | $ | 3,386 | | | $ | (12) | | | $ | 290 | | | $ | (4) | | | $ | 3,660 | | | $ | — | | | AA- | Obligations of state and political subdivisions | | 45 | % | | $ | 3,509 | | | $ | (14) | | | $ | 37 | | | $ | (138) | | | $ | 3,394 | | | A |
| U.S. government and agencies | U.S. government and agencies | | 2 | | | 123 | | | — | | | 7 | | | (2) | | | 128 | | | — | | | AA+ | U.S. government and agencies | | 2 | | | 118 | | | — | | | 1 | | | (8) | | | 111 | | | AA+ |
| Corporate securities (3) | Corporate securities (3) | | 32 | | | 2,516 | | | (1) | | | 111 | | | (21) | | | 2,605 | | | (4) | | | A | Corporate securities (3) | | 31 | | | 2,387 | | | (6) | | | 2 | | | (299) | | | 2,084 | | | A |
| Mortgage-backed securities (4): | Mortgage-backed securities (4): | | | | | | | | | | | | | Mortgage-backed securities (4): | | | | | | | | | | |
| RMBS | RMBS | | 6 | | | 454 | | | (17) | | | 24 | | | (24) | | | 437 | | | (24) | | | BBB+ | RMBS | | 5 | | | 418 | | | (19) | | | 3 | | | (62) | | | 340 | | | BBB |
| CMBS | CMBS | | 4 | | | 332 | | | — | | | 14 | | | — | | | 346 | | | — | | | AAA | CMBS | | 4 | | | 282 | | | — | | | — | | | (11) | | | 271 | | | AAA |
| Asset-backed securities: | Asset-backed securities: | | Asset-backed securities: | |
| CLOs | CLOs | | 6 | | | 457 | | | — | | | 1 | | | — | | | 458 | | | — | | | AA- | CLOs | | 6 | | | 449 | | | — | | | — | | | (21) | | | 428 | | | A+ |
| Other | Other | | 5 | | | 420 | | | (12) | | | 26 | | | (2) | | | 432 | | | (2) | | | CCC+ | Other | | 5 | | | 423 | | | (26) | | | 22 | | | (26) | | | 393 | | | CCC+ |
| Non-U.S. government securities | Non-U.S. government securities | | 2 | | | 134 | | | — | | | 5 | | | (3) | | | 136 | | | — | | | AA- | Non-U.S. government securities | | 2 | | | 121 | | | — | | | — | | | (23) | | | 98 | | | AA- |
| Total available-for-sale fixed-maturity securities | Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 7,822 | | | $ | (42) | | | $ | 478 | | | $ | (56) | | | $ | 8,202 | | | $ | (30) | | | A+ | Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 7,707 | | | $ | (65) | | | $ | 65 | | | $ | (588) | | | $ | 7,119 | | | A |
____________________
(1)Based on amortized cost.
(2)Ratings represent the lower of the Moody’s and S&P classifications, except for loss mitigationLoss Mitigation Securities and certain other securities, which use internal ratings classifications. The Company’s portfolio primarily consists of high-quality, liquid instruments. New recovery bondsRecovery Bonds received in connection with the consummation of the March2022 Puerto Rico Resolutions are not rated.
(3)Includes securities issued by taxable universities and hospitals.
(4)U.S. government-agency obligations were approximately 29%38% and 31%30% of mortgage-backed securities as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, 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 SeptemberJune 30, 20222023
| | | | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
| | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss |
| | | (dollars in millions) | | (dollars in millions) |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | $ | 2,450 | | | $ | (155) | | | $ | 39 | | | $ | (15) | | | $ | 2,489 | | | $ | (170) | | Obligations of state and political subdivisions | $ | 1,357 | | | $ | (18) | | | $ | 622 | | | $ | (89) | | | $ | 1,979 | | | $ | (107) | |
| U.S. government and agencies | U.S. government and agencies | 32 | | | — | | | 52 | | | (9) | | | 84 | | | (9) | | U.S. government and agencies | 9 | | | — | | | 32 | | | (6) | | | 41 | | | (6) | |
| Corporate securities | Corporate securities | 1,501 | | | (216) | | | 271 | | | (105) | | | 1,772 | | | (321) | | Corporate securities | 473 | | | (13) | | | 1,253 | | | (202) | | | 1,726 | | | (215) | |
| Mortgage-backed securities: | Mortgage-backed securities: | | | | Mortgage-backed securities: | | | |
| RMBS | RMBS | 160 | | | (11) | | | 1 | | | — | | | 161 | | | (11) | | RMBS | 127 | | | (6) | | | 56 | | | (5) | | | 183 | | | (11) | |
| CMBS | CMBS | 277 | | | (11) | | | — | | | — | | | 277 | | | (11) | | CMBS | 21 | | | (1) | | | 183 | | | (9) | | | 204 | | | (10) | |
| Asset-backed securities: | Asset-backed securities: | | Asset-backed securities: | |
| CLOs | CLOs | 272 | | | (18) | | | 141 | | | (13) | | | 413 | | | (31) | | CLOs | 1 | | | — | | | 415 | | | (14) | | | 416 | | | (14) | |
| Other | Other | 27 | | | (2) | | | — | | | — | | | 27 | | | (2) | | Other | 10 | | | — | | | 18 | | | (2) | | | 28 | | | (2) | |
| Non-U.S. government securities | Non-U.S. government securities | 70 | | | (22) | | | 19 | | | (11) | | | 89 | | | (33) | | Non-U.S. government securities | — | | | — | | | 94 | | | (20) | | | 94 | | | (20) | |
| Total | Total | $ | 4,789 | | | $ | (435) | | | $ | 523 | | | $ | (153) | | | $ | 5,312 | | | $ | (588) | | Total | $ | 1,998 | | | $ | (38) | | | $ | 2,673 | | | $ | (347) | | | $ | 4,671 | | | $ | (385) | |
| Number of securities (1) | Number of securities (1) | | | 1,799 | | | | | 288 | | | | | 2,060 | | Number of securities (1) | | | 778 | | | | | 1,079 | | | | | 1,830 | |
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 December 31, 20212022
| | | | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
| | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss |
| | | (dollars in millions) | | (dollars in millions) |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | $ | 117 | | | $ | (3) | | | $ | 10 | | | $ | (1) | | | $ | 127 | | | $ | (4) | | Obligations of state and political subdivisions | $ | 1,763 | | | $ | (79) | | | $ | 163 | | | $ | (56) | | | $ | 1,926 | | | $ | (135) | |
| U.S. government and agencies | U.S. government and agencies | 26 | | | — | | | 32 | | | (2) | | | 58 | | | (2) | | U.S. government and agencies | 32 | | | — | | | 52 | | | (8) | | | 84 | | | (8) | |
| Corporate securities | Corporate securities | 407 | | | (12) | | | 70 | | | (5) | | | 477 | | | (17) | | Corporate securities | 1,276 | | | (95) | | | 519 | | | (147) | | | 1,795 | | | (242) | |
| Mortgage-backed securities: | Mortgage-backed securities: | | | | | | | | | Mortgage-backed securities: | | | | | | | | |
| RMBS | RMBS | 4 | | | — | | | — | | | — | | | 4 | | | — | | RMBS | 147 | | | (9) | | | 3 | | | (1) | | | 150 | | | (10) | |
| CMBS | | CMBS | 270 | | | (11) | | | — | | | — | | | 270 | | | (11) | |
| Asset-backed securities: | Asset-backed securities: | | Asset-backed securities: | |
| CLOs | CLOs | 226 | | | — | | | — | | | — | | | 226 | | | — | | CLOs | 171 | | | (7) | | | 250 | | | (14) | | | 421 | | | (21) | |
| Other | | Other | 27 | | | (2) | | | — | | | — | | | 27 | | | (2) | |
| Non-U.S. government securities | Non-U.S. government securities | 24 | | | (2) | | | 8 | | | (1) | | | 32 | | | (3) | | Non-U.S. government securities | 65 | | | (10) | | | 30 | | | (13) | | | 95 | | | (23) | |
| Total | Total | $ | 804 | | | $ | (17) | | | $ | 120 | | | $ | (9) | | | $ | 924 | | | $ | (26) | | Total | $ | 3,751 | | | $ | (213) | | | $ | 1,017 | | | $ | (239) | | | $ | 4,768 | | | $ | (452) | |
| Number of securities (1) | Number of securities (1) | | | 355 | | | | | 60 | | | | | 410 | | Number of securities (1) | | | 1,340 | | | | | 466 | | | | | 1,776 | |
___________________
(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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 SeptemberJune 30, 20222023 and December 31, 20212022 were not related to higher interest rates rather than credit quality, and in the casequality. As of nine months 2022, primarily attributable to rising interest rates. In addition, as of SeptemberJune 30, 2022,2023, 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 SeptemberJune 30, 2022,2023, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 687508 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2021, 232022, 567 securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $450$269 million as of SeptemberJune 30, 20222023 and $6$329 million as of December 31, 2021.2022.
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of SeptemberJune 30, 20222023 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 SeptemberJune 30, 20222023
| | | | Amortized
Cost | | Estimated
Fair Value | | Amortized
Cost | | Estimated
Fair Value |
| | | (in millions) | | (in millions) |
| Due within one year | Due within one year | $ | 242 | | | $ | 234 | | Due within one year | $ | 286 | | | $ | 280 | |
| Due after one year through five years | Due after one year through five years | 1,775 | | | 1,575 | | Due after one year through five years | 1,537 | | | 1,430 | |
| Due after five years through 10 years | Due after five years through 10 years | 1,651 | | | 1,503 | | Due after five years through 10 years | 1,696 | | | 1,597 | |
| Due after 10 years | Due after 10 years | 3,115 | | | 2,827 | | Due after 10 years | 2,871 | | | 2,625 | |
| Mortgage-backed securities: | Mortgage-backed securities: | | | | Mortgage-backed securities: | | | |
| RMBS | RMBS | 432 | | | 361 | | RMBS | 440 | | | 352 | |
| CMBS | CMBS | 291 | | | 280 | | CMBS | 214 | | | 204 | |
| Total | Total | $ | 7,506 | | | $ | 6,780 | | Total | $ | 7,044 | | | $ | 6,488 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 $211$230 million as of SeptemberJune 30, 20222023 and $243$222 million as of December 31, 2021.2022. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or are otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amounts of $1,174$1,149 million and $1,231$1,169 million based on fair value as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Income from Investment PortfolioInvestments
Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments, and the size of such portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.
Puerto Rico CVIs in the investment portfolio are classified as trading with changes in fair value reported in the condensed consolidated statements of operations.securities. Equity in earnings (losses) of investees represents the Company’s interest in the earnings of its equity method investments.
Income from Investments
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
| Investment income: | | | | | | | |
| Fixed-maturity securities, available-for-sale: | | | | | | | |
| Externally managed (1) | $ | 53 | | | $ | 50 | | | $ | 105 | | | $ | 100 | |
| Loss Mitigation Securities | 12 | | | 6 | | | 22 | | | 15 | |
| Puerto Rico, New Recovery Bonds | 1 | | | 3 | | | 4 | | | 4 | |
| Other (2) | 4 | | | 4 | | | 7 | | | 7 | |
| Short-term investments | 18 | | | 1 | | | 32 | | | 1 | |
| Other invested assets | 2 | | | — | | | 2 | | | — | |
| Investment income | 90 | | | 64 | | | 172 | | | 127 | |
| Investment expenses | (1) | | | (2) | | | (2) | | | (3) | |
| Net investment income | $ | 89 | | | $ | 62 | | | $ | 170 | | | $ | 124 | |
| | | | | | | |
| Fair value gains (losses) on trading securities (3) | $ | 40 | | | $ | (18) | | | $ | 38 | | | $ | (22) | |
| Equity in earnings (losses) of investees (4) | $ | 5 | | | $ | — | | | $ | 7 | | | $ | (11) | |
____________________
(1) Amounts for 2022 include income on the portion of the CLO portfolio that was previously managed by AssuredIM.
(2) Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM.
(3) Fair value gains on trading securities pertaining to securities still held as of June 30, 2023 were $40 million for second quarter 2023 and $38 million for six months 2023, respectively. Fair value losses on trading securities pertaining to securities still held as of June 30, 2022 were $12 million for second quarter 2022 and $16 million for six months 2022, respectively.
(4) Fair value gains (losses) on investments where the fair value option (FVO) was elected utilizing the NAV as a practical expedient were $1 million in second quarter 2023, $2 million in six months 2023, and $3 million in six months 2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Income from Investment Portfolio
| | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) |
| Investment income: | | | | | | | |
| Externally managed | $ | 46 | | | $ | 52 | | | $ | 141 | | | $ | 155 | |
| Loss mitigation securities and other | 16 | | | 11 | | | 39 | | | 41 | |
| Managed by AssuredIM (1) | 6 | | | 4 | | | 15 | | | 12 | |
| Investment income | 68 | | | 67 | | | 195 | | | 208 | |
| Investment expenses | (1) | | | (1) | | | (4) | | | (4) | |
| Net investment income | $ | 67 | | | $ | 66 | | | $ | 191 | | | $ | 204 | |
| | | | | | | |
| Fair value gains (losses) on trading securities (2) | $ | (8) | | | $ | — | | | $ | (30) | | | $ | — | |
| Equity in earnings (losses) of investees (3) | $ | (20) | | | $ | 23 | | | $ | (31) | | | $ | 66 | |
____________________
(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.
(2) Fair value losses on trading securities pertaining to securities still held as of September 30, 2022 were $2 million for third quarter 2022 and $18 million for nine months 2022.
(3) Fair value gains (losses) on investments where the fair value option (FVO) was elected utilizing the net asset value (NAV) as a practical expedient were $13 million in third quarter 2021, $(3) million in nine months 2022, and $39 million in nine months 2021.
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)
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Gross realized gains on sales available-for-sale securities | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | |
| Gross realized losses on sales available-for-sale securities (1) | (10) | | | — | | | (33) | | | (2) | | |
| Gross realized gains on sales of available-for-sale securities (1) | | Gross realized gains on sales of available-for-sale securities (1) | $ | 7 | | | $ | — | | | $ | 19 | | | $ | — | |
| Gross realized losses on sales of available-for-sale securities (1) | | Gross realized losses on sales of available-for-sale securities (1) | (6) | | | (21) | | | (15) | | | (23) | |
| Net foreign currency gains (losses) | Net foreign currency gains (losses) | — | | | (2) | | | (3) | | | — | | Net foreign currency gains (losses) | — | | | (3) | | | — | | | (3) | |
| Change in credit impairment and intent to sell | (4) | | | 5 | | | (13) | | | 1 | | |
| Change in allowance for credit losses and intent to sell | | Change in allowance for credit losses and intent to sell | (10) | | | (4) | | | (15) | | | (9) | |
Other net realized gains (losses) (2) | Other net realized gains (losses) (2) | — | | | — | | | 10 | | | 3 | | Other net realized gains (losses) (2) | — | | | — | | | — | | | 10 | |
| Net realized investment gains (losses) | Net realized investment gains (losses) | $ | (14) | | | $ | 3 | | | $ | (39) | | | $ | 4 | | Net realized investment gains (losses) | $ | (9) | | | $ | (28) | | | $ | (11) | | | $ | (25) | |
____________________
(1) Third quarter 2022Gross realized gains and nine months 2022losses on sales in all periods related primarily to sales of bondsNew Recovery Bonds received as part of the March2022 Puerto Rico Resolutions.
(2) Net realized gains in nine months 2022 related primarily to the sale of one of the Company’s alternative investments.
The proceeds from sales of fixed-maturity securities classified as available-for-sale were $207$239 million in thirdsecond quarter 2023, $296 million in second quarter 2022, $560$694 million in ninesix months 20222023 and $222$353 million in ninesix months 2021. There were no sales of fixed-maturity securities classified as available-for-sale in third quarter 2021.2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table presents the roll forward of allowance for 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.securities.
Roll Forward of Allowance for
Credit Losses for Available-for-Sale Fixed-Maturity Securities
| | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions) |
| Balance, beginning of period | $ | 51 | | | $ | 39 | | | $ | 42 | | | $ | 78 | |
| Additions on securities for which credit impairments were not previously recognized | 1 | | | — | | | 4 | | | 1 | |
| Additions from purchases of securities accounted for as purchased financial assets with credit deterioration | 2 | | | — | | | 2 | | | — | |
| Additions (reductions) on securities for which credit impairments were previously recognized | 3 | | | (4) | | | 9 | | | (2) | |
| Reductions for securities sold and other settlements (1) | — | | | — | | | — | | | (42) | |
| Balance, end of period | $ | 57 | | | $ | 35 | | | $ | 57 | | | $ | 35 | |
(1) Primarily attributable to the sale of a security with a $42 million credit allowance in nine months 2021. | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Balance, beginning of period | $ | 69 | | | $ | 47 | | | $ | 65 | | | $ | 42 | |
| Additions for securities for which credit losses were not previously recognized | — | | | — | | | — | | | 4 | |
| | | | | | | |
| Additions (reductions) for securities for which credit losses were previously recognized | 10 | | | 4 | | | 14 | | | 5 | |
| | | | | | | |
| Balance, end of period | $ | 79 | | | $ | 51 | | | $ | 79 | | | $ | 51 | |
The Company recorded credit loss expenses of $4 million and $13 million in third quarter 2022 and nine months 2022, respectively. The Company recorded a benefit in credit loss of $4 million and $1 million in third quarter 2021 and nine months 2021, respectively. During third quarter 2022, the Company purchased a loss mitigation security with a fair value of $22 million that was accounted for as a purchased security with credit deterioration. At acquisition, this security had an unpaid principal on remaining collateral of $31 million, an allowance for credit losses of $2 million, and a non-credit related discount of $7 million. The Company did not purchase any securities with credit deterioration induring the first half of 2022 or nine months 2021.periods presented. Most of the Company’s securities with credit deterioration are loss mitigation securities.Loss Mitigation Securities.
8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
FG VIEs
Structured Finance and Other FG VIEs
The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.
The insurance subsidiaries are not primarily liable for the debt obligations issued by the structured finance and other FG VIEs (which excludes the Puerto Rico Trusts described below) they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the structured finance and other FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on structured finance and other FG VIEs’ liabilities.
As part of the terms of its financial guaranty contracts, the insurance subsidiaries under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed to no longer have those protective rights, the VIE is deconsolidated.
The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the 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 FVO 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 VIEsVIEs’ 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 VIEVIEs’ liabilities, which is reported in other comprehensive income (OCI). As of Septemberboth June 30, 20222023 and December 31, 2021,2022, the Company consolidated 24 and 25 structured finance and other FG VIEs, respectively. During nine months 2022, one FG VIE was consolidated and two FG VIEs were deconsolidated. During nine months 2021, one FG VIE was deconsolidated. There were no other consolidations or deconsolidations for the periods presented.VIEs.
Puerto Rico Trusts
As of SeptemberJune 30, 2023 and December 31, 2022, the Company consolidated six45 custodial trusts established as part of the GO/PBA Plan (Puerto2022 Puerto Rico Trusts)Resolutions discussed in Note 3, Outstanding Exposure, ExposuresExposure to Puerto Rico. With respect to certain insured securities covered by the GO/PBA Plan,2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, new recovery bonds andNew Recovery Bonds and/or CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan.2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as they are paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts.
The assets within the Puerto Rico Trusts are classified as follows: new recovery bonds as available-for-sale securities ($21 million fair value, $24 million amortized cost as of September 30, 2022) and CVIs as trading securities ($6 million fair value as of September 30, 2022, $1 million fair value losses on trading securities for nine months 2022). The new recovery bonds and CVIs have maturity dates ranging fromOn July 28, 2023, to 2046. For the measurement of liabilities of the Puerto Rico Trusts, the Company electeddirected the FVOtrustee to notify certain holders of custody receipts representing interests in orderlegacy insured GO, PBA and HTA bonds of its intent to simplify the accounting for these instruments.
Investment incomesatisfy on the new recovery bonds, 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, except for the change in fair value attributable to change in ISCR on the Puerto Rico Trusts’ liabilities, which is reported in OCI. Unrealized gains and losses on the new recovery bonds are reported in OCI. During nine months 2022, the consolidation of the nine Puerto Rico Trusts resulted in a $4 million loss on consolidation and the deconsolidation of three Puerto Rico Trusts resulted in a $1 million loss, which were also reported in “fair value gains (losses) on FG VIEs.”August
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
31, 2023 its obligations under the legacy insured bonds with respect to $108 million net par outstanding as of July 28, 2023 and, following payment of such obligations, AGC and AGM will receive the New Recovery Bonds and/or CVIs with notional amounts and maturity values totaling $94 million as of July 28, 2023 held as collateral with respect to the custodial trusts. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given its power to collapse these trusts.
Puerto Rico Trusts
Carrying Value
| | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| New Recovery Bonds, available-for-sale | $ | 218 | | | $ | 204 | |
| CVIs, trading | 5 | | | 5 | |
New Recovery Bonds
Reported in FG VIEs’ Assets
Available-for-Sale
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| | | (dollars in millions) |
| As of June 30, 2023 | | $ | 205 | | | $ | 15 | | | $ | (2) | | | $ | 218 | |
| As of December 31, 2022 | | 204 | | | 4 | | | (4) | | | 204 | |
As of June 30, 2023, 11 securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $2 million and had a fair value of $21 million. All of these securities were in a continuous unrealized loss position for more than 12 months. As of December 31, 2022, 14 securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $4 million and had a fair value of $110 million. All of these securities were in a continuous unrealized loss position for less than 12 months. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss.
The Company has determined that the unrealized losses recorded as of June 30, 2023 and December 31, 2022 were primarily attributable to the change in interest rates, rather than credit quality. As of June 30, 2023 and December 31, 2022, the Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of June 30, 2023 and December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, three and eight securities, respectively, had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $1 million and $3 million as of June 30, 2023 and December 31, 2022, respectively.
The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of June 30, 2023 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.
New Recovery Bonds in FG VIEs’ Assets
Available-for-Sale
Distribution by Contractual Maturity
As of June 30, 2023
| | | | | | | | | | | |
| | Amortized
Cost | | Estimated
Fair Value |
| | (in millions) |
| Due within one year | $ | 1 | | | $ | 1 | |
| Due after one year through five years | 6 | | | 6 | |
| Due after five years through 10 years | 42 | | | 44 | |
| Due after 10 years | 156 | | | 167 | |
| Total | $ | 205 | | | $ | 218 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Components of FG VIEVIEs’ Assets and Liabilities
Net fair value gains and losses on FG VIEs are expected to reverse to zero by the 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.contracts. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered).
The table below shows the carrying value of all of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated balance sheets, segregated by the typestype of assets that collateralize the respective debt obligations for FG VIEs’ liabilities.collateral.
Consolidated FG VIEs by Type of Collateral
| | | As of | | As of |
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) | | (in millions) |
| FG VIEs’ assets: | FG VIEs’ assets: | | FG VIEs’ assets: | |
| U.S. RMBS first lien | U.S. RMBS first lien | $ | 177 | | | $ | 221 | | U.S. RMBS first lien | $ | 154 | | | $ | 167 | |
| U.S. RMBS second lien | U.S. RMBS second lien | 33 | | | 39 | | U.S. RMBS second lien | 27 | | | 30 | |
| Puerto Rico Trusts’ securities | 26 | | | — | | |
| Puerto Rico Trusts’ assets (includes $223 and $209 at fair value) (1) | | Puerto Rico Trusts’ assets (includes $223 and $209 at fair value) (1) | 226 | | | 212 | |
| Other | | Other | 7 | | | 7 | |
| Total FG VIEs’ assets | Total FG VIEs’ assets | $ | 236 | | | $ | 260 | | Total FG VIEs’ assets | $ | 414 | | | $ | 416 | |
| | FG VIEs’ liabilities with recourse: | FG VIEs’ liabilities with recourse: | | FG VIEs’ liabilities with recourse: | | | |
| U.S. RMBS first lien | U.S. RMBS first lien | $ | 182 | | | $ | 227 | | U.S. RMBS first lien | $ | 165 | | | $ | 176 | |
| U.S. RMBS second lien | U.S. RMBS second lien | 25 | | | 42 | | U.S. RMBS second lien | 22 | | | 24 | |
| Puerto Rico Trusts’ liabilities | Puerto Rico Trusts’ liabilities | 31 | | | — | | Puerto Rico Trusts’ liabilities | 493 | | | 495 | |
| Other | | Other | 7 | | | 7 | |
| Total FG VIEs’ liabilities with recourse | Total FG VIEs’ liabilities with recourse | $ | 238 | | | $ | 269 | | Total FG VIEs’ liabilities with recourse | $ | 687 | | | $ | 702 | |
| | FG VIEs’ liabilities without recourse: | FG VIEs’ liabilities without recourse: | | FG VIEs’ liabilities without recourse: | | | |
| U.S. RMBS first lien | U.S. RMBS first lien | $ | 13 | | | $ | 20 | | U.S. RMBS first lien | $ | 12 | | | $ | 13 | |
| Total FG VIEs’ liabilities without recourse | Total FG VIEs’ liabilities without recourse | $ | 13 | | | $ | 20 | | Total FG VIEs’ liabilities without recourse | $ | 12 | | | $ | 13 | |
____________________
(1) Includes $2 million of cash as of December 31, 2022.
The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIEs’ assets at FVO) held as of SeptemberJune 30, 20222023 that was reported in the condensed consolidated statements of operations for thirdsecond quarter 20222023 and ninesix months 20222023 were gainslosses of $15$1 million and $11$2 million, respectively. The change in the ISCR of the FG VIEs’ assets at FVO held as of SeptemberJune 30, 2021 were gains2022 was a gain of $5$1 million and $9a loss of $4 million for thirdsecond quarter 20212022 and ninesix months 2021,2022, respectively. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield.
The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the FVO) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. 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 FVO
| | | As of | | As of |
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) | | (in millions) |
| Excess of unpaid principal over fair value of: | Excess of unpaid principal over fair value of: | | Excess of unpaid principal over fair value of: | |
| FG VIEs’ assets | FG VIEs’ assets | $ | 261 | | | $ | 255 | | FG VIEs’ assets | $ | 266 | | | $ | 265 | |
| FG VIEs’ liabilities with recourse | FG VIEs’ liabilities with recourse | 34 | | | 12 | | FG VIEs’ liabilities with recourse | 23 | | | 21 | |
| FG VIEs’ liabilities without recourse | FG VIEs’ liabilities without recourse | 15 | | | 15 | | FG VIEs’ liabilities without recourse | 16 | | | 15 | |
| Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 38 | | | 52 | | Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 30 | | | 34 | |
Unpaid principal for FG VIEs’ liabilities with recourse (1) | Unpaid principal for FG VIEs’ liabilities with recourse (1) | 272 | | | 281 | | Unpaid principal for FG VIEs’ liabilities with recourse (1) | 710 | | | 723 | |
____________________
(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 20222023 through 2038.
During nine months 2022, the Company recorded an out-of-period adjustment totaling $6.6 million in pre-tax income and $5.2 million in net income attributable to AGL. The out-of-period adjustment related to the correction of the fair value of FG VIE.2041.
CIVs
As of June 30, 2023, CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses infor which the Company iswas the primary beneficiary.beneficiary or has a controlling interest. 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. In light of the Sound Point Transaction and the AHP Transaction, the Company is evaluating whether it will continue to consolidate each of its consolidated investment vehicles (CIVs).
The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. 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 | | | As of |
| CIV Type | CIV Type | | September 30, 2022 | | December 31, 2021 | CIV Type | | June 30, 2023 | | December 31, 2022 |
Funds | Funds | | 8 | | | 8 | | Funds | | 6 | | | 8 | |
CLOs | CLOs | | 10 | | | 9 | | CLOs | | 10 | | | 10 | |
CLO warehouses | CLO warehouses | | 4 | | | 3 | | CLO warehouses | | 2 | | | 4 | |
Total number of consolidated CIVs (1)(4) | Total number of consolidated CIVs (1)(4) | | 22 | | | 20 | | Total number of consolidated CIVs (1)(4) | | 18 | | | 22 | |
____________________
(1) Two funds were deconsolidated in six months 2023. One fund was consolidated in six months 2022.
(2) During six months 2022, the Company deconsolidated a CLO with assets and liabilities of $417 million.
(3) Two CLO warehouses were deconsolidated in six months 2023. One CLO warehouse was consolidated in six months 2022
(4) As of SeptemberJune 30, 2023 and December 31, 2022, one and two, CIVsrespectively, CIV were voting interest entities and as of December 31, 2021 one CIV was a voting interest entity.(VOEs). Certain funds meet the criteria for a voting interest entityVOE because the Company possesses substantially all of the economics and all of the decision-making authority.
The table below summarizes the change in the number of consolidated CIVs during each of the periods. During ninesix months 2022 and nine months 2021, two and three, respectively,2023, no consolidated CLO warehouses were securitized andbecame CLOs. During six months 2022, two consolidated CLO warehouses became CLOs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Number of Consolidated CIVs
| | | | | | | | | | | |
| | Nine Months |
| | 2022 | | 2021 |
| Beginning of year | 20 | | | 11 | |
| Consolidated | 4 | | | 6 | |
| Deconsolidated (1) | (2) | | | (1) | |
| September 30, | 22 | | | 16 | |
____________________
(1) During nine months 2022 the Company deconsolidated a CLO with assets and liabilities of $417 million.
Assets and Liabilities of CIVs | | | As of | | As of |
| | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) | | (in millions) |
| Assets: | Assets: | | Assets: | |
| Fund assets: | Fund assets: | | Fund assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 71 | | | $ | 64 | | Cash and cash equivalents | $ | 28 | | | $ | 59 | |
| Fund investments, at fair value | Fund investments, at fair value | | Fund investments, at fair value | |
| Equity securities and warrants | Equity securities and warrants | 434 | | | 252 | | Equity securities and warrants | 299 | | | 434 | |
| Obligations of state and political subdivisions | — | | | 101 | | |
| Corporate securities | Corporate securities | 87 | | | 98 | | Corporate securities | 84 | | | 96 | |
| Structured products | Structured products | 133 | | | 62 | | Structured products | 74 | | | 128 | |
| Due from brokers and counterparties | Due from brokers and counterparties | — | | | 49 | | Due from brokers and counterparties | 3 | | | — | |
| Other | Other | 1 | | | 1 | | Other | — | | | 1 | |
| CLO and CLO warehouse assets: | CLO and CLO warehouse assets: | | CLO and CLO warehouse assets: | |
| Cash | Cash | 68 | | | 156 | | Cash | 21 | | | 38 | |
| CLO investments: | CLO investments: | | CLO investments: | |
| Loans in CLOs, FVO | Loans in CLOs, FVO | 4,088 | | | 3,913 | | Loans in CLOs, FVO | 4,283 | | | 4,202 | |
| Loans in CLO warehouses, FVO | Loans in CLO warehouses, FVO | 324 | | | 331 | | Loans in CLO warehouses, FVO | 169 | | | 368 | |
| Short-term investments, at fair value | Short-term investments, at fair value | 85 | | | 145 | | Short-term investments, at fair value | 69 | | | 135 | |
| Due from brokers and counterparties | Due from brokers and counterparties | 45 | | | 99 | | Due from brokers and counterparties | 25 | | | 32 | |
| Total assets (1) | Total assets (1) | $ | 5,336 | | | $ | 5,271 | | Total assets (1) | $ | 5,055 | | | $ | 5,493 | |
| Liabilities: | Liabilities: | | | | Liabilities: | | | |
CLO obligations, FVO (2) | CLO obligations, FVO (2) | 3,962 | | | 3,665 | | CLO obligations, FVO (2) | 4,138 | | | 4,090 | |
| Warehouse financing debt, FVO (3) | Warehouse financing debt, FVO (3) | 224 | | | 126 | | Warehouse financing debt, FVO (3) | 157 | | | 313 | |
| Securities sold short, at fair value | — | | | 41 | | |
| Due to brokers and counterparties | Due to brokers and counterparties | 173 | | | 570 | | Due to brokers and counterparties | 60 | | | 112 | |
| Other liabilities | Other liabilities | 88 | | | 34 | | Other liabilities | 105 | | | 110 | |
| Total liabilities | Total liabilities | $ | 4,447 | | | $ | 4,436 | | Total liabilities | $ | 4,460 | | | $ | 4,625 | |
____________________
(1) Includes investments in AssuredIM Funds and other affiliated entities of $394$267 million and $223$392 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively. Includes assets of a VOE of $24 million as of June 30, 2023, and assets and liabilities of voting interest entities asa VOE of September 30, 2022 of $69$58 million and $2$1 million, respectively, and assets of $12 million as of December 31, 2021.2022.
(2) The weighted average maturity of CLO obligations was 6.55.8 years as of SeptemberJune 30, 20222023 and 6.66.2 years as of December 31, 2021.2022. The weighted average interest rate of CLO obligations was 3.9%6.6% as of SeptemberJune 30, 20222023 and 1.8%5.3% as of December 31, 2021.2022. CLO obligations have stated final maturity dates from 2034 to 2035.
(3) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.50.3 years as of SeptemberJune 30, 20222023 and 1.81.9 years as of December 31, 2021.2022. The weighted average interest rate of warehouse financing debt of CLO warehouses was 2.6%5.3% as of SeptemberJune 30, 20222023 and 1.1%4.5% as of December 31, 2021.2022. Warehouse financing debt will mature at various dates from 2023 to 2031.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The Company has an investment structure, where it invests with other co-investors in a municipal bond feeder fund. In this structure, the invested capital of one or more feeder funds purchases ownership interests in another fund, referred to as a master fund. The master fund utilizes this invested capital and, in certain cases, other debt financing, to purchase various classes of assets on behalf of its investors. The master fund’s investment objective is to generate attractive risk adjusted absolute returns by investing in municipal bonds, both investment grade and high-yield, taxable and tax-exempt as well as related investment and derivative products to hedge interest rate risk.2024.
The Company consolidates“equity securities and warrants” category in the feeder fund,table above includes $127 million as of December 31, 2022 related to a VIE. The feeder fund does not consolidate the master fund. Rather, because the feeder fund is an investment company, specialized industry accounting for investment companies requires it to measure its investments (i.e., limited partnership interests) at fair value through net income. The Company has elected to apply the NAV practical expedient to fair value measurement to measure the feeder’s proportionate share of the net assets of the master fund. The consolidated feeder’s investment in thisa municipal master fund totaled $125 million asthat was unwound in January 2023 based on its December 31, 2022 valuation. On January 31, 2023, the fund distributed substantially all of Septemberits available cash to AGAS and other investors in the fund. As of June 30, 2023 and December 31, 2022, and is includedother liabilities in the table above in the caption “equity securities and warrants”. The master fund had gross assets of $150 million and gross liabilities of $26 million, as of September 30, 2022.
Noncontrolling Interest in CIVs
Noncontrolling interest in CIVs represents the proportion of the consolidated funds not owned by the Company, and includes ownership interests of third parties, employees, and former employees. The majority of the noncontrolling interest is non-redeemable and presented on the statement of shareholders’ equity. The table below presents the rollforward ofinclude redeemable noncontrolling interest in CIVs.
Redeemable Noncontrolling Interest in CIVs
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) |
| Beginning balance | $ | 21 | | | $ | 21 | | | $ | 22 | | | $ | 21 | |
| Net income (loss) attributable to the redeemable noncontrolling interest | — | | | — | | | (1) | | | — | |
| Contributions | — | | | — | | | 21 | | | — | |
| Distributions | — | | | — | | | (21) | | | — | |
| September 30, | $ | 21 | | | $ | 21 | | | $ | 21 | | | $ | 21 | |
As of SeptemberJune 30, 2022,2023, the CIVs had $442 millionunfunded commitments to invest.invest of $452 million.
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the CIVs included derivative contracts with notional amounts totaling $45$39 million and $49$46 million, respectively, and average notional amounts of $47$42 million and $34$47 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 $7$4 million for nine monthssecond quarter 2022 and $1$8 million for ninesix months 2021.2022.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the 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 SeptemberJune 30, 2022,2023, these credit facilities had varying maturities ranging from 2023 to 20312024 with the aggregate principal amount not exceeding $1.5 billion.$820 million. The available commitment wascommitments were based on the amount of equity contributed to the warehousewarehouses which was $337$217 million. As of SeptemberJune 30, 2022, $2062023, $134 million was drawn under credit facilities with interest rates ranging from 3-monthrate Euro InterbankInterBank Offered Rate (Euribor) plus 150300 basis points (bps) to 3-month SOFR plus 150 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of SeptemberJune 30, 2022.2023.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
As of SeptemberJune 30, 2022,2023, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $110 million jointly and $71 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributedcapital committed to the funds. As of SeptemberJune 30, 2022, $622023, $54 million was drawn by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime floor of 3%). The fund was in compliance with all financial covenants as of SeptemberJune 30, 2022.2023.
During nine months 2022, the Company recorded an out-of-period adjustment totaling $2.1 millionNCI in pre-tax income and $1.7 million in net income attributable to AGL. The out-of-period adjustments related to an incorrect elimination of the foreign exchange remeasurement on the portion of consolidated CLOs that are owned by other Assured Guaranty subsidiaries.CIVs
NCI represents the proportion of the consolidated funds not owned by the Company and includes ownership interests of third parties, employees, and former employees. The NCI is non-redeemable and presented on the statement of shareholders’ equity.
Other Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $85$89 million and liabilities of $14$9 million as of SeptemberJune 30, 2022,2023, and assets of $96$86 million and liabilities of $11$12 million as of December 31, 2021,2022, 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 1615 thousand policies monitored as of SeptemberJune 30, 2022,2023, 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, asAs of Septemberboth June 30, 20222023 and December 31, 2021,2022, the Company identified 63 and 6985 policies respectively, that contain provisions and experienced events that may trigger consolidation. Based on management’s assessment of these potential triggers or events, the Company consolidated 24 and 25 structured finance and other FG VIEs as of September 30, 2022 and December 31, 2021, respectively. In addition, as of September 30, 2022 the Company consolidated six 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 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 excluding the feeder fund’s investment in the master fund, 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 SeptemberJune 30, 20222023 and December 31, 2021)2022) 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 ninesix months 2022,2023, 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 valuation methods for calculatingproduce fair value produce a fair valuevalues that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date.
The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels, as follows, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization within the hierarchy is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
There was a transfer of a fixed-maturity security in the investment portfolio and securities in the FG VIEs’ asset portfolio from Level 3 to Level 2 during second quarter 2022. There were no other 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 SeptemberJune 30, 2022,2023, the Company used models to price 188 securities, including loss mitigation securities, with a Level 3 fair value of $1.0 billion.193 securities. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecastsforecasts; 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.
Short-Term Investments
Short-term investments that are traded in active markets are classified withinas Level 1 in the fair value hierarchy as their value is based on quoted market prices. Securities such as discount notes are classified withinas Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Other Invested Assets
Other invested assets that are carried at fair value primarily include: (i) equity 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)include equity method investments for which the Company elected the FVO using NAV, as a practical expedient, whichand, therefore, are excluded from the fair value hierarchy.
Other Assets
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four 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 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 curve projections, the Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3 in the fair value hierarchy.3.
Supplemental Executive Retirement Plans
The Company classifiesclassified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes in the fair value reported in the condensed consolidated statements of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions arewere generally terminated for an amount that approximatesapproximated the present value of future premiums or for a negotiated amount, rather than at fair value.
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative contracts in determining the fair value of these contracts.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at SeptemberJune 30, 20222023 were such that market prices of the Company’s CDS contracts were not available.
Assumptions and Inputs
The various inputs and assumptions that are key to the measurement of the Company’s fair value for CDS contracts are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost and the weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided by or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company.
The primary sources of information used to determine gross spread include:
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The rates used to discount future expected premium cash flows ranged from 2.49%2.94% to 4.62%5.48% at SeptemberJune 30, 20222023 and 0.11%2.78% to 1.78%5.08% at December 31, 2021.2022.
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 mitigatinglimiting the amount of unrealized gains that are recognized on certain CDS contracts. Given market conditions and the Company’s own credit spreads, approximately 10.6%, based on fair value, of the Company’s CDS contracts were fair valued using this minimum premium as of June 30, 2023. As of September 30, 2022 and December 31, 2021,2022, the use of
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC’s credit spreads. In general, when AGC’s credit spreads narrow, the cost to hedge AGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC’s credit spreads widen, the cost to hedge AGC’s name increases causing more transactions to price at established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s own credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture.
The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.
A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are lower than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of such contract and discounting such amounts using the LIBORapplicable discount rate 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
•There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.
•The markets for the inputs to the model are highly illiquid, which impacts their reliability.
•Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.
FG VIEs’ Assets and Liabilities
FG VIEs include Puerto Rico Trusts and structured finance and other FG VIEs. Assets in the Puerto Rico Trusts, which consist of New Recovery Bonds and CVIs, are classified as Level 2. The Company elected the FVO for the Puerto Rico Trusts’ liabilities and they are classified as Level 3. See “ - Fixed Maturity Securities” above for a description of the fair value methodology for the New Recovery Bonds and CVIs in the Puerto Rico Trusts. For structured finance and other FG VIEs’ assets and liabilities the Company elected the FVO and classifies themthey are classified as Level 3 in the fair value hierarchy. 3.
The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach.
For the assets in the Puerto Rico Trusts, new recovery bonds are classified as Level 2 available-for-sale securities, and CVIs are classified as Level 2 trading securities. The liabilities of the Puerto Rico Trusts are measured under the FVO as Level 3 onCompany records the fair value hierarchy. See “ - Fixed Maturity Securities” above for a description of the fair value methodology for the recovery bondsstructured finance and CVIs in the Puerto Rico Trusts, which represent the majority of theother FG VIEs’ assets in the Puerto Rico Trusts.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
and liabilities based on modeled prices. The fair value of the residential mortgage loan FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the marketfair value of the FG VIEs’ assets and the implied collateral losses within the transaction.these transactions. 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 pricing service utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds.
The models used to price the FG VIEs’ liabilities (other than the liabilities of the Puerto Rico Trusts) generally apply the same inputs used in determining fair value of FG VIEs’ assets. For those liabilities insured by the Company, the benefit of the Company’s insurance policy guaranteeing the timely payment of debt service is also taken into account. The liabilities of the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries’ financial guaranty policies.
Significant changes to any of the inputs described above could materially change the timing of expected losses within an insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse.
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”FG VIEs” in the condensed consolidated statementsstatement of operations, except for (i) the change in fair value ofattributable to change in ISCR on FG VIEs’ liabilities, with recourse caused by changes in ISCR which is separately presented in OCI, and the change in fair value of available-for-sale securities, which is reported as a component of the change in(ii) unrealized gains (losses)and losses on investmentsthe New Recovery Bonds in the Puerto Rico Trusts, which are reported in 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.FG VIEs.” The FG VIEs issued securities that are typically collateralized by first lienInvestment income on the New Recovery Bonds and second lien U.S. residential mortgage loans, or,changes in fair value on the case ofCVIs in the Puerto Rico Trusts are all reported in “fair value gains (losses) on FG VIEs” on the Plan Consideration received under the GO/PBA Plan.condensed consolidated statement of operations.
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 FVO using the CFE practical expedient. Loans in CLOs are priced using a loan pricing service which aggregates quotes from loan market participants. The loans are all Level 2 assets, which are more
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt is measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the underlying financial liabilities to the beneficial interests retained by the Company).
Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE. The Company has elected the FVO to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO.
Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
determined by the Company, after giving consideration to third-party data generally at the average between the offer and bid prices. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; (vi) and/or evaluating information provided by management of these investments. These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments. Inputs are used in applying the various valuation techniques and broadly refer to the current assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors. Investments in private equity funds are generally valued utilizing NAV.
Level 2 assets in the CIVs include assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the FVO), securities sold short and derivative liabilities.. Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.
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 SeptemberJune 30, 20222023
| | | | Fair Value Hierarchy | | | Fair Value Hierarchy | |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (in millions) | | (in millions) |
| Assets: | Assets: | | | | | | | Assets: | | | | | | |
| Investments: | Investments: | | | | | | | Investments: | | | | | | |
| Fixed-maturity securities, available-for-sale | Fixed-maturity securities, available-for-sale | | | | | | | Fixed-maturity securities, available-for-sale | | | | | | |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | $ | — | | | $ | 3,053 | | | $ | 48 | | | $ | 3,101 | | Obligations of state and political subdivisions | $ | — | | | $ | 2,830 | | | $ | 46 | | | $ | 2,876 | |
| U.S. government and agencies | U.S. government and agencies | — | | | 115 | | | — | | | 115 | | U.S. government and agencies | — | | | 64 | | | — | | | 64 | |
| Corporate securities | Corporate securities | — | | | 2,000 | | | — | | | 2,000 | | Corporate securities | — | | | 2,066 | | | — | | | 2,066 | |
| Mortgage-backed securities: | Mortgage-backed securities: | | Mortgage-backed securities: | |
| RMBS | RMBS | — | | | 169 | | | 192 | | | 361 | | RMBS | — | | | 190 | | | 162 | | | 352 | |
| CMBS | CMBS | — | | | 280 | | | — | | | 280 | | CMBS | — | | | 204 | | | — | | | 204 | |
| Asset-backed securities | Asset-backed securities | — | | | 28 | | | 806 | | | 834 | | Asset-backed securities | — | | | 28 | | | 800 | | | 828 | |
| Non-U.S. government securities | Non-U.S. government securities | — | | | 89 | | | — | | | 89 | | Non-U.S. government securities | — | | | 98 | | | — | | | 98 | |
| Total fixed-maturity securities, available-for-sale | Total fixed-maturity securities, available-for-sale | — | | | 5,734 | | | 1,046 | | | 6,780 | | Total fixed-maturity securities, available-for-sale | — | | | 5,480 | | | 1,008 | | | 6,488 | |
| Fixed-maturity securities, trading | Fixed-maturity securities, trading | — | | | 393 | | | — | | | 393 | | Fixed-maturity securities, trading | — | | | 340 | | | — | | | 340 | |
| Short-term investments | Short-term investments | 1,158 | | | 19 | | | — | | | 1,177 | | Short-term investments | 1,629 | | | 21 | | | — | | | 1,650 | |
| Other invested assets (1) | Other invested assets (1) | 2 | | | — | | | 5 | | | 7 | | Other invested assets (1) | — | | | — | | | 3 | | | 3 | |
| FG VIEs’ assets | FG VIEs’ assets | — | | | 26 | | | 210 | | | 236 | | FG VIEs’ assets | — | | | 223 | | | 188 | | | 411 | |
| Assets of CIVs (2): | Assets of CIVs (2): | | Assets of CIVs (2): | |
| Fund investments: | Fund investments: | | Fund investments: | |
| Equity securities and warrants | Equity securities and warrants | — | | | 6 | | | 297 | | | 303 | | Equity securities and warrants | — | | | 4 | | | 290 | | | 294 | |
| Corporate securities | Corporate securities | — | | | — | | | 87 | | | 87 | | Corporate securities | — | | | — | | | 84 | | | 84 | |
| Structured products | Structured products | — | | | 90 | | | 43 | | | 133 | | Structured products | — | | | 74 | | | — | | | 74 | |
| CLOs and CLO warehouse assets: | CLOs and CLO warehouse assets: | | CLOs and CLO warehouse assets: | |
| Loans | Loans | — | | | 4,412 | | | — | | | 4,412 | | Loans | — | | | 4,452 | | | — | | | 4,452 | |
| Short-term investments | Short-term investments | 85 | | | — | | | — | | | 85 | | Short-term investments | 69 | | | — | | | — | | | 69 | |
| Total assets of CIVs | Total assets of CIVs | 85 | | | 4,508 | | | 427 | | | 5,020 | | Total assets of CIVs | 69 | | | 4,530 | | | 374 | | | 4,973 | |
| Assets held for sale | | Assets held for sale | 1 | | | — | | | — | | | 1 | |
| Other assets | Other assets | 50 | | | 43 | | | 36 | | | 129 | | Other assets | 59 | | | 49 | | | 33 | | | 141 | |
| Total assets carried at fair value | Total assets carried at fair value | $ | 1,295 | | | $ | 10,723 | | | $ | 1,724 | | | $ | 13,742 | | Total assets carried at fair value | $ | 1,758 | | | $ | 10,643 | | | $ | 1,606 | | | $ | 14,007 | |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | |
| Credit derivative liabilities | Credit derivative liabilities | $ | — | | | $ | — | | | $ | 195 | | | $ | 195 | | Credit derivative liabilities | $ | — | | | $ | — | | | $ | 58 | | | $ | 58 | |
| FG VIEs’ liabilities (3) | FG VIEs’ liabilities (3) | — | | | — | | | 251 | | | 251 | | FG VIEs’ liabilities (3) | — | | | — | | | 699 | | | 699 | |
| Liabilities of CIVs: | Liabilities of CIVs: | | Liabilities of CIVs: | |
| CLO obligations of CFEs | CLO obligations of CFEs | — | | | — | | | 3,962 | | | 3,962 | | CLO obligations of CFEs | — | | | — | | | 4,138 | | | 4,138 | |
| Warehouse financing debt | Warehouse financing debt | — | | | 199 | | | 25 | | | 224 | | Warehouse financing debt | — | | | 127 | | | 30 | | | 157 | |
| Securitized borrowing | Securitized borrowing | — | | | — | | | 22 | | | 22 | | Securitized borrowing | — | | | — | | | 31 | | | 31 | |
| Other | — | | | 1 | | | — | | | 1 | | |
| | Total liabilities of CIVs | Total liabilities of CIVs | — | | | 200 | | | 4,009 | | | 4,209 | | Total liabilities of CIVs | — | | | 127 | | | 4,199 | | | 4,326 | |
| Other liabilities | — | | | 8 | | | — | | | 8 | | |
| Liabilities held for sale | | Liabilities held for sale | — | | | 7 | | | — | | | 7 | |
| | Total liabilities carried at fair value | Total liabilities carried at fair value | $ | — | | | $ | 208 | | | $ | 4,455 | | | $ | 4,663 | | Total liabilities carried at fair value | $ | — | | | $ | 134 | | | $ | 4,956 | | | $ | 5,090 | |
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, 20212022
| | | | Fair Value Hierarchy | | | Fair Value Hierarchy | |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (in millions) | | (in millions) |
| Assets: | Assets: | | | | | | | Assets: | | | | | | |
| Investments: | Investments: | | | | | | | Investments: | | | | | | |
| Fixed-maturity securities, available-for sale | Fixed-maturity securities, available-for sale | | | | | | | Fixed-maturity securities, available-for sale | | | | | | |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | $ | — | | | $ | 3,588 | | | $ | 72 | | | $ | 3,660 | | Obligations of state and political subdivisions | $ | — | | | $ | 3,347 | | | $ | 47 | | | $ | 3,394 | |
| U.S. government and agencies | U.S. government and agencies | — | | | 128 | | | — | | | 128 | | U.S. government and agencies | — | | | 111 | | | — | | | 111 | |
| Corporate securities | Corporate securities | — | | | 2,605 | | | — | | | 2,605 | | Corporate securities | — | | | 2,084 | | | — | | | 2,084 | |
| Mortgage-backed securities: | Mortgage-backed securities: | | Mortgage-backed securities: | |
| RMBS | RMBS | — | | | 221 | | | 216 | | | 437 | | RMBS | — | | | 161 | | | 179 | | | 340 | |
| CMBS | CMBS | — | | | 346 | | | — | | | 346 | | CMBS | — | | | 271 | | | — | | | 271 | |
| Asset-backed securities | Asset-backed securities | — | | | 27 | | | 863 | | | 890 | | Asset-backed securities | — | | | 27 | | | 794 | | | 821 | |
| Non-U.S. government securities | Non-U.S. government securities | — | | | 136 | | | — | | | 136 | | Non-U.S. government securities | — | | | 98 | | | — | | | 98 | |
| Total fixed-maturity securities, available-for-sale | Total fixed-maturity securities, available-for-sale | — | | | 7,051 | | | 1,151 | | | 8,202 | | Total fixed-maturity securities, available-for-sale | — | | | 6,099 | | | 1,020 | | | 7,119 | |
| Fixed-maturity securities, trading | | Fixed-maturity securities, trading | — | | | 303 | | | — | | | 303 | |
| Short-term investments | Short-term investments | 1,225 | | | — | | | — | | | 1,225 | | Short-term investments | 771 | | | 39 | | | — | | | 810 | |
| Other invested assets (1) | Other invested assets (1) | 6 | | | — | | | 6 | | | 12 | | Other invested assets (1) | 2 | | | — | | | 5 | | | 7 | |
| FG VIEs’ assets | FG VIEs’ assets | — | | | — | | | 260 | | | 260 | | FG VIEs’ assets | — | | | 209 | | | 204 | | | 413 | |
| Assets of CIVs (2): | Assets of CIVs (2): | | Assets of CIVs (2): | |
| Fund investments: | Fund investments: | | Fund investments: | |
| Equity securities and warrants | Equity securities and warrants | — | | | 7 | | | 239 | | | 246 | | Equity securities and warrants | — | | | 5 | | | 297 | | | 302 | |
| Obligations of state and political subdivisions | — | | | 101 | | | — | | | 101 | | |
| Corporate securities | Corporate securities | — | | | 7 | | | 91 | | | 98 | | Corporate securities | — | | | — | | | 96 | | | 96 | |
| Structured products | Structured products | — | | | 62 | | | — | | | 62 | | Structured products | — | | | 82 | | | 46 | | | 128 | |
| CLOs and CLO warehouse assets: | CLOs and CLO warehouse assets: | | CLOs and CLO warehouse assets: | |
| Loans | Loans | — | | | 4,244 | | | — | | | 4,244 | | Loans | — | | | 4,570 | | | — | | | 4,570 | |
| Short-term investments | Short-term investments | 145 | | | — | | | — | | | 145 | | Short-term investments | 135 | | | — | | | — | | | 135 | |
| Total assets of CIVs | Total assets of CIVs | 145 | | | 4,421 | | | 330 | | | 4,896 | | Total assets of CIVs | 135 | | | 4,657 | | | 439 | | | 5,231 | |
| Other assets | Other assets | 53 | | | 54 | | | 25 | | | 132 | | Other assets | 54 | | | 46 | | | 48 | | | 148 | |
| Total assets carried at fair value | Total assets carried at fair value | $ | 1,429 | | | $ | 11,526 | | | $ | 1,772 | | | $ | 14,727 | | Total assets carried at fair value | $ | 962 | | | $ | 11,353 | | | $ | 1,716 | | | $ | 14,031 | |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | |
| Credit derivative liabilities | Credit derivative liabilities | $ | — | | | $ | — | | | $ | 156 | | | $ | 156 | | Credit derivative liabilities | $ | — | | | $ | — | | | $ | 163 | | | $ | 163 | |
| FG VIEs’ liabilities (3) | FG VIEs’ liabilities (3) | — | | | — | | | 289 | | | 289 | | FG VIEs’ liabilities (3) | — | | | — | | | 715 | | | 715 | |
| Liabilities of CIVs: | Liabilities of CIVs: | | Liabilities of CIVs: | |
| CLO obligations of CFEs | CLO obligations of CFEs | — | | | — | | | 3,665 | | | 3,665 | | CLO obligations of CFEs | — | | | — | | | 4,090 | | | 4,090 | |
| Warehouse financing debt | Warehouse financing debt | — | | | 103 | | | 23 | | | 126 | | Warehouse financing debt | — | | | 277 | | | 36 | | | 313 | |
| Securities sold short | — | | | 41 | | | — | | | 41 | | |
| Securitized borrowing | Securitized borrowing | — | | | — | | | 17 | | | 17 | | Securitized borrowing | — | | | — | | | 28 | | | 28 | |
| Total liabilities of CIVs | Total liabilities of CIVs | — | | | 144 | | | 3,705 | | | 3,849 | | Total liabilities of CIVs | — | | | 277 | | | 4,154 | | | 4,431 | |
| Other liabilities | Other liabilities | — | | | 1 | | | — | | | 1 | | Other liabilities | — | | | 7 | | | — | | | 7 | |
| Total liabilities carried at fair value | Total liabilities carried at fair value | $ | — | | | $ | 145 | | | $ | 4,150 | | | $ | 4,295 | | Total liabilities carried at fair value | $ | — | | | $ | 284 | | | $ | 5,032 | | | $ | 5,316 | |
___________________
(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $17 million and $19$23 million of equity method investments measured at fair value under the FVO using the NAV as a practical expedient as of Septemberboth June 30, 20222023 and December 31, 2021, respectively.2022.
(2) Excludes $5 million, as of both June 30, 2023 and December 31, 2022, in investments in AssuredIM Funds for which the Company records a 100% NCI. The consolidation of these funds results in a gross up of assets and NCI on the consolidated financial statements; however, it results in no economic equity or net income attributable to AGL. As of December 31, 2022, excludes $127 million investment in the AssuredIM municipal relative value master fund, which is measured using NAV as a practical expedient.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(2) Excludes $6 million as of both September 30, 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. As of September 30, 2022, excludes a $125 million investment in the AssuredIM municipal relative value master fund, which is measured using NAV as a practical expedient.
(3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Changes in Level 3 Fair Value Measurements
The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during thirdsecond quarter 2023, second quarter 2022, third quarter 2021, ninesix months 2022,2023 and ninesix months 2021.2022.
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
ThirdSecond Quarter 20222023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities, Available-for-Sale | | | | Assets of CIVs | | | |
| | Obligations
of State and
Political
Subdivisions | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Equity Securities and Warrants | | Corporate Securities | | Structured Products | | Other
(7) | |
| | (in millions) |
| Fair value as of March 31, 2023 | $ | 47 | | | $ | 174 | | | $ | 795 | | | $ | 197 | | | $ | 329 | | | $ | 93 | | | $ | 17 | | | $ | 34 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | 1 | | (1) | 4 | | (1) | (3) | | (1) | (2) | | (2) | 7 | | (4) | (1) | | (4) | — | | | 3 | | (3) |
| Other comprehensive income (loss) | (1) | | | (7) | | | (5) | | | — | | | — | | | — | | | — | | | — | | |
| Purchases | — | | | — | | | 18 | | | — | | | 34 | | | 2 | | | — | | | — | | |
| Sales | — | | | — | | | (2) | | | — | | | (80) | | | (10) | | | (17) | | | — | | |
| Settlements | (1) | | | (9) | | | (3) | | | (7) | | | — | | | — | | | — | | | (4) | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Fair value as of June 30, 2023 | $ | 46 | | | $ | 162 | | | $ | 800 | | | $ | 188 | | | $ | 290 | | | $ | 84 | | | $ | — | | | $ | 33 | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2023 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | (3) | | (2) | $ | (33) | | (4) | $ | — | | | $ | — | | | $ | 3 | | (3) |
| OCI | $ | (1) | | | $ | (7) | | | $ | (4) | | | | | | | | | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities, Available-for-Sale | | | | Assets of CIVs | | | |
| | Obligations
of State and
Political
Subdivisions | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Equity Securities and Warrants | | Corporate Securities | | Structured Products | | Other
(7) | |
| | (in millions) |
| Fair value as of June 30, 2022 | $ | 51 | | | $ | 184 | | | $ | 805 | | | $ | 223 | | | $ | 258 | | | $ | 90 | | | $ | 38 | | | $ | 37 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | (1) | 3 | | (1) | 2 | | (1) | 3 | | (2) | (11) | | (4) | (2) | | (4) | (3) | | (4) | 1 | | (3) |
| Other comprehensive income (loss) | (3) | | | (8) | | | 1 | | | — | | | — | | | — | | | — | | | — | | |
| Purchases | — | | | 22 | | | 4 | | | — | | | 52 | | | 1 | | | 8 | | | — | | |
| Sales | — | | | — | | | (1) | | | — | | | (2) | | | (2) | | | — | | | — | | |
| Settlements | — | | | (9) | | | (5) | | | (16) | | | — | | | — | | | — | | | — | | |
| | | | | | | | | | | | | | | | |
| Fair value as of September 30, 2022 | $ | 48 | | | $ | 192 | | | $ | 806 | | | $ | 210 | | | $ | 297 | | | $ | 87 | | | $ | 43 | | | $ | 38 | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | 3 | | (2) | $ | (11) | | (4) | $ | (2) | | (4) | $ | (3) | | (4) | $ | 1 | | (3) |
| OCI | $ | (3) | | | $ | (8) | | | $ | 1 | | | | | | | | | | | $ | — | | |
Second Quarter 2023
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
Liability, net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| | (in millions) |
| Fair value as of March 31, 2023 | $ | (148) | | | $ | (704) | | | $ | (4,220) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | 91 | | (6) | (2) | | (2) | 17 | | (4) |
| Other comprehensive income (loss) | — | | | 2 | | | (5) | | |
| | | | | | |
| | | | | | |
| Settlements | — | | | 5 | | | 9 | | |
| | | | | | |
| | | | | | |
| Fair value as of June 30, 2023 | $ | (57) | | | $ | (699) | | | $ | (4,199) | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2023 included in: | | | | | | |
| Earnings | $ | 91 | | (6) | $ | 4 | | (2) | $ | (2) | | (4) |
| OCI | | | $ | 2 | | | $ | (5) | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Second 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 | | Structured Products | | Other
(7) | |
| | (in millions) |
| Fair value as of March 31, 2022 | $ | 70 | | | $ | 200 | | | $ | 842 | | | $ | 267 | | | $ | 243 | | | $ | 83 | | | $ | — | | | $ | 28 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | (1) | | (1) | 6 | | (1) | (3) | | (1) | 1 | | (2) | 16 | | (4) | 7 | | (4) | (3) | | (4) | 10 | | (3) |
| Other comprehensive income (loss) | (3) | | | (11) | | | (30) | | | — | | | — | | | — | | | — | | | (1) | | |
| Purchases | — | | | — | | | 10 | | | — | | | 5 | | | — | | | 42 | | | — | | |
| Sales | — | | | — | | | (9) | | | — | | | (6) | | | — | | | (21) | | | — | | |
| Settlements | (14) | | | (11) | | | (5) | | | (26) | | | — | | | — | | | — | | | — | | |
| Deconsolidations | — | | | — | | | — | | | (15) | | | — | | | — | | | 20 | | | — | | |
| Transfers out of Level 3 | (1) | | | — | | | — | | | (4) | | | — | | | — | | | — | | | — | | |
| Fair value as of June 30, 2022 | $ | 51 | | | $ | 184 | | | $ | 805 | | | $ | 223 | | | $ | 258 | | | $ | 90 | | | $ | 38 | | | $ | 37 | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2022 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | 2 | | (2) | $ | 10 | | (4) | $ | 7 | | (4) | $ | (3) | | (4) | $ | 10 | | (3) |
| OCI | $ | (4) | | | $ | (10) | | | $ | (29) | | | | | | | | | | | $ | (1) | | |
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Second Quarter 2022
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
Liability, net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| | (in millions) |
| Fair value as of March 31, 2022 | $ | (156) | | | $ | (335) | | | $ | (3,650) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | 9 | | (6) | 11 | | (2) | 250 | | (4) |
| Other comprehensive income (loss) | — | | | 3 | | | 37 | | |
| Issuances | — | | | — | | | (1,027) | | |
| Settlements | — | | | 24 | | | 29 | | |
| Deconsolidations | — | | | 15 | | | 374 | | |
| Fair value as of June 30, 2022 | $ | (147) | | | $ | (282) | | | $ | (3,987) | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2022 included in: | | | | | | |
| Earnings | $ | 8 | | (6) | $ | 11 | | (2) | $ | 262 | | (4) |
| OCI | | | $ | 3 | | | $ | 37 | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Six Months 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities, Available-for-Sale | | | | Assets of CIVs | | | |
| | Obligations
of State and
Political
Subdivisions | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Equity Securities and Warrants | | Corporate Securities | | Structured Products | | Other
(7) | |
| | (in millions) |
| Fair value as of December 31, 2022 | $ | 47 | | | $ | 179 | | | $ | 794 | | | $ | 204 | | | $ | 297 | | | $ | 96 | | | $ | 46 | | | $ | 50 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | 1 | | (1) | 7 | | (1) | — | | | (1) | | (2) | 40 | | (4) | (3) | | (4) | 2 | | (4) | (13) | | (3) |
| Other comprehensive income (loss) | — | | | (8) | | | (8) | | | — | | | — | | | — | | | — | | | — | | |
| Purchases | — | | | — | | | 23 | | | — | | | 38 | | | 6 | | | — | | | — | | |
| Sales | — | | | — | | | (2) | | | — | | | (85) | | | (15) | | | (48) | | | — | | |
| Settlements | (2) | | | (16) | | | (7) | | | (15) | | | — | | | — | | | — | | | (4) | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Fair value as of June 30, 2023 | $ | 46 | | | $ | 162 | | | $ | 800 | | | $ | 188 | | | $ | 290 | | | $ | 84 | | | $ | — | | | $ | 33 | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2023 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | (3) | | (2) | $ | (1) | | (4) | $ | (3) | | (4) | $ | — | | | $ | (13) | | (3) |
| OCI | $ | — | | | $ | (8) | | | $ | (7) | | | | | | | | | | | $ | — | | |
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Six Months 2023
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
Liability, net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| | (in millions) |
| Fair value as of December 31, 2022 | $ | (162) | | | $ | (715) | | | $ | (4,154) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | 106 | | (6) | 1 | | (2) | (45) | | (4) |
| Other comprehensive income (loss) | — | | | 1 | | | (13) | | |
| | | | | | |
| | | | | | |
| Settlements | (1) | | | 14 | | | 13 | | |
| | | | | | |
| | | | | | |
| Fair value as of June 30, 2023 | $ | (57) | | | $ | (699) | | | $ | (4,199) | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2023 included in: | | | | | | |
| Earnings | $ | 105 | | (6) | $ | 2 | | (2) | $ | (67) | | (4) |
| OCI | | | $ | 1 | | | $ | (13) | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Six Months 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 | | Corporate Securities | | Structured Products | | Other
(7) | |
| | (in millions) | | | | |
| Fair value as of December 31, 2021 | $ | 72 | | | $ | 216 | | | $ | 863 | | | $ | 260 | | | $ | 239 | | | $ | 91 | | | $ | — | | | $ | 27 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | 10 | | (1) | — | | | (3) | | (2) | 26 | | (4) | 6 | | (4) | (3) | | (4) | 11 | | (3) |
| Other comprehensive income (loss) | (8) | | | (19) | | | (37) | | | — | | | — | | | — | | | — | | | (1) | | |
| Purchases | — | | | — | | | 35 | | | — | | | 5 | | | 1 | | | 42 | | | — | | |
| Sales | — | | | — | | | (12) | | | — | | | (12) | | | (8) | | | (21) | | | — | | |
| Settlements | (13) | | | (23) | | | (44) | | | (34) | | | — | | | — | | | — | | | — | | |
| Consolidations | — | | | — | | | — | | | 15 | | | — | | | — | | | — | | | — | | |
| Deconsolidations | — | | | — | | | — | | | (15) | | | — | | | — | | | 20 | | | — | | |
| Fair value as of June 30, 2022 | $ | 51 | | | $ | 184 | | | $ | 805 | | | $ | 223 | | | $ | 258 | | | $ | 90 | | | $ | 38 | | | $ | 37 | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2022 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | (2) | | (2) | $ | 18 | | (4) | $ | 5 | | (4) | $ | (3) | | (4) | $ | 11 | | (3) |
| OCI | $ | (10) | | | $ | (17) | | | $ | (36) | | | | | | | | | | | $ | (1) | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 LiabilitiesAssets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 2022
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
Liability, net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| | (in millions) |
| Fair value as of June 30, 2022 | $ | (147) | | | $ | (282) | | | $ | (3,987) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | (48) | | (6) | 8 | | (2) | (31) | | (4) |
| Other comprehensive income (loss) | — | | | (4) | | | 41 | | |
| Issuances | — | | | — | | | (8) | | |
| Sales | — | | | — | | | 2 | | |
| Settlements | 1 | | | 27 | | | — | | |
| Consolidations | — | | | — | | | (26) | | |
| | | | | | |
| Fair value as of September 30, 2022 | $ | (194) | | | $ | (251) | | | $ | (4,009) | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in: | | | | | | |
| Earnings | $ | (46) | | (6) | $ | 8 | | (2) | $ | (13) | | (4) |
| OCI | | | $ | (4) | | | $ | 41 | | |
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
Third Quarter 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities, Available-for-Sale | | | | | | | |
| | Obligations
of State and
Political
Subdivisions | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Assets of CIVs- Equity Securities | | Other
(7) | |
| | (in millions) |
| Fair value as of June 30, 2021 | $ | 110 | | | $ | 248 | | | $ | 975 | | | $ | 287 | | | $ | 1 | | | $ | 31 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | |
| Net income (loss) | 1 | | (1) | 8 | | (1) | 5 | | (1) | 2 | | (2) | — | | | (4) | | (3) |
| Other comprehensive income (loss) | (1) | | | (2) | | | 3 | | | — | | | — | | | — | | |
| Purchases | — | | | — | | | 55 | | | — | | | 33 | | | — | | |
| Sales | — | | | — | | | — | | | — | | | — | | | — | | |
| Settlements | — | | | (16) | | | (70) | | | (18) | | | — | | | — | | |
| Fair value as of September 30, 2021 | $ | 110 | | | $ | 238 | | | $ | 968 | | | $ | 271 | | | $ | 34 | | | $ | 27 | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2021included in: | | | | | | | | | | | | |
| Earnings | | | | | | | $ | 2 | | (2) | $ | — | | | $ | (3) | | (3) |
| OCI | $ | (1) | | | $ | (2) | | | $ | 3 | | | | | | | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
Third Quarter 2021
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
Liability, net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| | (in millions) |
| Fair value as of June 30, 2021 | $ | (154) | | | $ | (320) | | | $ | (2,385) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | 21 | | (6) | 2 | | (2) | 4 | | (4) |
| Other comprehensive income (loss) | — | | | 2 | | | — | | |
| Issuances | — | | | — | | | (989) | | |
| Settlements | (1) | | | 15 | | | 374 | | |
| Fair value as of September 30, 2021 | $ | (134) | | | $ | (301) | | | $ | (2,996) | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2021 included in: | | | | | | |
| Earnings | $ | 1 | | (6) | $ | 2 | | (2) | $ | 1 | | (4) |
| OCI | | | $ | 2 | | | | |
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
NineSix Months 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities, Available-for-Sale | | | | Assets of CIVs | | | |
| | Obligations
of State and
Political
Subdivisions | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Equity Securities and Warrants | | Corporate Securities | | Structured Products | | Other
(7) | |
| | (in millions) |
| Fair value as of December 31, 2021 | $ | 72 | | | $ | 216 | | | $ | 863 | | | $ | 260 | | | $ | 239 | | | $ | 91 | | | $ | — | | | $ | 27 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | 13 | | (1) | 2 | | (1) | — | | | 15 | | (4) | 4 | | (4) | (6) | | (4) | 12 | | (3) |
| Other comprehensive income (loss) | (11) | | | (27) | | | (36) | | | — | | | — | | | — | | | — | | | (1) | | |
| Purchases | — | | | 22 | | | 39 | | | — | | | 57 | | | 2 | | | 50 | | | — | | |
| Sales | — | | | — | | | (13) | | | — | | | (14) | | | (10) | | | (21) | | | — | | |
| Settlements | (13) | | | (32) | | | (49) | | | (50) | | | — | | | — | | | — | | | — | | |
| Consolidations | — | | | — | | | — | | | 15 | | | — | | | — | | | — | | | — | | |
| Deconsolidations | — | | | — | | | — | | | (15) | | | — | | | — | | | 20 | | | — | | |
| Fair value as of September 30, 2022 | $ | 48 | | | $ | 192 | | | $ | 806 | | | $ | 210 | | | $ | 297 | | | $ | 87 | | | $ | 43 | | | $ | 38 | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | $ | 1 | | (2) | $ | 7 | | (4) | $ | 3 | | (4) | $ | (6) | | (4) | $ | 12 | | (3) |
| OCI | $ | (13) | | | $ | (25) | | | $ | (35) | | | | | | | | | | | $ | (1) | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis
Nine Months 2022
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative
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) | (42) | | (6) | 34 | | (2) | 264 | | (4) |
| Other comprehensive income (loss) | — | | | (1) | | | 97 | | |
| Issuances | — | | | — | | | (1,416) | | |
| Sales | — | | | — | | | 2 | | |
| Settlements | 2 | | | 92 | | | 401 | | |
| Consolidations | — | | | (102) | | | (26) | | |
| Deconsolidations | — | | | 15 | | | 374 | | |
| Fair value as of September 30, 2022 | $ | (194) | | | $ | (251) | | | $ | (4,009) | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in: | | | | | | |
| Earnings | $ | (41) | | (6) | $ | 57 | | (2) | $ | 289 | | (4) |
| OCI | | | $ | (1) | | | $ | 97 | | |
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
Nine Months 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) | 4 | | (1) | 2 | | (1) | 15 | | (1) | 16 | | (1) | 20 | | (2) | 4 | | (4) | (28) | | (3) |
| Other comprehensive income (loss) | 7 | | | 16 | | | 7 | | | 9 | | | — | | | — | | | 1 | | |
| Purchases | — | | | — | | | — | | | 266 | | | — | | | 55 | | | — | | |
| Sales | — | | | (48) | | | — | | | (76) | | | — | | | (27) | | | — | | |
| Settlements | (2) | | | — | | | (39) | | | (187) | | | (45) | | | — | | | — | | |
| Fair value as of September 30, 2021 | $ | 110 | | | $ | — | | | $ | 238 | | | $ | 968 | | | $ | 271 | | | $ | 34 | | | $ | 27 | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2021 included in: | | | | | | | | | | | | | | |
| Earnings | | | | | | | | | $ | 21 | | (2) | $ | 2 | | (4) | $ | (28) | | (3) |
| OCI | $ | 7 | | | $ | — | | | $ | 6 | | | $ | 9 | | | | | | | $ | 1 | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis
Nine Months 2021
| | | | Credit Derivative
Liability, net (5) | | FG VIEs’
Liabilities (8) | | Liabilities of CIVs | | | Credit Derivative
Liability, net (5) | | FG VIEs’
Liabilities (8) | | Liabilities of CIVs | |
| | | (in millions) | | (in millions) |
| Fair value as of December 31, 2020 | $ | (100) | | | $ | (333) | | | $ | (1,227) | | | |
| Fair value as of December 31, 2021 | | Fair value as of December 31, 2021 | $ | (154) | | | $ | (289) | | | $ | (3,705) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | |
| Net income (loss) | Net income (loss) | (31) | | (6) | (5) | | (2) | 2 | | (4) | Net income (loss) | 6 | | (6) | 26 | | (2) | 295 | | (4) |
| Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | (1) | | | — | | | Other comprehensive income (loss) | — | | | 3 | | | 56 | | |
| Issuances | Issuances | — | | | — | | | (2,147) | | | Issuances | — | | | — | | | (1,408) | | |
| Settlements | Settlements | (3) | | | 38 | | | 376 | | | Settlements | 1 | | | 65 | | | 401 | | |
| Fair value as of September 30, 2021 | $ | (134) | | | $ | (301) | | | $ | (2,996) | | | |
| Change in unrealized gains (losses) related to financial instruments held as of September 30, 2021 included in: | | | | | | | |
| Consolidations | | Consolidations | — | | | (102) | | | — | | |
| Deconsolidations | | Deconsolidations | — | | | 15 | | | 374 | | |
| Fair value as of June 30, 2022 | | Fair value as of June 30, 2022 | $ | (147) | | | $ | (282) | | | $ | (3,987) | | |
| Change in unrealized gains (losses) related to financial instruments held as of June 30, 2022 included in: | | Change in unrealized gains (losses) related to financial instruments held as of June 30, 2022 included in: | | | | | | |
| Earnings | Earnings | $ | (54) | | (6) | $ | (4) | | (2) | $ | 5 | | (4) | Earnings | $ | 5 | | (6) | $ | 49 | | (2) | $ | 303 | | (4) |
| OCI | OCI | | | $ | (1) | | | | | OCI | | | $ | 3 | | | $ | 56 | | |
____________________
(1)Included in “net realized investment gains (losses)” and “net investment income”.income.”
(2)Included in “fair value gains (losses) on FG VIEs”.VIEs.”
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss).”.
(4)Reported in “fair value gains (losses) on CIVs”.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”.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 SeptemberJune 30, 20222023 | | Financial Instrument Description | Financial Instrument Description | | Fair Value
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) | Financial Instrument Description | | Fair Value Assets (Liabilities)
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Assets (2): | | | | | | | | | |
| Investments (2): | | Investments (2): | | | | | | | | |
| Fixed-maturity securities, available-for-sale (1): | Fixed-maturity securities, available-for-sale (1): | | | | | | Fixed-maturity securities, available-for-sale (1): | | | | | |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | | $ | 48 | | | Yield | | 7.3 | % | - | 27.1% | | 10.1% | Obligations of state and political subdivisions | | $ | 46 | | | Yield | | 7.3 | % | - | 20.0% | | 8.8% |
| RMBS | RMBS | | 192 | | | CPR | | 0.0 | % | - | 17.3% | | 8.1% | RMBS | | 162 | | | CPR | | 1.0 | % | - | 15.1% | | 4.2% |
| CDR | | 1.5 | % | - | 12.0% | | 5.9% | | CDR | | 1.5 | % | - | 16.0% | | 5.8% |
| Loss severity | | 50.0 | % | - | 125.0% | | 82.5% | | Loss severity | | 50.0 | % | - | 125.0% | | 82.6% |
| Yield | | 7.0 | % | - | 10.7% | | 8.4% | | Yield | | 7.5 | % | - | 11.8% | | 9.0% |
| Asset-backed securities: | Asset-backed securities: | | Asset-backed securities: | |
| Life insurance transactions | Life insurance transactions | | 366 | | | Yield | | 10.0% | | Life insurance transactions | | 326 | | | Yield | | 8.1% | |
| CLOs | CLOs | | 414 | | | Discount Margin | | 2.0 | % | - | 4.5% | | 3.3% | CLOs | | 454 | | | Discount margin | | 1.5 | % | - | 3.9% | | 2.6% |
| Others | Others | | 26 | | | Yield | | 7.7 | % | - | 12.4% | | 12.4% | Others | | 20 | | | Yield | | 7.0 | % | - | 12.8% | | 12.7% |
| FG VIEs’ assets (1) | FG VIEs’ assets (1) | | 210 | | | CPR | | 0.9 | % | - | 22.0% | | 15.4% | FG VIEs’ assets (1) | | 188 | | | CPR | | 0.4 | % | - | 22.1% | | 8.3% |
| CDR | | 1.0 | % | - | 41.0% | | 7.5% | | CDR | | 1.3 | % | - | 41.0% | | 9.3% |
| Loss severity | | 45.0 | % | - | 100.0% | | 82.2% | | Loss severity | | 45.0 | % | - | 100.0% | | 82.5% |
| Yield | | 4.8 | % | - | 10.4% | | 7.1% | | Yield | | 8.0 | % | - | 11.1% | | 9.5% |
| Assets of CIVs (3): | Assets of CIVs (3): | | Assets of CIVs (3): | |
| Equity securities and warrants | Equity securities and warrants | | 297 | | | Yield | | 9.2% | | Equity securities and warrants | | 290 | | | Yield | | 8.7% | |
| | Discount rate | | 19.0 | % | - | 25.4% | | 23.3% | | Discount rate | | 17.1 | % | - | 27.4% | | 23.6% |
| | Market multiple-enterprise value/revenue | | 1.00x | - | 1.10x | | 1.05x | | Market multiple-enterprise value/revenue | | 0.95x | - | 0.99x | | 0.97x |
| | Market multiple-enterprise value/EBITDA (6) | | 3.00x | - | 12.00x | | 10.36x | | Market multiple-enterprise value/EBITDA (6) | | 2.50x | - | 11.50x | | 10.66x |
| | Market multiple-price to book | | 1.30x | - | 1.35x | | 1.33x | | Market multiple-price to book | | 1.00x | |
| | Market multiple-price to earnings | | 5.00x | - | 6.00x | | 5.50x | | Market multiple-price to earnings | | 5.25x | |
| | Terminal growth rate | | 4.0% | | | Terminal growth rate | | 3.0 | % | - | 4.0% | | 3.4% |
| | Cost | | 1.0x | | | Exit multiple-EBITDA | | 11.00x | - | 12.00x | | 11.29x |
| | | Exit multiple-price to book | | 1.10x | |
| | | Exit multiple-price to earnings | | 5.25x | |
| | | Cost | | 1.00x | |
| | | Sale scenario - discount rate | | 4.7 | % | - | 4.8% | | 4.8% |
| | | Haircut to Holdback | | 30.0 | % | - | 95.0% | | 62.5% |
| Corporate securities | Corporate securities | | 87 | | | Discount rate | | 22.2 | % | - | 24.3% | | 22.9% | Corporate securities | | 84 | | | Discount rate | | 17.1% | |
| | Yield | | 16.3% | | | Yield | | 16.3% | |
| | Cost | | 1.00x | | | Cost | | 1.00x | |
| | Market multiple-enterprise value/EBITDA | | 3.00x | - | 8.00x | | 4.70x | | Market multiple-enterprise value/EBITDA | | 2.50x | - | 2.75x | | 2.63x |
| Structured products | | 43 | | | Yield | | 13.8 | % | - | 32.9% | | 18.6% | |
| Other assets (1) | Other assets (1) | | 35 | | | Implied Yield | | 6.1 | % | - | 6.8% | | 6.4% | Other assets (1) | | 32 | | | Implied Yield | | 8.1 | % | - | 8.7% | | 8.4% |
| Term (years) | | 10 years | | | Term (years) | | 10 years | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
| | Financial Instrument Description | Financial Instrument Description | | Fair Value
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) | Financial Instrument Description | | Fair Value Assets (Liabilities)
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Liabilities (1): | | |
| Credit derivative liabilities, net | | $ | (194) | | | Hedge cost (in bps) | | 12.8 | - | 28.0 | | 17.5 | |
| Bank profit (in bps) | | 57.7 | - | 260.0 | | 121.6 | |
| Internal credit rating | | AAA | - | CCC | | AA | |
| Credit derivative liabilities, net (1) | | Credit derivative liabilities, net (1) | | $ | (57) | | | Hedge cost (in bps) | | 17.2 | - | 39.5 | | 24.2 |
| | Bank profit (in bps) | | 115.9 | - | 298.8 | | 178.0 |
| | Internal floor (in bps) | | 10.0 | |
| | Internal credit rating | | AAA | - | CCC | | AA |
FG VIEs’ liabilities | FG VIEs’ liabilities | | (251) | | | CPR | | 0.9 | % | - | 22.0% | | 14.5% | FG VIEs’ liabilities | | (699) | | | CPR | | 0.4 | % | - | 22.1% | | 8.3% |
| CDR | | 1.0 | % | - | 41.0% | | 7.0% | | CDR | | 1.3 | % | - | 41.0% | | 9.3% |
| Loss severity | | 45.0 | % | - | 100.0% | | 77.2% | | Loss severity | | 45.0 | % | - | 100.0% | | 82.5% |
| Yield | | 4.3 | % | - | 10.4% | | 5.9% | | Yield | | 4.5 | % | - | 11.1% | | 5.5% |
| Liabilities of CIVs: | | |
| Liabilities of CIVs (1): | | Liabilities of CIVs (1): | |
| CLO obligations of CFEs (5) | CLO obligations of CFEs (5) | | (3,962) | | | Yield | | 1.6 | % | - | 26.8% | | 4.3% | CLO obligations of CFEs (5) | | (4,138) | | | Yield | | 4.8 | % | - | 24.1% | | 7.0% |
| Warehouse financing debt | Warehouse financing debt | | (25) | | | Yield | | 13.8 | % | - | 16.3% | | 14.5% | Warehouse financing debt | | (30) | | | Yield | | 0.0 | % | - | 9.3% | | 9.3% |
| Securitized borrowing | Securitized borrowing | | (22) | | | Discount rate | | 20.6% | | Securitized borrowing | | (31) | | | Discount rate | | 24.3% | |
| | Market multiple-enterprise value/EBITDA | | 10.00x | - | 11.00x | | 10.67x | | Terminal growth rate | | 3.0% | |
| | | Exit multiple-EBITDA | | 11.00x | |
| | | Market multiple-enterprise value/EBITDA | | 10.50x | - | 11.50x | | 11.00x |
___________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments recordedreported in “other invested assets” with a fair value of $5$3 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, 20212022
| | Financial Instrument Description | Financial Instrument Description | | Fair Value (in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) | Financial Instrument Description | | Fair Value Assets (Liabilities)
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Assets (2): | | | | | | | | | | |
| Investments (2): | | Investments (2): | | | | | | | | | |
| Fixed-maturity securities, available-for-sale (1): | Fixed-maturity securities, available-for-sale (1): | | | | | | Fixed-maturity securities, available-for-sale (1): | | | | | |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | | $ | 72 | | | Yield | | 4.4 | % | - | 24.5% | | 6.2% | Obligations of state and political subdivisions | | $ | 47 | | | Yield | | 7.4 | % | - | 13.5% | | 9.4% |
| RMBS | RMBS | | 216 | | | CPR | | 0.0 | % | - | 22.7% | | 10.4% | RMBS | | 179 | | | CPR | | 3.8 | % | - | 16.1% | | 8.2% |
| CDR | | 1.4 | % | - | 12.0% | | 5.9% | | CDR | | 1.5 | % | - | 12.0% | | 5.9% |
| Loss severity | | 50.0 | % | - | 125.0% | | 84.9% | | Loss severity | | 50.0 | % | - | 125.0% | | 82.5% |
| Yield | | 3.8 | % | - | 5.6% | | 4.5% | | Yield | | 7.5 | % | - | 11.3% | | 9.0% |
| Asset-backed securities: | Asset-backed securities: | | Asset-backed securities: | |
| Life insurance transactions | Life insurance transactions | | 367 | | | Yield | | 5.0% | | Life insurance transactions | | 342 | | | Yield | | 11.3% | |
| CLOs | CLOs | | 458 | | | Discount margin | | 0.0 | % | - | 2.9% | | 1.8% | CLOs | | 428 | | | Discount margin | | 1.8 | % | - | 4.1% | | 3.0% |
| Others | Others | | 38 | | | Yield | | 3.2 | % | - | 7.9% | | 7.9% | Others | | 24 | | | Yield | | 7.4 | % | - | 12.9% | | 12.8% |
| FG VIEs’ assets (1) | FG VIEs’ assets (1) | | 260 | | | CPR | | 0.9 | % | - | 24.5% | | 13.3% | FG VIEs’ assets (1) | | 204 | | | CPR | | 0.9 | % | - | 21.9% | | 12.9% |
| CDR | | 1.4 | % | - | 26.9% | | 7.6% | | CDR | | 1.3 | % | - | 41.0% | | 7.6% |
| Loss severity | | 45.0 | % | - | 100.0% | | 81.6% | | Loss severity | | 45.0 | % | - | 100.0% | | 81.0% |
| Yield | | 1.4 | % | - | 8.0% | | 4.6% | | Yield | | 6.6 | % | - | 10.9% | | 7.5% |
| Assets of CIVs (3): | Assets of CIVs (3): | | Assets of CIVs (3): | |
| Equity securities and warrants | Equity securities and warrants | | 239 | | | Yield | | 7.7% | | Equity securities and warrants | | 297 | | | Yield | | 10.0% | |
| | Discount rate | | 14.7 | % | - | 23.9% | | 21.6% | | Discount rate | | 19.8% | - | 25.1% | | 22.7% |
| | Market multiple-enterprise value/revenue | | 1.10x | | | Market multiple-enterprise value/revenue | | 1.05x | - | 1.10x | | 1.08x |
| | Market multiple-enterprise value/EBITDA | | 3.00x | - | 10.50x | | 8.95x | | Market multiple-enterprise value/EBITDA | | 2.50x | - | 11.00x | | 10.25x |
| | Market multiple-price to book | | 1.85x | | | Market multiple-price to book | | 1.15x | |
| | | Market multiple-price to earnings | | 4.50x | |
| | | Terminal growth rate | | 3.0% | - | 4.0% | | 3.5% |
| | | Exit multiple-EBITDA | | 8.00x | - | 12.00x | | 10.53x |
| | | Exit multiple-price to book | | 1.30x | |
| | | Exit multiple-price to earnings | | 5.50x | |
| | | Cost | | 1.00x | |
| Corporate securities | Corporate securities | | 91 | | | Discount rate | | 14.7 | % | - | 21.4% | | 17.8% | Corporate securities | | 96 | | | Discount rate | | 20.8 | % | - | 23.8% | | 21.7% |
| | Yield | | 16.4% | | | Yield | | 16.3% | |
| | | Exit multiple-EBITDA | | 8.00x | |
| | | Cost | | 1.00x | |
| | | Market multiple-enterprise value/EBITDA | | 2.50x | - | 2.75x | | 2.63x |
| Structured products | | Structured products | | 46 | | | Yield | | 12.8 | % | - | 37.1% | | 18.9% |
Other assets (1) | Other assets (1) | | 23 | | | Implied Yield | | 2.7 | % | - | 3.3% | | 3.0% | Other assets (1) | | 47 | | | Implied Yield | | 7.7 | % | - | 8.4% | | 8.1% |
| | Term (years) | | 10 years | | | 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 | | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instrument Description | | Fair Value Assets (Liabilities)
(in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
| Credit derivative liabilities, net (1) | | (162) | | | Year 1 loss estimates | | 11.5 | % | - | 25.2% | | 15.7% |
| | Bank profit (in bps) | | 51.0 | - | 270.5 | | 109.4 |
| | Internal credit rating | | AAA | - | CCC | | AA |
| FG VIEs’ liabilities (1) | | (715) | | | CPR | | 0.9 | % | - | 21.9% | | 6.3% |
| | CDR | | 1.3 | % | - | 41.0% | | 3.7% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 39.9% |
| | Yield | | 4.8 | % | - | 10.9% | | 5.9% |
| Liabilities of CIVs (1): | | | | | | | | | | |
| CLO obligations of CFEs (5) | | (4,090) | | | Yield | | 3.0 | % | - | 27.4% | | 5.5% |
| Warehouse financing debt | | (36) | | | Yield | | 11.7 | % | - | 16.9% | | 12.9% |
| Securitized borrowing | | (28) | | | Discount rate | | 20.9% | | |
| | | | Terminal growth rate | | 3.0% | | |
| | | | Exit multiple-EBITDA | | 11.00x | | |
| | | | Market multiple-enterprise value/EBITDA | | 10.00x | - | 11.00x | | 10.50x |
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $6$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.
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 is classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry.
Assets and Liabilities of CIVs
Cash equivalents are recorded at cost which approximates fair value. Due from/to brokers and counterparties primarily consists of cash, margin deposits, and cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date. Due from/to brokers and counterparties represents balances on a net-by counterparty basis on the 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Other Liabilities
Other liabilities in the table below include $32 million and $37 million asAs of SeptemberJune 30, 20222023 and December 31, 2021,2022, $36 million and $35 million, respectively, forof AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain BlueMountainconsolidated European CLOs, which was required to comply with its European risk retention obligations.obligations, were included in “liabilities held for sale” and “other liabilities,” respectively. 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 September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| | | (in millions) | | (in millions) |
| Assets (liabilities): | Assets (liabilities): | | | | | | | | Assets (liabilities): | | | | | | | |
| Assets of CIVs (1) | Assets of CIVs (1) | $ | 73 | | | $ | 73 | | | $ | 171 | | | $ | 171 | | Assets of CIVs (1) | $ | 47 | | | $ | 47 | | | $ | 46 | | | $ | 46 | |
| Assets held for sale | | Assets held for sale | 10 | | | 10 | | | — | | | — | |
| Other assets (including other invested assets) (2) | Other assets (including other invested assets) (2) | 88 | | | 89 | | | 134 | | | 135 | | Other assets (including other invested assets) (2) | 130 | | | 131 | | | 92 | | | 93 | |
| Financial guaranty insurance contracts (3) | Financial guaranty insurance contracts (3) | (2,888) | | | (2,003) | | | (2,394) | | | (2,315) | | Financial guaranty insurance contracts (3) | (2,291) | | | (1,901) | | | (2,335) | | | (986) | |
| Long-term debt | Long-term debt | (1,675) | | | (1,463) | | | (1,673) | | | (1,832) | | Long-term debt | (1,677) | | | (1,491) | | | (1,675) | | | (1,477) | |
| Liabilities of CIVs (4) | Liabilities of CIVs (4) | (236) | | | (236) | | | (586) | | | (586) | | Liabilities of CIVs (4) | (114) | | | (114) | | | (170) | | | (170) | |
| Liabilities held for sale | | Liabilities held for sale | (36) | | | (36) | | | — | | | — | |
| Other liabilities (5) | Other liabilities (5) | (52) | | | (52) | | | (45) | | | (45) | | Other liabilities (5) | (66) | | | (66) | | | (43) | | | (43) | |
____________________
(1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2) Primarily includes accrued interest, receivable for an unsettled sale of a portion of the Puerto Rico salvage and subrogation recoverable, management fees receivables for December 31, 2022, a participation loan, and receivables for securities sold, for which carrying value approximates fair value.
(3) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.
(4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value.
(5) Primarily includes accrued interest, repurchase agreement liability as of December 31, 2022, and payables for securities purchased for which carrying value approximates fair value.
10. Asset Management Fees
The following table presents the sources of asset management fees on a consolidated basis. Upon closing of the Sound Point Transaction and the AHP Transaction, the Company will account for its investment in Sound Point as an equity method investment rather than as a consolidated asset manager.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Asset Management Fees
| | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Management fees: | Management fees: | | Management fees: | |
CLOs | CLOs | $ | 8 | | | $ | 9 | | | $ | 25 | | | $ | 31 | | CLOs | $ | 9 | | | $ | 8 | | | $ | 17 | | | $ | 17 | |
| Opportunity funds and liquid strategies | Opportunity funds and liquid strategies | 2 | | | 4 | | | 14 | | | 12 | | Opportunity funds and liquid strategies | 1 | | | 8 | | | 4 | | | 12 | |
| Wind-down funds | Wind-down funds | 1 | | | 2 | | | 2 | | | 6 | | Wind-down funds | — | | | — | | | — | | | 1 | |
| Total management fees | Total management fees | 11 | | | 15 | | | 41 | | | 49 | | Total management fees | 10 | | | 16 | | | 21 | | | 30 | |
| Performance fees | Performance fees | 2 | | | — | | | 17 | | | 1 | | Performance fees | 6 | | | 1 | | | 18 | | | 15 | |
| Reimbursable fund expenses | Reimbursable fund expenses | 3 | | | 5 | | | 13 | | | 15 | | Reimbursable fund expenses | 11 | | | 4 | | | 14 | | | 10 | |
| Total asset management fees | Total asset management fees | $ | 16 | | | $ | 20 | | | $ | 71 | | | $ | 65 | | Total asset management fees | $ | 27 | | | $ | 21 | | | $ | 53 | | | $ | 55 | |
_____________________
(1) To the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs.
The Company had management and performance fees receivable whichof $10 million as of both June 30, 2023 and December 31, 2022. These balances are included in other assets“assets held for sale” and “other assets” on the condensed consolidated balance sheets of $10 million as of SeptemberJune 30, 20222023 and $8 million as of December 31, 2021.2022, respectively. Performance fees in nine months 2022 were attributable to the healthcare and asset-based funds.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
11. Long-Term Debt and Credit Facilities
On May 26, 2021, AGUS issued $500 million of 3.15% Senior Notes due 2031 (3.15% Senior Notes) for net proceeds of $494 million. On August 20, 2021, AGUS issued $400 million of 3.600% Senior Notes due 2051 (3.6% Senior Notes) for net proceeds of $395 million. On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt as follows: all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and $100 million of the $230 million of AGMH’s 6.25% Notes due in 2102. On 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. In third quarter 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 loss on extinguishment of debt primarily consisted of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the acquisition of AGMH in 2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS 5% Senior Notes.
On February 3, 2022, the Company entered into a secured short-term loan facility with a major financial institution to partially fund gross payments in connection with the resolution of a portion of its Puerto Rico exposures. See Note 3, Outstanding Exposure. The short-term loan facility permitted the Company to borrow up to $550 million for up to thirty days and up to $150 million for up to six months. The Company borrowed $400 million under the thirty days portion of this facility on March 14, 2022, and repaid it in full, with interest, on March 16, 2022. The Company did not borrow any amounts under the six months portion of the facility. The one month component bore interest at 1.10% per annum. The ability of the Company to borrow under the facility has expired.
12. Income Taxes
Overview
AGL and its Bermuda subsidiaries AG Re, AGRO and Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries) are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL’s U.S., U.K. and French subsidiaries are subject to income taxes imposed by U.S., U.K. and French authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code (the Code) to be taxed as a U.S. domestic corporation.
AGL is a tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda.
AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries, AGRO and AG Intermediary Inc., file their own consolidated federal income tax return.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (the IRA), which, among other things, implemented a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases that occur after December 31, 2022, and several tax incentives to promote clean energy. Currently, we do not believe that this new minimum tax nor the other income tax provisions of the IRA will have a material impact on our consolidated financial statements.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Tax Assets (Liabilities)
Deferred and Current Tax Assets (Liabilities) (1)
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
| (in millions) |
| Net deferred tax assets (liabilities) | $ | 185 | | | $ | (33) | |
| Net current tax assets (liabilities) | 13 | | | (43) | |
____________________
(1) Included in “other assets” or “other liabilities” on the condensed consolidated balance sheets. | | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 |
| (in millions) |
| Net deferred tax assets (liabilities) | $ | 101 | | | $ | 114 | |
| Net current tax assets (liabilities) | 35 | | | 63 | |
Valuation Allowance
During third quarterAs of June 30, 2023 and December 31, 2022, the Company recorded a return to provision adjustment, which included the utilization of $19had $5 million in foreign tax credits thereby reducing the Company's foreign tax credits (FTC) from $24 million as of December 31, 2021(FTCs) due to $5 million as of September 30, 2022. FTCs were established under the 2017 Tax Cuts and Jobs Act (TCJA) for use against regular tax in future years, andyears. 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
that the remaining FTCFTCs of $5 million will not be utilized, and therefore maintained athe valuation allowance from December 31, 2022 with respect to this tax attribute, resulting in a decrease in the valuation allowance from $24 million as of December 31, 2021 to $5 million as of September 30, 2022.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.
Changes in market conditions during 2023 and 2022, including rising interest rates, resulted in the recording of deferred tax assets related to net unrealized tax capital losses. When assessing recoverability of these deferred tax assets, the Company considers the ability and intent to hold the underlying securities to recovery in value, if necessary, as well as other factors as noted above. As of June 30, 2023 and December 31, 2022, based on all available evidence, including capital loss carryback capacity, the Company concluded that the deferred tax assets related to the unrealized tax capital losses on the available-for-sale securities portfolios are, more likely than not, expected to be realized.
Provision for Income Taxes
The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year 2022.2023. A discrete calculation of the provision is calculated for each interim period.
The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, and the French subsidiary taxed at the French marginal corporate tax rate of 25% 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 the periods between April 1, 2017 and March 31, 2023, the U.K. corporation tax rate was 19%. For periods subsequent to April 1, 2023, the U.K. corporation tax rate has been increased to 25%. For the full year 2023, the U.K. subsidiaries will be taxed at the U.K. blended marginal corporate tax rate of 23.5%. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Expected tax provision (benefit) | Expected tax provision (benefit) | $ | (6) | | | $ | (6) | | | $ | 6 | | | $ | 16 | | Expected tax provision (benefit) | $ | 23 | | | $ | (2) | | | $ | 43 | | | $ | 12 | |
| Tax-exempt interest | Tax-exempt interest | (3) | | | (4) | | | (10) | | | (12) | | Tax-exempt interest | (3) | | | (4) | | | (6) | | | (7) | |
| Noncontrolling interest | 1 | | | — | | | (5) | | | (2) | | |
| Return to provision adjustment | (20) | | | (4) | | | (20) | | | (4) | | |
| NCI | | NCI | — | | | (5) | | | (3) | | | (6) | |
| State taxes | State taxes | 2 | | | (2) | | | 10 | | | 5 | | State taxes | 4 | | | 4 | | | 7 | | | 8 | |
| Foreign taxes | Foreign taxes | (1) | | | 4 | | | 9 | | | 6 | | Foreign taxes | (4) | | | 9 | | | 1 | | | 10 | |
| Taxes on reinsurance | — | | | (4) | | | (1) | | | (1) | | |
| Stock based compensation | Stock based compensation | — | | | 1 | | | 4 | | | 1 | | Stock based compensation | (1) | | | 2 | | | — | | | 4 | |
| Other | Other | — | | | — | | | 1 | | | (1) | | Other | (1) | | | (1) | | | (1) | | | — | |
| Total provision (benefit) for income taxes | Total provision (benefit) for income taxes | $ | (27) | | | $ | (15) | | | $ | (6) | | | $ | 8 | | Total provision (benefit) for income taxes | $ | 18 | | | $ | 3 | | | $ | 41 | | | $ | 21 | |
| Effective tax rate | Effective tax rate | 123.5 | % | | (313.3) | % | | (12.1) | % | | 6.0 | % | Effective tax rate | 12.6 | % | | (12.9) | % | | 15.6 | % | | 30.3 | % |
The expected tax provision (benefit) is calculated as the sum of pre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pre-tax loss in one jurisdiction and pre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following tables present pre-tax income and revenue by jurisdiction.
Pre-tax Income (Loss) by Tax Jurisdiction
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| U.S. | U.S. | $ | 3 | | | $ | (10) | | | $ | 112 | | | $ | 92 | | U.S. | $ | 117 | | | $ | 25 | | | $ | 225 | | | $ | 109 | |
| Bermuda | Bermuda | 10 | | | 31 | | | 27 | | | 67 | | Bermuda | 33 | | | (10) | | | 58 | | | 17 | |
| U.K. | U.K. | (30) | | | (13) | | | (75) | | | (9) | | U.K. | (4) | | | (31) | | | (15) | | | (45) | |
| Other | Other | (5) | | | (3) | | | (15) | | | (5) | | Other | (2) | | | (6) | | | (4) | | | (10) | |
| Total | Total | $ | (22) | | | $ | 5 | | | $ | 49 | | | $ | 145 | | Total | $ | 144 | | | $ | (22) | | | $ | 264 | | | $ | 71 | |
Revenue by Tax Jurisdiction
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| U.S. | U.S. | $ | 60 | | | $ | 181 | | | $ | 435 | | | $ | 465 | | U.S. | $ | 293 | | | $ | 106 | | | $ | 528 | | | $ | 375 | |
| Bermuda | Bermuda | 4 | | | 32 | | | 43 | | | 90 | | Bermuda | 58 | | | 6 | | | 93 | | | 39 | |
| U.K. | U.K. | (21) | | | (1) | | | (39) | | | 29 | | U.K. | 8 | | | (18) | | | 21 | | | (18) | |
| Other | Other | (2) | | | — | | | (8) | | | 1 | | Other | 1 | | | (4) | | | 1 | | | (6) | |
| Total | Total | $ | 41 | | | $ | 212 | | | $ | 431 | | | $ | 585 | | Total | $ | 360 | | | $ | 90 | | | $ | 643 | | | $ | 390 | |
Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Audits
As of SeptemberJune 30, 2022,2023, AGUS and Assured Guaranty Overseas US Holdings Inc. had open tax years with the U.S. Internal Revenue Service (IRS) for 2018 forward and AGUS is currently under audit for the 2018 and 2019 tax years. As of June 30, 2023, Assured Guaranty Overseas US Holdings Inc. had open tax years with the IRS for 2019 forward and is not currently under audit with the IRS. In September 2022, Her Majesty'sHis Majesty’s Revenue & Customs completed a business risk review of Assured Guaranty that commenced in July 2022 and assigned a low-risk rating for corporate taxes.taxes in the U.K. The Company’s French subsidiary is not currently under examination and has open tax years of 2019 forward.
13.12. Commitments and Contingencies
Legal Proceedings
Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations or liquidity in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of AGL’s insurance subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company is involved in a number of legal actions in the Federal District Court forof Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See “Exposure to Puerto Rico” section of Note 3, Outstanding Exposure, for a description of such actions. Also in the ordinary course of their respective business, certain of AGL’s investment management subsidiariesaffiliates are involved in litigation with third parties regarding fees, appraisals, or portfolio companies. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
year. In the first quarter of 2023, the Company reduced its previously recorded accrual of $20 million to zero in connection with developments in litigation.
The Company also receives subpoenas and interrogatories from regulators from time to time.
Litigation
On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial Products Inc. (AGFP), an affiliate of AGC, which, in the past, had provided credit protection to counterparties under CDS. AGC acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the State of New York (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 nine credit derivative transactions between LBIE and AGFP and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination in July 20082009 of 28 other credit derivative transactions between LBIE and AGFP and AGFP’s calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP properlyhad terminated the transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP hasproperly calculated that LBIE owes AGFP approximately $4 million for the claims which were dismissed (as described below) 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. AGFP filed a motion to dismiss the claims for breach of the implied covenant of good faith in LBIE’s complaint, and onOn March 15, 2013, the courtCourt granted AGFP’s motion to dismiss in respect of the count relating to the nine credit derivative transactions and narrowed LBIE’s claim with respect to the 28 other credit derivative transactions. LBIE’s administrators disclosedFollowing a bench trial, on March 8, 2023, the Court rendered its decision and found in favor of AGFP. On May 17, 2023, the Court issued an April 10, 2015 reportorder holding that AGFP is entitled to LBIE’s unsecured creditors that LBIE’s valuation expert has calculated LBIE’s claiminterest on its damages award at a rate of 8% simple and directing the clerk to enter judgment in favor of AGFP. On June 30, 2023, the clerk entered judgment in favor of AGFP in the amount of approximately $54 million 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. In addition, LBIE seeks prejudgment interest from the time of termination onwards. AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP’s counterclaims and, on July 2, 2018,10, 2023, LBIE filed a notice of appeal of that judgment. On July 1, 2023, AGFP moved the court granted in partCourt to award it approximately $58 million for attorneys’ fees and denied in part AGFP’s motion.expenses AGFP incurred through March 2023. The court dismissed,Company has not accrued for either of these amounts in its entirety, LBIE’s remaining claim for breach of the implied covenant of good faith and fair dealing and also dismissed LBIE’s claim for breach of contract solely to the extent that it is based upon AGFP’s conduct in connection with the auction. With respect to LBIE’s claim for breach of contract, the court held that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. On October 1, 2018, AGFP filed an appeal with the Appellate Division of the Supreme Court of the State of New York, First Judicial Department, seeking reversal of the portions of thefinancial statements.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
lower court’s ruling denying AGFP’s motion for summary judgment with respect to LBIE’s sole remaining claim for breach of contract. On January 17, 2019, the Appellate Division affirmed the Supreme Court’s decision, holding that the lower court correctly determined that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. A bench trial was held before Justice Melissa A. Crane of the New York Supreme Court from October 18 through November 19, 2021. Post-trial briefing was completed on June 21, 2022, and a decision is anticipated in the fourth quarter of 2022.
14.13. Shareholders’ Equity
Other Comprehensive Income
The following tables present the changes in each component of AOCIaccumulated other comprehensive income (AOCI) and the effect of reclassifications out of AOCI into the respective lines in the condensed consolidated statements of operations.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
ThirdSecond Quarter 20222023
| | | Net Unrealized Gains (Losses) on Investments with: | | ISCR on
FG VIEs’ Liabilities with Recourse | | Cumulative
Translation
Adjustment | | Cash Flow
Hedge | | Total AOCI | | 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 | | | No Credit Impairment | | Credit Impairment | |
| | (in millions) | | (in millions) |
| Balance, June 30, 2022 | $ | (205) | | | $ | (107) | | | $ | (19) | | | $ | (45) | | | $ | 6 | | | $ | (370) | | |
| Balance, March 31, 2023 | | Balance, March 31, 2023 | $ | (254) | | | $ | (105) | | | $ | (24) | | | $ | (43) | | | $ | 6 | | | $ | (420) | |
| Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | (286) | | | (1) | | | (3) | | | (4) | | | — | | | (294) | | Other comprehensive income (loss) before reclassifications | (30) | | | (18) | | | 1 | | | 1 | | | — | | | (46) | |
| Less: Amounts reclassified from AOCI to: | Less: Amounts reclassified from AOCI to: | | Less: Amounts reclassified from AOCI to: | |
| Net realized investment gains (losses) | Net realized investment gains (losses) | (11) | | | (3) | | | — | | | — | | | — | | | (14) | | Net realized investment gains (losses) | 1 | | | (10) | | | — | | | — | | | — | | | (9) | |
| Fair value gains (losses) on FG VIEs | Fair value gains (losses) on FG VIEs | — | | | — | | | — | | | — | | | — | | | — | | Fair value gains (losses) on FG VIEs | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Interest expense | | Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Total before tax | Total before tax | (11) | | | (3) | | | — | | | — | | | — | | | (14) | | Total before tax | 1 | | | (10) | | | (1) | | | — | | | 1 | | | (9) | |
| Tax (provision) benefit | Tax (provision) benefit | 2 | | | — | | | — | | | — | | | — | | | 2 | | Tax (provision) benefit | (1) | | | 2 | | | — | | | — | | | 1 | |
| Total amount reclassified from AOCI, net of tax | Total amount reclassified from AOCI, net of tax | (9) | | | (3) | | | — | | | — | | | — | | | (12) | | Total amount reclassified from AOCI, net of tax | — | | | (8) | | | (1) | | | — | | | 1 | | | (8) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | (277) | | | 2 | | | (3) | | | (4) | | | — | | | (282) | | Other comprehensive income (loss) | (30) | | | (10) | | | 2 | | | 1 | | | (1) | | | (38) | |
| Balance, September 30, 2022 | $ | (482) | | | $ | (105) | | | $ | (22) | | | $ | (49) | | | $ | 6 | | | $ | (652) | | |
| Balance, June 30, 2023 | | Balance, June 30, 2023 | $ | (284) | | | $ | (115) | | | $ | (22) | | | $ | (42) | | | $ | 5 | | | $ | (458) | |
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Second Quarter 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, March 31, 2022 | $ | 37 | | | $ | (63) | | | $ | (21) | | | $ | (37) | | | $ | 6 | | | $ | (78) | |
| Other comprehensive income (loss) before reclassifications | (261) | | | (48) | | | 2 | | | (8) | | | — | | | (315) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | (23) | | | (5) | | | — | | | — | | | — | | | (28) | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Total before tax | (23) | | | (5) | | | (1) | | | — | | | — | | | (29) | |
| Tax (provision) benefit | 4 | | | 1 | | | 1 | | | — | | | — | | | 6 | |
| Total amount reclassified from AOCI, net of tax | (19) | | | (4) | | | — | | | — | | | — | | | (23) | |
| Other comprehensive income (loss) | (242) | | | (44) | | | 2 | | | (8) | | | — | | | (292) | |
| Balance, June 30, 2022 | $ | (205) | | | $ | (107) | | | $ | (19) | | | $ | (45) | | | $ | 6 | | | $ | (370) | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Third Quarter 2021Six Months 2023
| | | Net Unrealized Gains (Losses) on Investments with: | | ISCR on
FG VIEs’ Liabilities with Recourse | | Cumulative
Translation
Adjustment | | Cash Flow
Hedge | | Total AOCI | | 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 | | | No Credit Impairment | | Credit Impairment | |
| | (in millions) | | (in millions) |
| Balance, June 30, 2021 | $ | 509 | | | $ | (12) | | | $ | (23) | | | $ | (36) | | | $ | 7 | | | $ | 445 | | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | $ | (343) | | | $ | (110) | | | $ | (23) | | | $ | (45) | | | $ | 6 | | | $ | (515) | |
| Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | (69) | | | (2) | | | 1 | | | — | | | — | | | (70) | | Other comprehensive income (loss) before reclassifications | 61 | | | (17) | | | (1) | | | 3 | | | — | | | 46 | |
| Less: Amounts reclassified from AOCI to: | Less: Amounts reclassified from AOCI to: | | Less: Amounts reclassified from AOCI to: | |
| Net realized investment gains (losses) | Net realized investment gains (losses) | (3) | | | 5 | | | — | | | — | | | — | | | 2 | | Net realized investment gains (losses) | 4 | | | (15) | | | — | | | — | | | — | | | (11) | |
| Fair value gains (losses) on FG VIEs | Fair value gains (losses) on FG VIEs | — | | | — | | | (1) | | | — | | | — | | | (1) | | Fair value gains (losses) on FG VIEs | — | | | — | | | (2) | | | — | | | — | | | (2) | |
| Interest expense | Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | | Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Total before tax | Total before tax | (3) | | | 5 | | | (1) | | | — | | | 1 | | | 2 | | Total before tax | 4 | | | (15) | | | (2) | | | — | | | 1 | | | (12) | |
| Tax (provision) benefit | Tax (provision) benefit | — | | | (1) | | | — | | | — | | | — | | | (1) | | Tax (provision) benefit | (2) | | | 3 | | | — | | | — | | | 1 | |
| Total amount reclassified from AOCI, net of tax | Total amount reclassified from AOCI, net of tax | (3) | | | 4 | | | (1) | | | — | | | 1 | | | 1 | | Total amount reclassified from AOCI, net of tax | 2 | | | (12) | | | (2) | | | — | | | 1 | | | (11) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | (66) | | | (6) | | | 2 | | | — | | | (1) | | | (71) | | Other comprehensive income (loss) | 59 | | | (5) | | | 1 | | | 3 | | | (1) | | | 57 | |
| Balance, September 30, 2021 | $ | 443 | | | $ | (18) | | | $ | (21) | | | $ | (36) | | | $ | 6 | | | $ | 374 | | |
| Balance, June 30, 2023 | | Balance, June 30, 2023 | $ | (284) | | | $ | (115) | | | $ | (22) | | | $ | (42) | | | $ | 5 | | | $ | (458) | |
Changes in Accumulated Other Comprehensive Income (Loss) by Component
NineSix Months 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | (886) | | | (92) | | | (2) | | | (13) | | | — | | | (993) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | (35) | | | (13) | | | — | | | — | | | — | | | (48) | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (2) | | | — | | | — | | | (2) | |
| Total before tax | (35) | | | (13) | | | (2) | | | — | | | — | | | (50) | |
| Tax (provision) benefit | 6 | | | 2 | | | 1 | | | — | | | — | | | 9 | |
| Total amount reclassified from AOCI, net of tax | (29) | | | (11) | | | (1) | | | — | | | — | | | (41) | |
| Other comprehensive income (loss) | (857) | | | (81) | | | (1) | | | (13) | | | — | | | (952) | |
| Balance, September 30, 2022 | $ | (482) | | | $ | (105) | | | $ | (22) | | | $ | (49) | | | $ | 6 | | | $ | (652) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | (600) | | | (91) | | | 1 | | | (9) | | | — | | | (699) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | (24) | | | (10) | | | — | | | — | | | — | | | (34) | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (2) | | | — | | | — | | | (2) | |
| Total before tax | (24) | | | (10) | | | (2) | | | — | | | — | | | (36) | |
| Tax (provision) benefit | 4 | | | 2 | | | 1 | | | — | | | — | | | 7 | |
| Total amount reclassified from AOCI, net of tax | (20) | | | (8) | | | (1) | | | — | | | — | | | (29) | |
| Other comprehensive income (loss) | (580) | | | (83) | | | 2 | | | (9) | | | — | | | (670) | |
| Balance, June 30, 2022 | $ | (205) | | | $ | (107) | | | $ | (19) | | | $ | (45) | | | $ | 6 | | | $ | (370) | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Nine Months 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | (134) | | | 14 | | | (3) | | | — | | | — | | | (123) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | 1 | | | 2 | | | — | | | — | | | — | | | 3 | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (3) | | | — | | | — | | | (3) | |
| Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Total before tax | 1 | | | 2 | | | (3) | | | — | | | 1 | | | 1 | |
| Tax (provision) benefit | (1) | | | — | | | 1 | | | — | | | — | | | — | |
| Total amount reclassified from AOCI, net of tax | — | | | 2 | | | (2) | | | — | | | 1 | | | 1 | |
| Other comprehensive income (loss) | (134) | | | 12 | | | (1) | | | — | | | (1) | | | (124) | |
| Balance, September 30, 2021 | $ | 443 | | | $ | (18) | | | $ | (21) | | | $ | (36) | | | $ | 6 | | | $ | 374 | |
Share Repurchases
On August 3, 2022, the Board of Directors (the Board) authorized the repurchase of an additional $250 million of its common shares. Under this and previous authorizations, as of November 7, 2022, the Company was authorized to purchase $261 million of its common shares. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date.
Share Repurchases
| | | | | | | | | | | | | | | | | | | | |
| Period | | Number of Shares Repurchased | | Total Payments
(in millions) | | Average Price Paid Per Share |
| 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 - June 30) | | 2,605,947 | | | 151 | | | 58.03 | |
| 2022 (July 1 - September 30) | | 1,790,395 | | | 97 | | | 53.77 | |
| 2022 (October 1 - November 7) | | 785,863 | | | 42 | | | 53.99 | |
| Total 2022 | | 7,920,428 | | | $ | 445 | | | 56.18 | |
____________________
(1) Includes $3 As of August 8, 2023, the Company was authorized to purchase $158 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 that was prepaid in December 2021under the program are at the discretion of management and settled inwill depend on a variety of factors, including funds available at the first quarterparent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of 2022.Directors at any time. It does not have an expiration date.
Share Repurchases
| | | | | | | | | | | | | | | | | | | | |
| Period | | Number of Shares Repurchased | | Total Payments
(in millions) | | Average Price Paid Per Share |
| 2022 (January 1 - March 31) | | 2,738,223 | | | $ | 155 | | | $ | 56.62 | |
| 2022 (April 1 - June 30) | | 2,605,947 | | | 151 | | | 58.03 | |
| 2022 (July 1- September 30) | | 1,790,395 | | | 97 | | | 53.77 | |
| 2022 (October 1- December 31) | | 1,713,416 | | | 100 | | | 58.34 | |
| Total 2022 | | 8,847,981 | | | $ | 503 | | | 56.79 | |
| 2023 (January 1 - March 31) | | 36,369 | | | 2 | | | 62.23 | |
| 2023 (April 1 - June 30) | | 453,942 | | | 24 | | | 53.08 | |
| 2023 (July 1 - August 8) | | 320,646 | | | 19 | | | 58.32 | |
| Total 2023 | | 810,957 | | | $ | 45 | | | 55.56 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
15.14. Earnings Per Share
Computation of Earnings Per Share
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions, except per share amounts) | | (in millions, except per share amounts) |
| Basic Earnings Per Share (EPS): | Basic Earnings Per Share (EPS): | | Basic Earnings Per Share (EPS): | |
| Net income (loss) attributable to AGL | Net income (loss) attributable to AGL | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Net income (loss) attributable to AGL | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| Less: Distributed and undistributed income (loss) available to nonvested shareholders | Less: Distributed and undistributed income (loss) available to nonvested shareholders | — | | | — | | | — | | | — | | Less: Distributed and undistributed income (loss) available to nonvested shareholders | 1 | | | — | | | 1 | | | — | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 124 | | | $ | (47) | | | $ | 205 | | | $ | 19 | |
| Basic shares | Basic shares | 61.7 | | | 72.7 | | | 63.9 | | | 74.9 | | Basic shares | 59.2 | | | 63.8 | | | 59.1 | | | 65.0 | |
| Basic EPS | Basic EPS | $ | 0.18 | | | $ | 0.22 | | | $ | 0.47 | | | $ | 1.67 | | Basic EPS | $ | 2.09�� | | | $ | (0.74) | | | $ | 3.46 | | | $ | 0.29 | |
| | Diluted EPS: | Diluted EPS: | | Diluted EPS: | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 124 | | | $ | (47) | | | $ | 205 | | | $ | 19 | |
| Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries | Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries | — | | | — | | | — | | | — | | 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 | Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted | $ | 124 | | | $ | (47) | | | $ | 205 | | | $ | 19 | |
| Basic shares | Basic shares | 61.7 | | | 72.7 | | | 63.9 | | | 74.9 | | Basic shares | 59.2 | | | 63.8 | | | 59.1 | | | 65.0 | |
| Dilutive securities: | Dilutive securities: | | Dilutive securities: | |
| Options and restricted stock awards | 1.2 | | | 0.9 | | | 1.2 | | | 0.8 | | |
| Restricted stock awards | | Restricted stock awards | 0.9 | | | — | | | 1.2 | | | 1.2 | |
| Diluted shares | Diluted shares | 62.9 | | | 73.6 | | | 65.1 | | | 75.7 | | Diluted shares | 60.1 | | | 63.8 | | | 60.3 | | | 66.2 | |
| Diluted EPS | Diluted EPS | $ | 0.18 | | | $ | 0.22 | | | $ | 0.46 | | | $ | 1.66 | | Diluted EPS | $ | 2.06 | | | $ | (0.74) | | | $ | 3.40 | | | $ | 0.29 | |
| Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | 0.1 | | | — | | | 0.8 | | | 0.1 | | Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | 0.2 | | | 2.1 | | | 0.1 | | | 1.2 | |
ITEM 2. MANAGEMENT'SMANAGEMENT’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:
•significant changes in inflation, interest rates, the world’s credit markets or segments thereof, credit spreads, foreign exchange rates or general economic conditions, including the possibility of a recession;
•consequencesgeopolitical risk, including United States (U.S.)-China strategic competition and technology decoupling, Russia’s invasion of Ukraine and the conflict in Ukraine, includingresulting economic sanctions, fragmentation of global supply chains, volatility in energy prices, and the potential for increased cyberattacks;cyberattacks, and risk of intentional or accidental escalation between The North Atlantic Treaty Organization (NATO) and Russia;
•the development, course and durationpossibility of a U.S. government shutdown, payment defaults on the debt of the COVID-19 pandemicU.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings;
•public health crises, including pandemics and endemics, and the governmental and private actions taken in response and the global consequences of the pandemic andto such actions, including their impact on the factors listed in this section;events;
•developments in the world’s financial and capital markets, including stresses in the financial condition of banking institutions in the U.S., that adversely affect insured obligors’ repayment rates related to commercial real estate, municipalities and other insured obligors, Assured Guaranty’s insurance loss or recovery experience, or investments of Assured Guaranty or assets it manages;Guaranty;
•reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty’s insurance;
•the loss of investorsrisk that the Company’s investments in funds managed by Sound Point Capital Management, LP (Sound Point) do not result in the benefits anticipated or subject Assured Guaranty’s asset management strategies or the failureGuaranty to attract new investors to Assured Guaranty’s asset management business;negative consequences;
•the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures;
•insured losses, including losses with respect to related legal proceedings, in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the failure to resolvefinal resolution of Assured Guaranty’s exposures toremaining Puerto Rico (Puerto Ricoexposures or the Commonwealth)amounts recovered on securities received in a manner substantially consistentconnection with the support agreements signedresolution of Puerto Rico exposures already resolved;
•the impact of the Company satisfying its obligations under insurance policies with respect to date;legacy insured Puerto Rico bonds;
•increased competition, including from new entrants into the financial guaranty industry;
•poor performanceindustry, nonpayment insurance and other forms of Assured Guaranty’s asset management strategies comparedcapital saving or risk syndication available to the performance of the asset management strategies of Assured Guaranty’s competitors;banks and insurers;
•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 impacts of the completion of Assured Guaranty’s transactions with Sound Point and/or Assured Healthcare Partners LLC (AHP) on Assured Guaranty and its relationships with its shareholders, regulators, rating agencies, employees and the obligors it insures and on the AssuredIM Contributed Business and on the business of AHP and their relationships with their respective clients and employees;
•the possibility that strategic transactions made by Assured Guaranty, including the consummation of the transactions with Sound Point and/or AHP, do not result in the benefits anticipated or subject Assured Guaranty to negative consequences;
•the inability to control the business, management or policies of entities in which the Company holds a minority interest;
•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 watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured;
•the inability of Assured Guaranty to access external sources of capital on acceptable terms;
•changes in applicable accounting policies or practices;
•changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions;
•the possibility that acquisitions made by Assured Guaranty, including its acquisition of BlueMountain Capital Management LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities (BlueMountain Acquisition), do not result in the benefits anticipated or subject Assured Guaranty to unanticipated consequences;
•difficulties with the execution of Assured Guaranty’s business strategy;
•loss of key personnel;
•the effects of mergers, acquisitions and divestitures;
•natural or man-made catastrophes or pandemics;
•the impact of climate change on Assured Guaranty’s business and regulatory actions taken related to such risk;
•other risk factors identified in AGL’s filings with the United States (U.S.)U.S. Securities and Exchange Commission (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 and risk factors that are included in this Form 10-Q, as well as the risk factors included in the Company’s 20212022 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 internet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance) links to the Company’s Corporate Governance Guidelines, the Company’s Global Code of Ethics, AGL’s Bye-Laws and the charters for the committees of its Board of Directors. In addition, the SEC maintains a web site (at www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses). The Company also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.
The information contained on, or that may be accessed through, the Company’s web site or social media account is not incorporated by reference into, and is not a part of, this report.
Overview
Business
The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s chief operating decision maker reviews the business to assess performance and allocate 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 internationalnon-U.S. public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled
payment due on an obligation, including a scheduled principal or interest payment (collectively, debt service),Until July 1, 2023, the Company is required under its unconditional and irrevocable financial guarantyserved as investment advisor to pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia. The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience, 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 provides investment advisory services, which include the management of collateralized loan obligations (CLOs), and opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down.wind-down, through 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,. Beginning July 1, 2023, the Company participates in the fourth quarter of 2019, of the Asset Management segment diversifies the risk profile and revenue opportunities of the Company. As of September 30, 2022, AssuredIM had $17.5 billion of assets underasset management (AUM), including $1.3 billion that is managed on behalf of Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC).
Feesbusiness through its ownership interest in respect of investment advisory services are the largest component of revenues for the Asset Management segment. AssuredIM is compensated for its investment advisory services generally through management fees which are based on AUM, and may also earn performance fees calculatedSound Point as a percentage of net profits or based on an internal rate of return referencing distributions made to investors, in each case, in respect of funds, CLOs and/or accounts which it advises.described below.
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 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.
Asset Management Transactions
On July 1, 2023, Assured Guaranty contributed to Sound Point most of its asset management business, other than that conducted by Assured Healthcare Partners LLC (AssuredIM Contributed Business), as contemplated by the transaction agreement entered into with Sound Point on April 5, 2023 (Transaction Agreement). In addition, in accordance with the terms of a letter agreement (Letter Agreement), effective July 1, 2023, Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC) (collectively, the U.S. Insurance Subsidiaries) (i) engaged Sound Point as their sole alternative credit manager, and (ii) transitioned to Sound Point the management of certain existing alternative investments and related commitments. The Letter Agreement also provides that, in the first two years of Sound Point’s engagement, the U.S. Insurance Subsidiaries would, subject to regulatory approval, make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the alternative investments and commitments transitioned from AssuredIM, will total $1 billion. See Note 7, Investments. Assured Guaranty received, subject to certain potential post-closing adjustments, common interests in Sound Point representing a 30% participation percentage in Sound Point, and certain other interests in related Sound Point entities (the transactions contemplated under the Transaction Agreement and the Letter Agreement, the Sound Point Transaction).
Based on the combined assets under management (AUM) of AssuredIM and Sound Point as of March 31, 2023, Sound Point would be the fifth largest CLO manager by AUM in the world (based on March 31, 2023 CreditFlux CLO manager rankings).
In July 2023, Assured Guaranty sold all of its equity interests in Assured Healthcare Partners LLC (AHP), which manages healthcare funds, to an entity owned and controlled by the managing partner of AHP (AHP Transaction). In connection with the AHP Transaction, the Company agreed to remain a strategic investor in certain AHP investment vehicles, is retaining certain carried interest in AHP entities and received other consideration.
Economic Environment
Economic activity in the U.S. and in Europe showed mixed signalsReal gross domestic product (GDP) increased 2.4% in the three-month period ended SeptemberJune 30, 2022 (third2023 (second quarter 2022). According2023), compared to an increase of 2.0% in the first quarter of 2023, according to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA), the initial estimate for third quarter 2022 real gross domestic product (GDP) was 2.6%. This return to positive GDP in third quarter 2022 followed two consecutive negative GDP quarters to start 2022, with GDP contracting 1.6% in the first quarter of 2022 and contracting 0.6% in the second quarter of 2022. Two straight quarters of GDP contraction is commonly recognized as a sign of recession. At the end of September 2022,June 2023, the U.S. unemployment rate, seasonally adjusted, stood at 3.5%3.6%, relativelynearly unchanged from where it had started the end of June 2022 when it stood at 3.6%,quarter, and down from athe COVID-19 pandemic high of 14.7% in April 2020. According to the U.K.’s Office for National Statistics (ONS), U.K. GDP fell by 0.3% in the three months through August compared with the three months through May 2022, the latest data available. More globally, the Organization for Economic Co-operation and Development (OECD) estimated that GDP in the OECD area increased by 0.4% in the second quarter of 2022 compared to the first quarter of 2022 (the latest data available). The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default.
According to the U.S. Bureau of Labor Statistics (BLS), the inflation rate in the U.S. overbefore seasonal adjustment for the 12-month period ending September 2022,June 2023, as measured by the consumer price index (CPI)Consumer Price Index for all urban consumers, roseAll Urban Consumers (CPI-U), was 3.0%, as compared to 8.2% before seasonal adjustment.5.0% for the 12-month period ending March 2023. The energy index increased 19.8%BLS reports that the 3.0% increase for the 12 months ending September, a smallerJune 2023 was the smallest 12-month increase thansince the 41.6% increase over the 12 months ended June 2022. The food index increased 11.2% over the same period.period ending March 2021. According to the U.K.’s ONS,United
Kingdom’s (U.K.) Office for National Statistics, the CPIConsumer Prices Index including owner occupiers’ housing costs (CPIH) was 8.8% in7.3% for the 12 months ending September 2022, upto June 2023, down from 8.6% in August 2022 and 8.2% in June 2022.8.9% for the 12 months ended March 2023. Consumer price inflation 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. In addition, consumer price inflation in the U.K. increases exposurereported net par outstanding for certain U.K exposures with approximately $18$22.0 billion of net par outstanding as of SeptemberJune 30, 2022,2023, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally.
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 third quarter 2022 at 3.18% but rose 72 basis points (bps) to end the quarter at 3.90%. The average rate for the quarter was 3.22%, considerably above the 2.00% average for the first quarter of 2022 and 1.54% average for full year 2021. With the Federal Open Market Committee (FOMC) acknowledging inflationary pressure building,the need to combat inflation, the FOMC decided at its meeting in March 2022 to start again raising the target range for the federal funds rate and has continued to do so since then. In addition, the FOMC stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. At the conclusion of its September 20-21,From March 2022 meeting,through July 26, 2023, the FOMC raised the target range for the federal funds target rate by 75 bps11 times, from a range of 0% to 3%0.25% where it started 2022 to 3.25%,a range of 5.25% to 5.50% at its July 25-26, 2023 meeting, stating that it anticipates that ongoing increases inseeks to achieve maximum employment and inflation at the target range willrate of 2% over the longer run. In determining the extent to which additional policy firming may be appropriate. At the conclusion of its November 1-2, 2022 meeting,appropriate to return inflation to 2% over time, the FOMC raisedindicated that it will take into account the federal funds target rate by 75 bps to 3.75% to 4%. cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
The level and direction of interest rates and credit spreads impact the Company in numerous ways. For example,On the one hand, higher interest rates (when accompanied by wider spreads) may makereduce the fair value of fixed-maturity securities currently held in the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for those products, and, over time, also increase the amount the Company can earn on its largely fixed-income investment portfolio. Specifically, the level of interest rates and spreads 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 and spreads 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. Higher interest rates may alsoportfolio, dampen municipal bond issuance and negatively impact the finances of some of the obligors whose payments the Company insures.
On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it can charge for those products. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.41% for the quarter ended June 2023, slightly higher than the 3.37% average for the quarter ended March 2023, and higher than the 3.05% average for the quarter ended June 2022. Meanwhile, the difference, or credit spread, between the 30-year A-ratedBBB-rated general obligation relative to the 30-year AAA MMD averaged 56 bps101 basis points (bps) in thirdthe quarter 2022,ended June 2023, which is the same spread as 56 bps in the second quarter of 2022, and 33 bps in full year 2021. BBB credit spreads measured onended March 2023, but wider than the same basis averaged 95 bps in third quarter 2022, up from 90 bps inaverage for the second quarter of 2022ended June 2022. The Company believes that, over time, wider spreads could permit it to increase its premium rates on new business, and 70 bps in full year 2021.higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.
U.S.Additionally, the Company believes that higher interest rates are discouraging homeowners from moving as many are locked into lower mortgage interest rates at the homes in which they reside, which, in turn, is restricting housing inventory and leading to an increase in home prices decreasedas demand outpaces supply. The increase in third quarter 2022. According tohousing prices may benefit distressed residential mortgage-backed securities (RMBS) the Company insures. The National Association of Realtors reported existing-home sales declined 18.9% in June 2023 from one year ago with fewer Americans on the move. The median existing-home price for all housing types in September 2022June 2023 was $384,000, a 7.7% decrease. Existing home sales continued to decline in September 2022, the eighth consecutive month, to a seasonally adjusted rate$410,200, an increase of 4.71 million, down 23.8%9.2% from one year ago. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, continued to decelerate in August, reporting a 13.0% annual gain in August (the latest data available), down from 15.6% in the previous month. The 10-City Composite annual increase came in at 12.1%, down from 14.9% in the previous month. The 20-City Composite posted a 13.1% year-over-year gain, down from 16.0% in the previous monthMarch 2023 ($375,700). Home prices in the U.S. impact the performance of the 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
The emergence and continuation of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Due to the nature of the Company’s business, COVID-19 and its global impact, directly and indirectly affected certain sectors in the insured portfolio.
Shortly after the pandemic reached the U.S. through early 2021, the Company’s surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio 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 these supplemental procedures. However, the Company it is still monitoring those sectors it identified as most at risk for any developments related to COVID-19. 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., U.K. and France. By the end of February 2022, the Company had reopened all of its offices, choosing a hybrid remote and office work model in response to employee feedback and as part of its commitment to providing a safe and healthy workplace. Whether its employees are working remotely or in a hybrid remote and office work model, the Company continues to provide the services and communications it normally would.
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 managementstrategies and alternative investments. Currently, the Company is currently pursuing the following key business strategies in three areas: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.
Insurance
The Company seeks to grow the insurance business through new business production, acquisitions of remaining other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (legacy monoline insurers) or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio.
Growth of the Insured Portfolio
The Company seeks to grow its financial guaranty insurance portfolio through new business production in each of its three markets: U.S. public finance international infrastructure(including infrastructure) and 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:
• (i) encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds;
• (ii) enables institutional investors to operate more efficiently; and
• (iii) allows smaller, less well-known issuers to gain market access on a more cost-effective basis.
The low interest rate environment and tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. More recently, uncertainty related tocrisis. After the onset of the COVID-19 pandemic and then rising interest rates improvedin early 2020, credit spreads initially widened as a result of market concerns about the impact of the COVID-19 pandemic on some municipal credits, thereby improving demand for financial guaranty insurance.insurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that, if interest rates andover time, wider credit spreads further increase in 2022,may improve demand for bond insurance may improve.insurance.
In certain segments of the global infrastructure and structured finance markets, the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company’s business opportunities and its risk profile beyond U.S. public finance. The timing of new business production in 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
| | | | Nine Months 2022 | | Nine Months 2021 | | Year Ended December 31, 2021 | | Six Months 2023 | | Six Months 2022 | | Year Ended December 31, 2022 |
| | | (dollars in billions, except number of issues and percentages) | | (dollars in billions, except number of issues and percentages) |
| Par: | Par: | | Par: | |
| New municipal bonds issued | New municipal bonds issued | $ | 292.2 | | | $ | 343.4 | | | $ | 456.7 | | New municipal bonds issued | $ | 172.5 | | | $ | 200.8 | | | $ | 359.7 | |
| Total insured | Total insured | $ | 22.9 | | | $ | 29.1 | | | $ | 37.5 | | Total insured | $ | 15.6 | | | $ | 17.6 | | | $ | 28.8 | |
| Insured by Assured Guaranty | Insured by Assured Guaranty | $ | 12.9 | | | $ | 17.4 | | | $ | 22.6 | | Insured by Assured Guaranty | $ | 9.8 | | | $ | 9.9 | | | $ | 17.0 | |
| Number of issues: | Number of issues: | | Number of issues: | |
| New municipal bonds issued | New municipal bonds issued | 6,420 | | | 9,125 | | | 11,819 | | New municipal bonds issued | 3,525 | | | 4,682 | | | 7,902 | |
| Total insured | Total insured | 1,146 | | | 1,714 | | | 2,198 | | Total insured | 622 | | | 840 | | | 1,420 | |
| Insured by Assured Guaranty | Insured by Assured Guaranty | 529 | | | 826 | | | 1,076 | | Insured by Assured Guaranty | 290 | | | 378 | | | 648 | |
| Bond insurance market penetration based on: | Bond insurance market penetration based on: | | Bond insurance market penetration based on: | |
| Par | Par | 7.8 | % | | 8.5 | % | | 8.2 | % | Par | 9.0 | % | | 8.8 | % | | 8.0 | % |
| Number of issues | Number of issues | 17.9 | % | | 18.8 | % | | 18.6 | % | Number of issues | 17.6 | % | | 17.9 | % | | 18.0 | % |
| Single A par sold | Single A par sold | 29.9 | % | | 27.2 | % | | 26.6 | % | Single A par sold | 36.8 | % | | 35.7 | % | | 30.2 | % |
| Single A transactions sold | Single A transactions sold | 58.8 | % | | 56.4 | % | | 56.6 | % | Single A transactions sold | 62.3 | % | | 59.0 | % | | 59.0 | % |
| $25 million and under par sold | $25 million and under par sold | 21.6 | % | | 21.6 | % | | 21.3 | % | $25 million and under par sold | 22.3 | % | | 21.6 | % | | 21.9 | % |
| $25 million and under transactions sold | $25 million and under transactions sold | 21.0 | % | | 21.9 | % | | 21.7 | % | $25 million and under transactions sold | 21.2 | % | | 20.8 | % | | 21.4 | % |
____________________
(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business.
The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies.
In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company’s role in the
Detroit, Michigan and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations.
After over five years of negotiations, 2022 has beenwas a turning point for resolving a substantial portion of the Company’s Puerto Rico exposure in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico):
•On January 18, 2022, related to the Federal District Court ofCompany’s exposure to all defaulting Puerto Rico acting under Title III of thecredits except Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth ofElectric Power Authority (PREPA) (2022 Puerto Rico the Employees Retirement System of the Government of the Commonwealth ofResolutions) as discussed in Item 1, Financial Statements, Note 3, Outstanding Exposure—Exposure to 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 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), and the Company believes its terms are consistent with the terms of the settlement embodied in a revised plan support agreement (PSA) for GO and PBA 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).
•On October 12, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the amended plan of adjustment for the Puerto Rico Highways and Transportation Authority (PRHTA) filed by the FOMB with the Federal District Court of Puerto Rico on September 6, 2022 (HTA Plan). The HTA Plan restructures approximately $6.4 billion of debt (including the PRHTA bonds insured by the Company), and the Company believes its terms are consistent with the terms of the settlement embodied in the PRHTA PSA entered into on May 5, 2021, by AGM and AGC and certain other stakeholders, the Commonwealth, and the FOMB (the HTA PSA). The FOMB will set the effective date of the HTA Plan (HTA Effective Date) and, as of November 7, 2022, the expected HTA Effective Date had not yet been announced.Rico.
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 the PRCCDAPuerto Rico Convention Center District Authority (PRCCDA) and PRIFAPuerto Rico Infrastructure Authority (PRIFA) were extinguished, and its insurance exposure to Puerto Rico GOgeneral obligations (GO) bonds, Public Buildings Authority (PBA) bonds and PBAPuerto Rico Highway and Transportation Authority (PRHTA) bonds was greatly reduced. The Company expects that, upon consummation ofbelieves the HTA Plan, its exposure to PRHTA also will be greatly reduced. In the nine-month period ended September 30, 2022 (nine months 2022), the Company has reduced its total Puerto Rico exposure, all rated below-investment-grade (BIG), by $1.5 billion (from $3.6 billion as of December 31, 2021 to $2.1 billion as of September 30, 2022), with a further substantial reduction likely upon implementation of the HTA Plan. The Company believes the consummation of the March Puerto Rico Resolutions on March 15, 2022, and the consummation of the HTA Plan that will occur on the HTA Effective Date, mark significant milestones in its Puerto Rico loss mitigation efforts.
In connection with the consummation of the March2022 Puerto Rico Resolutions, and the HTA PSA, the Company received substantial amounts of cash, new recoverygeneral obligation bonds (New GO Bonds) and new bonds backed by toll revenues (Toll Bonds, and together with New GO Bonds, New Recovery Bonds) and contingent value instruments (CVIs).
Under the GO/PBA Plan and in connection associated with its direct exposure the Company received (including amounts received in connection with the second election described in Item 1, Financial Statements, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):
•$530 million in cash, net of ceded reinsurance,
•$605 million of new recovery bonds (see Item 1, Financial Statements, 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 CVIs (see Item 1, Financial Statements, 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.
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).
During third quarter 2022, the Company received from the Commonwealth, pursuant to the GO/PBA Plan and the terms of the HTA PSA, $147 million of cash and $672 million original notional of CVI. The Company has sold a portion of those CVIs. On the HTA Effective Date, the Company also expects to receive additional recoveries in the form of cash and Toll Bonds.
exposures. The Company has sold some of the new recovery bondsNew Recovery Bonds and CVIs it had received in connection with the March2022 Puerto Rico Resolutions and the HTA PSA and may continue to sell amounts it still retains, or expects to receive in connection with the consummation of the HTA Plan, subject to market conditions. The fair value of such securities held by the Company as of September 30, 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 continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, Puerto Rico Electric Power Authority (PREPA). For information about PREPA developments, see Item 1, Financial Statements, Note 3, Outstanding Exposure.PREPA. 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.
The Company is and has for several years been working with the servicers of some of the RMBS transactions it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS.
The Company also purchases attractively priced obligations, including BIGbelow-investment-grade (BIG) obligations, that it has insured and for which it hashad expected losses to be paid, in order to mitigate the economic effect of insured losses (loss mitigation securities)(Loss Mitigation Securities). The fair value of loss mitigation securitiesLoss Mitigation Securities as of September 30,2022June 30, 2023 (excluding the value of the Company'sCompany’s insurance) was $557$463 million, with a par of $805$761 million.
In some instances, the terms of the Company’s policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief.
Asset Management and Alternative Investments
AssuredIM is a diversifiedUntil July 1, 2023, the Company pursued its asset manager that servesmanagement strategy through AssuredIM. With the consummation of the Sound Point Transaction and AHP Transaction, effective as investment adviser to CLOs, opportunityof July 1, 2023, the Company will participate in the asset management business through its ownership interest in Sound Point, and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of September 30, 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.will no longer directly manage investments for third parties through its subsidiaries.
Over time, the Company seeks to broaden and further diversifyThe Company’s ownership interest in Sound Point furthers its Asset Management segment leading to increased AUM andstrategy of participating in 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 asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussionfee-based earnings stream independent of the risk-based premiums generated by its financial guaranty business. The Sound Point business was strengthened by the addition of AssuredIM’s AUM metric, see “— Results of Operations by Segment — Asset Management Segment.”(excluding AUM relating to AHP).
Additionally,The Company also expects its relationship with Sound Point to enhance its alternative investment opportunities. Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company believes that AssuredIM provideshas increased 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 theaggregate amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated $750 million of capitalit has agreed to invest in funds managed by AssuredIM, plus $550 million aggregatealternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval. See Note 1, Business and Basis of investment assetsPresentation for a description of AGM, AGC and, until its merger with AGM on April 1, 2021, Municipal Assurance Corp. (MAC), (collectively,the Sound Point Transaction. Of the $1.5 billion to be invested, the U.S. Insurance Subsidiaries) to be managed by AssuredIM under an Investment Management Agreement (IMA). The Company is using these allocations to: (i) launch new products (CLOs, opportunity funds and liquid strategy funds) on the AssuredIM platform; and (ii) enhance the returns of its own investment portfolio.
Adding inception-to-date distributed gains to the original $750 million allocation, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in funds managed by AssuredIM (AssuredIM Funds) through their jointly owned investment subsidiary, AG Asset Strategies LLC (AGAS).AGAS, are authorized to invest up to $750 million plus previously distributed gains of $114 million for a total of $864 million as of June 30, 2023. As of September 30, 2022,July 1, 2023, AGAS had committed $755commitments to funds previously managed by AssuredIM of $553 million to AssuredIM Funds, including $219 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, asset-based finance, healthcare structured capital and municipal bonds.
Under the IMA with AssuredIM, AGM and AGC have together invested $250 million in municipal obligation strategies and $300 million to CLO strategies. All of these strategies are consistent with the investment strengths of AssuredIM and the Company’s plans to continue to grow its investment strategies.
Capital Management
The Company has developed strategies to efficiently manage capital within the Assured Guaranty group.
From 2013 through November 7, 2022,August 8, 2023, the Company has repurchased 140142 million common shares for approximately $4.6$4.7 billion, representing approximately 72%73% of the total shares outstanding at the beginning of the repurchase program in 2013. OnAs of August 3, 2022, the AGL Board of Directors (the Board) authorized the repurchase of an additional $250 million of common shares. Under this and previous authorizations, as of November 7, 2022,8, 2023, the Company was authorized to purchase $261$158 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 14,13, Shareholders’ Equity, for additional information about the Company’s repurchases of its common shares.
Summary of Share Repurchases
| | | | | | | | | | | | | | | | | |
| Amount | | Number of Shares | | Average price
per share |
| (in millions, except per share data) |
| 2013 - 2021 | $ | 4,158 | | | 132.027 | | | $ | 31.50 | |
| 2022 (First Quarter) | 155 | | | 2.738 | | | 56.62 | |
| 2022 (Second Quarter) | 151 | | | 2.606 | | | 58.03 | |
| 2022 (Third Quarter) | 97 | | | 1.790 | | | 53.77 | |
| 2022 (through November 7) | 42 | | | 0.786 | | | 53.99 | |
| Cumulative repurchases since the beginning of 2013 | $ | 4,603 | | | 139.947 | | | 32.89 | |
| | | | | | | | | | | | | | | | | |
| Amount | | Number of Shares | | Average price
per share |
| (in millions, except per share data) |
| 2013 - 2022 | $ | 4,661 | | | 140.875 | | | $ | 33.09 | |
| 2023 (First Quarter) | 2 | | | 0.036 | | | 62.23 | |
| 2023 (Second Quarter) | 24 | | | 0.454 | | | 53.08 | |
| 2023 (through August 8) | 19 | | | 0.321 | | | 58.32 | |
| Cumulative repurchases since the beginning of 2013 | $ | 4,706 | | | $ | 141.686 | | | 33.21 | |
As of SeptemberJune 30, 2022,2023, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $33.62$39.94 per share in shareholders’ equity attributable to AGL, $41.17$44.15 per share in adjusted operating shareholders’ equity and $73.18$78.42 per share in adjusted book value.
The Company considers the appropriate mix of debt and equity in its capital structure. On May 26,In 2021, the Company issued $500 million of 3.15% Senior Notes, due in 2031 for net proceedsand $400 million of $494 million. On July 9, 2021, a portion of the3.6% Senior Notes, due in 2051. The proceeds from the issuance of the 3.15% Senior Notes wasthese issuances 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: all2102, $100 million of AGMH’s 5.60% Notes due in 2103; the remaining $130 million of AGMH 6.25% Notes due in 2102;2103, and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. Since the second quarter of 2017, AGUS has also purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures.
The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt.
In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.
Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future.
Municipal Assurance Corp. Merger
On April 1, 2021, MAC merged with and into AGM, with AGM as the surviving company. Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM. As a result, the Company wrote off the $16 million carrying value of 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.
Executive Summary
This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to the Company’s 20212022 Annual Report on Form 10-K.
The primary drivers of volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs and committed capital securities (CCS), as well as loss and loss adjustment expense (LAE), foreign exchange gains (losses), the level of refundings of insured obligations, changes in the value of the Company’s alternative investments, the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds 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
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | (in millions, except per share amounts) |
| GAAP | GAAP | | GAAP | |
| Net income (loss) attributable to AGL | Net income (loss) attributable to AGL | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Net income (loss) attributable to AGL | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| Net income (loss) attributable to AGL per diluted share | Net income (loss) attributable to AGL per diluted share | $ | 0.18 | | | $ | 0.22 | | | $ | 0.46 | | | $ | 1.66 | | Net income (loss) attributable to AGL per diluted share | $ | 2.06 | | | $ | (0.74) | | | $ | 3.40 | | | $ | 0.29 | |
Weighted average diluted shares | Weighted average diluted shares | 62.9 | | | 73.6 | | | 65.1 | | | 75.7 | | Weighted average diluted shares | 60.1 | | | 63.8 | | | 60.3 | | | 66.2 | |
| | Non-GAAP | Non-GAAP | | Non-GAAP | |
Adjusted operating income (loss) (1)(2) | Adjusted operating income (loss) (1)(2) | $ | 133 | | | $ | 34 | | | $ | 253 | | | $ | 197 | | Adjusted operating income (loss) (1)(2) | $ | 36 | | | $ | 30 | | | $ | 104 | | | $ | 120 | |
| Adjusted operating income per diluted share | Adjusted operating income per diluted share | $ | 2.11 | | | $ | 0.45 | | | $ | 3.88 | | | $ | 2.60 | | Adjusted operating income per diluted share | $ | 0.60 | | | $ | 0.46 | | | $ | 1.72 | | | $ | 1.81 | |
| Weighted average diluted shares | Weighted average diluted shares | 62.9 | | | 73.6 | | | 65.1 | | | 75.7 | | Weighted average diluted shares | 60.1 | | | 65.0 | | | 60.3 | | | 66.2 | |
| | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | 7 | | | $ | (4) | | | $ | 7 | | | $ | — | | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | 0.12 | | | $ | (0.06) | | | $ | 0.11 | | | $ | — | | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.30) | | | $ | 0.15 | | | $ | (0.35) | | | $ | — | |
| | Components of total adjusted operating income (loss) | Components of total adjusted operating income (loss) | | Components of total adjusted operating income (loss) | |
| Insurance segment | Insurance segment | $ | 159 | | | $ | 214 | | | $ | 347 | | | $ | 445 | | Insurance segment | $ | 106 | | | $ | 55 | | | $ | 223 | | | $ | 188 | |
| Asset Management segment | Asset Management segment | (3) | | | (7) | | | (3) | | | (16) | | Asset Management segment | (2) | | | — | | | (3) | | | — | |
| Corporate division | Corporate division | (30) | | | (169) | | | (98) | | | (232) | | Corporate division | (50) | | | (35) | | | (94) | | | (68) | |
Other (2)(3) | Other (2)(3) | 7 | | | (4) | | | 7 | | | — | | Other (2)(3) | (18) | | | 10 | | | (22) | | | — | |
| Adjusted operating income (loss) | Adjusted operating income (loss) | $ | 133 | | | $ | 34 | | | $ | 253 | | | $ | 197 | | Adjusted operating income (loss) | $ | 36 | | | $ | 30 | | | $ | 104 | | | $ | 120 | |
| | Insurance Segment | Insurance Segment | | Insurance Segment | |
| Gross written premiums (GWP) | Gross written premiums (GWP) | $ | 94 | | | $ | 106 | | | $ | 229 | | | $ | 277 | | Gross written premiums (GWP) | $ | 95 | | | $ | 65 | | | $ | 181 | | | $ | 135 | |
Present value of new business production (PVP) (1)(2) | Present value of new business production (PVP) (1)(2) | 95 | | | 96 | | | 240 | | | 263 | | Present value of new business production (PVP) (1)(2) | 91 | | | 76 | | | 203 | | | 145 | |
| Gross par written | Gross par written | 3,846 | | | 8,561 | | | 15,012 | | | 20,170 | | Gross par written | 8,974 | | | 6,695 | | | 14,337 | | | 11,166 | |
| | Asset Management Segment | Asset Management Segment | | Asset Management Segment | |
AUM | AUM | | AUM | |
| Inflows - third party | Inflows - third party | $ | 1 | | | $ | 843 | | | $ | 1,362 | | | $ | 2,082 | | Inflows - third party | $ | 2 | | | $ | 1,270 | | | $ | 3 | | | $ | 1,361 | |
| Inflows - intercompany | Inflows - intercompany | 116 | | | 73 | | | 270 | | | 182 | | Inflows - intercompany | — | | | 154 | | | — | | | 154 | |
| | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | Amount | | Per Share | | Amount | | Per Share | | Amount | | Per Share | | Amount | | Per Share |
| | (in millions, except per share amounts) | | (in millions, except per share amounts) |
| Shareholders’ equity attributable to AGL | Shareholders’ equity attributable to AGL | $ | 4,929 | | | $ | 81.17 | | | $ | 6,292 | | | $ | 93.19 | | Shareholders’ equity attributable to AGL | $ | 5,276 | | | $ | 89.65 | | | $ | 5,064 | | | $ | 85.80 | |
Adjusted operating shareholders' equity (1)(2) | Adjusted operating shareholders' equity (1)(2) | 5,575 | | | 91.82 | | | 5,991 | | | 88.73 | | Adjusted operating shareholders' equity (1)(2) | 5,628 | | | 95.64 | | | 5,543 | | | 93.92 | |
Adjusted book value (1)(2) | Adjusted book value (1)(2) | 8,371 | | | 137.87 | | | 8,823 | | | 130.67 | | Adjusted book value (1)(2) | 8,487 | | | 144.21 | | | 8,379 | | | 141.98 | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | 27 | | | 0.44 | | | 32 | | | 0.47 | | Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | (3) | | | (0.04) | | | 17 | | | 0.28 | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | 16 | | | 0.27 | | | 23 | | | 0.34 | | Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | (7) | | | (0.12) | | | 11 | | | 0.19 | |
Common shares outstanding (3)(5) | Common shares outstanding (3)(5) | 60.7 | | | 67.5 | | | Common shares outstanding (3)(5) | 58.9 | | | 59.0 | | |
____________________
(1) In periods where the Company recognized a net loss, the impact of potentially dilutive outstanding stock-based awards was excluded from the calculation of diluted loss per share as their inclusion would have an antidilutive effect.
(2) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details.
(2)(3) Relates to the effect of consolidating FG VIEs and CIVs.
(3)(4) The Company was limited in its ability to raise third party AUM in 2023 as a result of the pending Sound Point Transaction and AHP Transaction due to regulatory and practical considerations.
(5) 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 September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Revenues: | Revenues: | | Revenues: | |
| Net earned premiums | Net earned premiums | $ | 89 | | | $ | 102 | | | $ | 385 | | | $ | 307 | | Net earned premiums | $ | 85 | | | $ | 82 | | | $ | 166 | | | $ | 296 | |
| Net investment income | Net investment income | 67 | | | 66 | | | 191 | | | 204 | | Net investment income | 89 | | | 62 | | | 170 | | | 124 | |
| Asset management fees | Asset management fees | 16 | | | 20 | | | 71 | | | 65 | | Asset management fees | 27 | | | 21 | | | 53 | | | 55 | |
| Net realized investment gains (losses) | Net realized investment gains (losses) | (14) | | | 3 | | | (39) | | | 4 | | Net realized investment gains (losses) | (9) | | | (28) | | | (11) | | | (25) | |
| Fair value gains (losses) on credit derivatives | Fair value gains (losses) on credit derivatives | (48) | | | 21 | | | (42) | | | (31) | | Fair value gains (losses) on credit derivatives | 91 | | | 9 | | | 106 | | | 6 | |
| Fair value gains (losses) on CCS | Fair value gains (losses) on CCS | 1 | | | (3) | | | 12 | | | (28) | | Fair value gains (losses) on CCS | 1 | | | 10 | | | (15) | | | 11 | |
| Fair value gains (losses) on FG VIEs | Fair value gains (losses) on FG VIEs | 11 | | | 5 | | | 27 | | | 18 | | Fair value gains (losses) on FG VIEs | (3) | | | 10 | | | (8) | | | 16 | |
| Fair value gains (losses) on CIVs | Fair value gains (losses) on CIVs | 8 | | | 16 | | | 25 | | | 53 | | Fair value gains (losses) on CIVs | 6 | | | 3 | | | 64 | | | 17 | |
| Foreign exchange gains (losses) on remeasurement | Foreign exchange gains (losses) on remeasurement | (80) | | | (27) | | | (181) | | | (22) | | Foreign exchange gains (losses) on remeasurement | 28 | | | (71) | | | 48 | | | (101) | |
| Fair value gains (losses) on trading securities | Fair value gains (losses) on trading securities | (8) | | | — | | | (30) | | | — | | Fair value gains (losses) on trading securities | 40 | | | (18) | | | 38 | | | (22) | |
| Other income (loss) | Other income (loss) | (1) | | | 9 | | | 12 | | | 15 | | Other income (loss) | 5 | | | 10 | | | 32 | | | 13 | |
| Total revenues | Total revenues | 41 | | | 212 | | | 431 | | | 585 | | Total revenues | 360 | | | 90 | | | 643 | | | 390 | |
| Expenses: | Expenses: | | | | | | | | Expenses: | | | | | | | |
| Loss and LAE (benefit) | Loss and LAE (benefit) | (75) | | | (68) | | | (29) | | | (54) | | Loss and LAE (benefit) | 55 | | | (11) | | | 59 | | | 46 | |
| Interest expense | Interest expense | 20 | | | 23 | | | 60 | | | 67 | | Interest expense | 22 | | | 20 | | | 43 | | | 40 | |
| Loss on extinguishment of debt | — | | | 175 | | | — | | | 175 | | |
| Amortization of deferred acquisition costs (DAC) | 4 | | | 3 | | | 11 | | | 10 | | |
| Amortization of deferred acquisition cost (DAC) | | Amortization of deferred acquisition cost (DAC) | 3 | | | 3 | | | 6 | | | 7 | |
| Employee compensation and benefit expenses | Employee compensation and benefit expenses | 57 | | | 59 | | | 189 | | | 173 | | Employee compensation and benefit expenses | 70 | | | 59 | | | 152 | | | 132 | |
| Other operating expenses | Other operating expenses | 37 | | | 38 | | | 120 | | | 135 | | Other operating expenses | 71 | | | 41 | | | 126 | | | 83 | |
| Total expenses | Total expenses | 43 | | | 230 | | | 351 | | | 506 | | Total expenses | 221 | | | 112 | | | 386 | | | 308 | |
| Income (loss) before income taxes and equity in earnings (losses) of investees | Income (loss) before income taxes and equity in earnings (losses) of investees | (2) | | | (18) | | | 80 | | | 79 | | Income (loss) before income taxes and equity in earnings (losses) of investees | 139 | | | (22) | | | 257 | | | 82 | |
| Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | (20) | | | 23 | | | (31) | | | 66 | | Equity in earnings (losses) of investees | 5 | | | — | | | 7 | | | (11) | |
| Income (loss) before income taxes | Income (loss) before income taxes | (22) | | | 5 | | | 49 | | | 145 | | Income (loss) before income taxes | 144 | | | (22) | | | 264 | | | 71 | |
| Less: Provision (benefit) for income taxes | Less: Provision (benefit) for income taxes | (27) | | | (15) | | | (6) | | | 8 | | Less: Provision (benefit) for income taxes | 18 | | | 3 | | | 41 | | | 21 | |
| Net income (loss) | Net income (loss) | 5 | | | 20 | | | 55 | | | 137 | | Net income (loss) | 126 | | | (25) | | | 223 | | | 50 | |
| Less: Noncontrolling interests | Less: Noncontrolling interests | (6) | | | 3 | | | 25 | | | 11 | | Less: Noncontrolling interests | 1 | | | 22 | | | 17 | | | 31 | |
| Net income (loss) attributable to Assured Guaranty Ltd. | Net income (loss) attributable to Assured Guaranty Ltd. | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Net income (loss) attributable to Assured Guaranty Ltd. | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| | Effective tax rate | Effective tax rate | 123.5 | % | | (313.3) | % | | (12.1) | % | | 6.0 | % | Effective tax rate | 12.6 | % | | (12.9) | % | | 15.6 | % | | 30.3 | % |
ThirdSecond Quarter 20222023 Compared with ThirdSecond Quarter 20212022
NetThe increase in net income attributable to AGL decreased in thirdsecond quarter 20222023 compared with the three-month period ended SeptemberJune 30, 2021 (third2022 (second quarter 2021)2022) was primarily due to:
•fair value losses on credit derivatives in third quarter 2022 compared with gains in third quarter 2021,
•higher foreign exchange lossesgains on remeasurement in thirdsecond quarter 2023, compared with losses in second quarter 2022,
•higher fair value gains on credit derivatives in second quarter 2023,
•fair value gains on trading portfolio in second quarter 2023, compared with losses on equity method alternative investments in thirdsecond quarter 2022, compared with gains in third quarter 2021, and
•realized and unrealized losses on thehigher net investment portfolio reported in realized gains (losses) on investments and fair value gains (losses) on trading securities.income.
These decreasesincreases were offset in part by:
•losses on extinguishment of debt of $175 million onand LAE in second quarter 2023 compared with a pre-tax basis ($138 million after-tax) related to the redemption of $600 million of long-term debtbenefit in thirdsecond quarter 2021 that did not recur in third quarter 2022.2022, and
Nine•higher operating expenses, primarily due to expenses of $24 million associated with the Sound Point Transaction and AHP Transaction.
Six Months 20222023 Compared with NineSix Months 20212022
Net income attributable to AGL for the nine-monthsix-month period ended SeptemberJune 30, 2022 (nine2023 (six months 2022)2023) was lowerhigher compared with the nine-monthsix-month period ended SeptemberJune 30, 2021 (nine2022 (six months 2021)2022) primarily due to:
•foreign exchange lossesgains on remeasurement in ninesix months 2023, compared with losses in six months 2022,
•higher fair value gains on credit derivatives in six months 2023,
•fair value gains on trading portfolio in six months 2023, compared with losses on equity method alternative investments in ninesix months 2022, compared with
•higher fair value gains in nine months 2021,on CIVs, and
•realized and unrealized losses on thehigher net investment portfolio reported in realized gains (losses) on investments and fair value gains (losses) on trading securities.income.
These decreasesincreases were offset in part by:
•losses on extinguishment of debtlower net earned premiums in ninesix months 2021 that did not recur in nine2023 compared with six months 2022 which benefited from premium accelerations related to the 2022 Puerto Rico Resolutions, and
•higher net earned premiums mainly attributableoperating expenses in six months 2023 primarily due to accelerations on certain Puerto Rico exposures,expenses of $31 million associated with the Sound Point Transaction and
•fair value gains on CCS in nine months 2022 compared with losses in nine months 2021. AHP Transaction.
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%, prior to March 31, 2023 and 25% after April 1 2023, the French subsidiary taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda subsidiaries, unless subject to U.S. tax by election or as a U.S. controlled foreign corporation.
Adjusted Operating Income
Adjusted operating income in third quarter 2022was $133 million, compared with $34 million in third quarter 2021. The increase was primarily attributable to losses on extinguishment of debt in third quarter 2021 that did not recur in third quarter 2022, offset in part by losses in equity method alternative investments in third quarter 2022, compared with gains in third quarter 2021.
Adjusted operating income in nine months 2022second quarter 2023 was $253$36 million, compared with $197$30 million in nine months 2021.second quarter 2022. The increase was primarily attributabledue to lossesfair value gains on extinguishment of debt in nine months 2021 that did not recur in nine months 2022the trading portfolio and higher net investment income, offset in part by higher losses and transaction expenses related to the Sound Point Transaction and the AHP transaction. Adjusted operating income in six months 2023 was $104 million, compared with $120 million in six months 2022. The decrease was primarily due to lower net earned premiums in ninesix months 2023, compared with six months 2022 due to higher refundingswhich included premium accelerations related to the March2022 Puerto Rico Resolutions, and higher operating expenses, partially offset in part by losses in equity method alternative investments.fair value gains on the trading portfolio and CIVs. See “— Results of Operations — Reconciliation to GAAP” below.for the reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Book Value and Adjusted Book Value
Shareholders’ equity attributable to AGL declined mainly due to unrealized losses on the available-for-sale fixed-maturity investment portfolio thatas of June 30, 2023 increased compared with December 31, 2022, as net income and other comprehensive income were causedpartially offset by higher interest rates,dividends and share repurchases. Adjusted operating shareholders’ equity and adjusted book value declined from December 31, 2021, mainlyincreased primarily due to operating income offset in part by dividends and share repurchases, dividends, foreign exchange remeasurement, investment losses, and losses on equity method investments partially offset, in the case of adjusted book value, by net written premiums onthe increase was also due to new business production.
Shareholder’s equity attributable to AGL per share, adjusted operating shareholders’ equity per share and adjusted book value per share were $81.17, $91.82 and $137.87, respectively as of September 30, 2022. Shareholders’ equity per share declined primarily due to unrealized losses on the available-for-sale fixed maturity portfolio attributable to increases in interest rates. 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 and
favorable loss development in the Insurance segment also contributed to the increase compared with December 31, 2021. See “— Overview — Key Business Strategies”. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value.
Other Matters
Inflation
By some key measures, consumer price inflation in the U.S. and the U.K. was higher in recent years than it has been in decades, and interest rates generally increased. Consumer price inflation in the U.K. impacts the Company directly by increasing exposure for certain index-linked U.K. debt with par that accretes with increasing inflation, and also increasing projected future installment premiums on the portion of such exposure that pays at least some of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments, and may be accompanied by higher interest rates that could impact the Company in several ways.
After acknowledging the need to combat inflation, the FOMC of the Federal Reserve Board decided at its March 2022 meeting to start again raising the target federal funds rate, and raised the rate 11 times from March 2022 through July 26, 2023. At its July 25-26, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 5.25% to 5.5%, and stated that its decision to raise the target range of the federal funds rate was in support of its goals of achieving maximum employment and inflation at the rate of 2% over the longer run. In determining the extent to which additional federal funds target rate increases are needed to return inflation to 2% over time, the FOMC indicated it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Higher interest rates impact the Company in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product. Despite the increases in interest rates in 2022 and first half of 2023, the pace of credit spread widening was more modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat compared to 2021. Over time, higher interest rates also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. However, higher interest rates may, in turn, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact the finances of some insured obligors.
See “Overview — Economic Environment”.
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 payment default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to reduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company cannot predict all of the potential effects of the conflict on the world or on the Company.
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 $272$271 million in net par outstanding as of SeptemberJune 30, 2022,2023, comprising $215$216 million net par exposure to the sovereign debt of Poland and $57$55 million net par exposure to a toll road in Hungary. The Company rates the toll road exposure BIG.
Inflation
As described above under "Overview -- Economic Environment", by some key 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. The Federal Reserve Board has raised interest rates a few times and communicated its intention to further raise them in the future. Concerns have been expressed in the financial press about inflation taking hold in the economy. Increases in the consumer price index (CPI) impacts the Company’s primary businesses directly by increasing exposure and future installment premium for certain periodic paying insured debt. CPI may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments, and accompanying higher interest rates could impact the Company in several 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 decrease the amount of excess spread available to support the distressed RMBS the Company insures and reduce the market value of its largely fixed rate fixed maturity investment portfolios.
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 end of 2021. Many legal documents entered into prior to that time did not include robust fallback language contemplating the permanent suspension of the publication of LIBOR. On March 5, 2021, IBA and 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 the current basis after June 2023 is unlikely. The publication of all sterling LIBOR rates ceased on December 31, 2021, as originally announced.
The Company has exposure to LIBOR in the following areas: (i) issuers of obligations the Company insures 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 floating interest rate tied to LIBOR, (iii) CCS from which the Company benefits 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 law the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act) which provides, among other things, a transition to the 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 LIBOR-based contracts that do not contain adequate fallback language. New York and other states have also passed legislation similar to the LIBOR Act.
Sterling LIBOR. The Company is cooperating with the relevant parties to amend the relevant documents referencing sterling LIBOR in its insured portfolio to instead reference Sterling Overnight Interbank Average Rate (SONIA), and the Company believes such 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.company. The final regulations are not expected to have a material impact to the Company’s business operation or its shareholders and the proposed regulations are continuing to be evaluated.
Results of Operations
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. The inputs into the Company’s estimates and assumptions consider the economic implications of COVID-19. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the Consolidated Financial Statements.condensed consolidated financial statements.
Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected bydifferent in the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time.
The accounting policies that the Company believes are most dependent on the application of judgment, estimates and assumptions are listed below. See Part II.II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, of the Company’s 20212022 Annual Report on Form 10-K, for the Company’s significant accounting policies which includes a reference to the applicable note where further details regarding the significant estimates and assumptions are provided, as well as Part II.II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s 20212022 Annual Report on Form 10-K, for further details regarding sensitivity analysis.
•Expected loss to be paid (recovered)
•Fair value of certain assets and liabilities, primarily:
▪Investments
▪Assets and liabilities of CIVs
▪Assets and liabilities of FG VIEs
▪Credit derivatives
•Recoverability of goodwill and other intangible assets
•Credit impairment of financial instruments
•Revenue recognition
•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities)
In addition, the valuation of AUM, which is the basis for calculating certain asset management fees, is based on estimates and assumptions. AUM valuations are often performed by independent pricing services based on observable and unobservable inputs. AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, see “— Results of Operations by Segment — Asset Management Segment”.
Results of Operations by Segment
The Company analyzes the operating performance of each segment using each segment’s adjusted operating income as described in Item 1, Financial Statements, Note 2, Segment Information.
Insurance Segment Results
Insurance Segment Results
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | | | | | |
| Segment revenues | Segment revenues | | Segment revenues | |
| Net earned premiums and credit derivative revenues | Net earned premiums and credit derivative revenues | $ | 92 | | | $ | 114 | | | $ | 397 | | | $ | 327 | | Net earned premiums and credit derivative revenues | $ | 88 | | | $ | 86 | | | $ | 172 | | | $ | 305 | |
| Net investment income | Net investment income | 69 | | | 69 | | | 198 | | | 213 | | Net investment income | 90 | | | 66 | | | 172 | | | 129 | |
| Fair value gains (losses) on trading securities | Fair value gains (losses) on trading securities | (8) | | | — | | | (30) | | | — | | Fair value gains (losses) on trading securities | 40 | | | (18) | | | 38 | | | (22) | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | Foreign exchange gains (losses) on remeasurement and other income (loss) | (6) | | | 7 | | | (1) | | | 11 | | Foreign exchange gains (losses) on remeasurement and other income (loss) | 6 | | | 5 | | | 32 | | | 5 | |
| Total segment revenues | Total segment revenues | 147 | | | 190 | | | 564 | | | 551 | | Total segment revenues | 224 | | | 139 | | | 414 | | | 417 | |
| Segment expenses | Segment expenses | | | | | | | | Segment expenses | | | | | | | |
| Loss expense (benefit) | Loss expense (benefit) | (75) | | | (78) | | | (32) | | | (60) | | Loss expense (benefit) | 44 | | | (17) | | | 53 | | | 43 | |
| Interest expense | Interest expense | — | | | — | | | 1 | | | — | | Interest expense | — | | | — | | | — | | | 1 | |
| Amortization of DAC | Amortization of DAC | 4 | | | 3 | | | 11 | | | 10 | | Amortization of DAC | 3 | | | 3 | | | 6 | | | 7 | |
| Employee compensation and benefit expenses | Employee compensation and benefit expenses | 34 | | | 35 | | | 107 | | | 105 | | Employee compensation and benefit expenses | 36 | | | 35 | | | 75 | | | 73 | |
| Other operating expenses | Other operating expenses | 21 | | | 18 | | | 60 | | | 76 | | Other operating expenses | 27 | | | 20 | | | 55 | | | 39 | |
| Total segment expenses | Total segment expenses | (16) | | | (22) | | | 147 | | | 131 | | Total segment expenses | 110 | | | 41 | | | 189 | | | 163 | |
| Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | (11) | | | 33 | | | (46) | | | 100 | | Equity in earnings (losses) of investees | 5 | | | (34) | | | 35 | | | (35) | |
| Segment adjusted operating income (loss) before income taxes | Segment adjusted operating income (loss) before income taxes | 152 | | | 245 | | | 371 | | | 520 | | Segment adjusted operating income (loss) before income taxes | 119 | | | 64 | | | 260 | | | 219 | |
| Less: Provision (benefit) for income taxes | Less: Provision (benefit) for income taxes | (7) | | | 31 | | | 24 | | | 75 | | Less: Provision (benefit) for income taxes | 13 | | | 9 | | | 37 | | | 31 | |
| Segment adjusted operating income (loss) | Segment adjusted operating income (loss) | $ | 159 | | | $ | 214 | | | $ | 347 | | | $ | 445 | | Segment adjusted operating income (loss) | $ | 106 | | | $ | 55 | | | $ | 223 | | | $ | 188 | |
Net Earned Premiums and Credit Derivative Revenues
Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of 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 decrease each year unless replaced by a higher amount of new business, or books of business acquired in a business combination or reassumptions of previously ceded business.combinations. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information.
Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policespolicies under the March2022 Puerto Rico Resolutions.
Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations arehave been more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable.
The Company has not written any new credit default swaps since 2009. While the Company has in the past and may in the future insure new interest rate swaps or acquire credit derivatives in business combinations or reinsurance agreements, or as part of loss mitigation, the Company expects credit derivative exposure to continue to decline.
Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Net earned premiums: | Net earned premiums: | | Net earned premiums: | |
| Financial guaranty insurance: | Financial guaranty insurance: | | Financial guaranty insurance: | |
| Public finance | Public finance | | Public finance | |
| Scheduled net earned premiums (1) | Scheduled net earned premiums (1) | $ | 62 | | | $ | 73 | | | $ | 196 | | | $ | 217 | | Scheduled net earned premiums (1) | $ | 61 | | | $ | 63 | | | $ | 123 | | | $ | 134 | |
| Accelerations: | Accelerations: | | Accelerations: | |
| Refundings | Refundings | 12 | | | 8 | | | 145 | | | 37 | | Refundings | 8 | | | 5 | | | 12 | | | 133 | |
| Terminations | Terminations | — | | | — | | | — | | | 1 | | Terminations | — | | | — | | | — | | | — | |
| Total accelerations | Total accelerations | 12 | | | 8 | | | 145 | | | 38 | | Total accelerations | 8 | | | 5 | | | 12 | | | 133 | |
| Total public finance | Total public finance | 74 | | | 81 | | | 341 | | | 255 | | Total public finance | 69 | | | 68 | | | 135 | | | 267 | |
| Structured finance | | |
| Scheduled net earned premiums (1) | 15 | | | 22 | | | 44 | | | 52 | | |
| Terminations | — | | | — | | | — | | | 1 | | |
| Total structured finance | 15 | | | 22 | | | 44 | | | 53 | | |
| Structured finance scheduled net earned premiums (1) | | Structured finance scheduled net earned premiums (1) | 16 | | | 14 | | | 31 | | | 29 | |
| Specialty insurance and reinsurance | Specialty insurance and reinsurance | 1 | | | — | | | 3 | | | 2 | | Specialty insurance and reinsurance | 1 | | | 1 | | | 2 | | | 2 | |
| Total net earned premiums | Total net earned premiums | 90 | | | 103 | | | 388 | | | 310 | | Total net earned premiums | 86 | | | 83 | | | 168 | | | 298 | |
| | Credit derivative revenues: | Credit derivative revenues: | | Credit derivative revenues: | |
| Scheduled net earned premiums | Scheduled net earned premiums | 2 | | | 4 | | | 7 | | | 10 | | Scheduled net earned premiums | 2 | | | 3 | | | 4 | | | 5 | |
| Accelerations | Accelerations | — | | | 7 | | | 2 | | | 7 | | Accelerations | — | | | — | | | — | | | 2 | |
| Total credit derivative revenues | Total credit derivative revenues | 2 | | | 11 | | | 9 | | | 17 | | Total credit derivative revenues | 2 | | | 3 | | | 4 | | | 7 | |
| Total net earned premiums and credit derivative revenues | Total net earned premiums and credit derivative revenues | $ | 92 | | | $ | 114 | | | $ | 397 | | | $ | 327 | | Total net earned premiums and credit derivative revenues | $ | 88 | | | $ | 86 | | | $ | 172 | | | $ | 305 | |
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues decreasedincreased in thirdsecond quarter 20222023 compared with thirdsecond quarter 20212022 primarily due to net earned premiums of $13 million on certain transactions in third quarter 2021 that did not recur, and lower accelerations and updates to debt service assumptions in third quarter 2022.higher refundings. Net earned premiums and credit derivative revenues increaseddecreased in ninesix months 20222023 compared with ninesix months 20212022 primarily due to refundings of $104 million associated withrelated to the resolution of PRCCDA, PRIFA and GO/PBA exposures that occurred in March Puerto Rico Resolutions2022 discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of SeptemberJune 30, 2022, $3.62023, $3.7 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
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| GWP | GWP | | GWP | |
| Public Finance—U.S. | Public Finance—U.S. | $ | 54 | | | $ | 52 | | | $ | 160 | | | $ | 160 | | Public Finance—U.S. | $ | 78 | | | $ | 57 | | | $ | 100 | | | $ | 106 | |
| Public Finance—non-U.S. | Public Finance—non-U.S. | 44 | | | 21 | | | 66 | | | 70 | | Public Finance—non-U.S. | 9 | | | 6 | | | 45 | | | 22 | |
| Structured Finance—U.S. | Structured Finance—U.S. | (2) | | | 29 | | | 4 | | | 43 | | Structured Finance—U.S. | 5 | | | 1 | | | 33 | | | 6 | |
| Structured Finance—non-U.S. | Structured Finance—non-U.S. | (2) | | | 4 | | | (1) | | | 4 | | Structured Finance—non-U.S. | 3 | | | 1 | | | 3 | | | 1 | |
| Total GWP | Total GWP | $ | 94 | | | $ | 106 | | | $ | 229 | | | $ | 277 | | Total GWP | $ | 95 | | | $ | 65 | | | $ | 181 | | | $ | 135 | |
| PVP (1): | PVP (1): | | | | | | | | PVP (1): | | | | | | | |
| Public Finance—U.S. | Public Finance—U.S. | $ | 57 | | | $ | 55 | | | $ | 163 | | | $ | 165 | | Public Finance—U.S. | $ | 77 | | | $ | 57 | | | $ | 99 | | | $ | 106 | |
| Public Finance—non-U.S. | Public Finance—non-U.S. | 37 | | | 17 | | | 67 | | | 63 | | Public Finance—non-U.S. | 6 | | | 18 | | | 36 | | | 30 | |
| Structured Finance—U.S. | Structured Finance—U.S. | 1 | | | 21 | | | 3 | | | 32 | | Structured Finance—U.S. | 3 | | | — | | | 30 | | | 2 | |
| Structured Finance—non-U.S. (1) | — | | | 3 | | | 7 | | | 3 | | |
| Structured Finance—non-U.S. (2) | | Structured Finance—non-U.S. (2) | 5 | | | 1 | | | 38 | | | 7 | |
| Total PVP | Total PVP | $ | 95 | | | $ | 96 | | | $ | 240 | | | $ | 263 | | Total PVP | $ | 91 | | | $ | 76 | | | $ | 203 | | | $ | 145 | |
Gross Par Written (2): | | | | | | | | |
Gross Par Written (1): | | Gross Par Written (1): | | | | | | | |
| Public Finance—U.S. | Public Finance—U.S. | $ | 3,622 | | | $ | 7,703 | | | $ | 13,982 | | | $ | 17,846 | | Public Finance—U.S. | $ | 7,747 | | | $ | 6,429 | | | $ | 10,654 | | | $ | 10,360 | |
| Public Finance—non-U.S. | Public Finance—non-U.S. | 194 | | | 156 | | | 624 | | | 1,117 | | Public Finance—non-U.S. | 249 | | | 207 | | | 609 | | | 430 | |
| Structured Finance—U.S. | Structured Finance—U.S. | 30 | | | 436 | | | 106 | | | 941 | | Structured Finance—U.S. | 252 | | | 16 | | | 834 | | | 76 | |
| Structured Finance—non-U.S. (1) | — | | | 266 | | | 300 | | | 266 | | |
| Structured Finance—non-U.S. (2) | | Structured Finance—non-U.S. (2) | 726 | | | 43 | | | 2,240 | | | 300 | |
| Total gross par written | Total gross par written | $ | 3,846 | | | $ | 8,561 | | | $ | 15,012 | | | $ | 20,170 | | Total gross par written | $ | 8,974 | | | $ | 6,695 | | | $ | 14,337 | | | $ | 11,166 | |
| Average rating on new business written | Average rating on new business written | A- | | A- | | A- | | A- | Average rating on new business written | A- | | A | | A | | A- |
____________________
(1) Nine months 2022 PVP and gross par written include 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.”
(2) Six months 2023 and 2022 PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under Accounting Standards Codification (ASC) 460, Guarantees.
ThirdSecond Quarter 20222023
U.S. public finance GWP and PVP in thirdsecond quarter 2022 was2023 were higher than the comparable GWP and PVP in thirdsecond quarter 2021,2022, due to $47 million in assumed GWP and $46 million in assumed PVP in second quarter 2023. These were offset in part by lower direct GWP and PVP of $31 million, primarily due to a large transportation revenue transactiondecrease in thirdsecondary market business in second quarter 2023. The average rating of U.S. public finance par written was A- in second quarter 2023 and A in second quarter 2022. The Company’s direct par written represented 64% of the total U.S. municipal market insured issuance in second quarter 2023, compared with 54% in second quarter 2022, and a higher proportionthe Company’s penetration of secondary market business which generally carries a higher premium rate.all municipal issuance was 6.5% in second quarter 2023 compared with 4.8% in second quarter 2022.
In non-U.S. infrastructure markets, the U.S. publicCompany wrote a guaranty on a U.K. regulated utility and, in the structured finance primary market, which had lower new issuanceasset class, the Company wrote several subscription finance guaranties in thirdsecond quarter 2022 compared with third quarter 2021, the ratio of PVP to par written was higher as the coupons on insured transactions increased due to the higher interest rate environment.2023.
Six Months 2023
U.S. public finance GWP and PVP in six months 2023 were comparable to GWP and PVP in six months 2022, with higher assumed business offsetting lower direct business that was primarily due to a decrease in secondary market business in six months 2023. The average rating of U.S. public finance par written was A- in both third quarter 2022six months 2023 and third quarter 2021.six months 2022. The Company’s direct par written in the primary market represented 56%63% of the total U.S. municipal market insured issuance in third quarter 2022,six months 2023, compared with 64%56% in third quarter 2021,six months 2022, and the Company’s penetration of all municipal issuance was 3.2%5.7% in third quarter 2022six months 2023 compared with 5.4%4.9% in third quarter 2021.
In third quarter 2022, non-U.S. public finance GWP and PVP were primarily attributable to a secondary market guarantee of a portfolio of regulated utilities.six months 2022.
Nine Months 2022
NineIn six months 2022 U.S. public finance GWP and PVP were relatively consistent compared with nine months 2021, despite a 22% decrease in par written. Secondary market transactions constituted a larger portion of PVP and GWP in nine months 2022 compared with nine months 2021.
The average rating of U.S. public finance par written was A- in both nine months 2022 and nine months 2021. The Company’s direct par written in the primary market represented 56% of the total U.S. municipal market insured issuance in nine months 2022, compared with 60% in nine months 2021, and the Company’s penetration of all municipal issuance was 4.4% for nine months 2022 and 5.1% for nine months 2021.
In nine months 2022,2023, non-U.S. public finance GWP and PVP were higher than GWP and PVP in six months 2022. In six months 2023, new business primarily attributableincluded the guaranty of a long-term sale and leaseback transaction with Glasgow City Council and several regulated utility transactions.
In six months 2023, structured finance GWP and PVP were $36 million and $68 million, respectively, compared with GWP and PVP of $7 million and $9 million, respectively, in six months 2022. Structured finance PVP in six months 2023 includes an insurance securitization and several subscription finance guaranties, as well as an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties for which no GWP was reported under GAAP because it is not accounted for as insurance.
Business activity in the non-U.S. public finance and structured finance sectors typically has long lead times and therefore may vary from period to secondary market guarantees and two U.K. water transactions.period.
Income from Investment PortfolioInvestments
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 on fixed-maturity securities is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.
CVIs issued by Puerto Rico and received as part of the March2022 Puerto Rico Resolutions or the HTA PSA are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the consolidated statements on operations. The fair value of such instruments as of SeptemberJune 30, 20222023 was $393$340 million.
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 to invest up to $750 million in AssuredIM Funds. Adding inception-to-date distributed gains, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds. As of September 30, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn.investees.
Insurance Segment
Income from Investment PortfolioInvestments
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | (in millions) |
| Net investment income | Net investment income | | Net investment income | |
| Externally managed | $ | 46 | | | $ | 52 | | | $ | 139 | | | $ | 154 | | |
| Loss mitigation securities and other | 17 | | | 12 | | | 42 | | | 44 | | |
| Managed by AssuredIM (1) | 6 | | | 4 | | | 15 | | | 12 | | |
| Fixed-maturity securities, available-for-sale: | | Fixed-maturity securities, available-for-sale: | |
| Externally managed (1) | | Externally managed (1) | $ | 53 | | | $ | 49 | | | $ | 105 | | | $ | 98 | |
| Loss Mitigation Securities | | Loss Mitigation Securities | 12 | | | 7 | | | 24 | | | 17 | |
| Puerto Rico, New Recovery Bonds | | Puerto Rico, New Recovery Bonds | 1 | | | 3 | | | 4 | | | 4 | |
| Other (2) | | Other (2) | 4 | | | 4 | | | 7 | | | 7 | |
| Short-term investments | | Short-term investments | 16 | | | 1 | | | 28 | | | 1 | |
| Intercompany loans | Intercompany loans | 2 | | | 2 | | | 7 | | | 7 | | Intercompany loans | 3 | | | 3 | | | 5 | | | 5 | |
| Other investment assets | | Other investment assets | 2 | | | — | | | 2 | | | — | |
| Investment income | Investment income | 71 | | | 70 | | | 203 | | | 217 | | Investment income | 91 | | | 67 | | | 175 | | | 132 | |
| Investment expenses | Investment expenses | (2) | | | (1) | | | (5) | | | (4) | | Investment expenses | (1) | | | (1) | | | (3) | | | (3) | |
| Net investment income | Net investment income | $ | 69 | | | $ | 69 | | | $ | 198 | | | $ | 213 | | Net investment income | $ | 90 | | | $ | 66 | | | $ | 172 | | | $ | 129 | |
| | Fair value gains (losses) on trading securities | Fair value gains (losses) on trading securities | $ | (8) | | | $ | — | | | $ | (30) | | | $ | — | | Fair value gains (losses) on trading securities | $ | 40 | | | $ | (18) | | | $ | 38 | | | $ | (22) | |
| | Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | | Equity in earnings (losses) of investees | |
| AssuredIM Funds | AssuredIM Funds | $ | 9 | | | $ | 23 | | | $ | (13) | | | $ | 70 | | AssuredIM Funds | $ | — | | | $ | (33) | | | $ | 28 | | | $ | (22) | |
| Other | Other | (20) | | | 10 | | | (33) | | | 30 | | Other | 5 | | | (1) | | | 7 | | | (13) | |
| Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | $ | (11) | | | $ | 33 | | | $ | (46) | | | $ | 100 | | Equity in earnings (losses) of investees | $ | 5 | | | $ | (34) | | | $ | 35 | | | $ | (35) | |
____________________
(1) Represents interestAmounts for 2022 include income on athe portion of the CLO portfolio of CLOs and municipal bondsthat was previously managed by AssuredIM under an IMA.AssuredIM.
(2) Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM.
Net investment income was $69 million in both thirdfor second quarter 2023 and six months 2023 increased compared to second quarter 2022 and third quarter 2021 and decreased for ninesix months 2022, compared with nine months 2021, primarily due to lowerthe increase in short-term rates and higher average short-term balances, in fixed-maturity securities as assets were liquidated to meet the liquidity needs of the Company.well as higher income on floating rate CLO investments. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.21%3.89% as of SeptemberJune 30, 20222023 and 3.10%2.95% as of SeptemberJune 30, 2021. Excluding the internally managed portfolio, pre-tax book yield was 3.01% as of September 30, 2022 and 2.87% as of September 30, 2021.2022.
Equity in earnings of AssuredIM Funds were gains in third quarter 2022 was a gainsix months 2023 and were primarily attributable to positive income generated fromhigher valuations of assets held in the CLO fund, and a losshealthcare funds. Equity in nineearnings of AssuredIM Funds in second quarter 2022 and six months 2022 were losses and were primarily attributable to lower valuations of assets held in CLO funds and the dilutive impact of athe subsequent close of a healthcare fund. Equity in earnings of other alternative investments decreased in third quarter 2022 and nine months 2022 compared with third quarter 2021 and nine months 2021 primarily due to mark-to-market losses in a private equity fund.
Foreign Exchange Gains (Losses) on Remeasurement and Other Income (Loss)
The increase in “foreign exchange gains (losses) on remeasurement and other income (loss)” in six months 2023 compared with six months 2022 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million. See Item 1, Financial Statements, Note 12, Commitments and Contingencies, for additional information.
Economic Loss Development
The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies used in estimating theand significant estimates for expected loss to be paid (recovered) for all contracts, see Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), of the Company’s 2022 Annual Report on Form 10-K. The GAAP accounting policies for measurement and recognition under GAAP for each type of contract seeare described in the notes listed below in Part II.II, Item 8, Financial Statements and Supplementary Data, of the Company’s 20212022 Annual Report on Form 10-K:
•Note 65 for contracts accounted for as insurance;
•Note 76 for contracts accounted for as credit derivatives;
•Note 98 for FG VIEs; and
•Note 109 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities.
In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and the effects of other loss mitigation strategies. Assumptions used in the
determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.
Current risk-free rates are used to discount expected losses at the end of each reporting period and thereforeperiod. Therefore, changes in such rates from period to period affect the expected loss estimates reported. Changes in risk-free rates used to discount losses affect economic loss development and loss and LAE; however,LAE. However, the effect of changes in discount rates areis 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 September 30, 2022 | | As of June 30, 2022 | | As of December 31, 2021 | | As of September 30, 2021 | | As of June 30, 2021 | | As of December 31, 2020 |
| Range | 2.98% | – | 4.18% | | 1.67% | – | 3.41% | | 0.00% | – | 1.98% | | 0.00% | – | 2.13% | | 0.00% | – | 2.14% | | 0.00% | – | 1.72% |
| Weighted average | 3.97% | | 2.90% | | 1.02% | | 0.78% | | 0.73% | | 0.60% |
The composition of economic loss development (benefit) by accounting model and by sector areis 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) | | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of | | Third Quarter | | Nine Months | | As of | | Second Quarter | | Six Months |
| Accounting Model | Accounting Model | | September 30, 2022 | | December 31, 2021 | | 2022 | | 2021 | | 2022 | | 2021 | Accounting Model | | June 30, 2023 | | December 31, 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | (in millions) | | | (in millions) |
| Insurance | Insurance | | $ | 695 | | (1) | $ | 364 | | | (67) | | | (82) | | | $ | (137) | | | $ | (91) | | Insurance | | $ | 262 | | | $ | 205 | | | $ | 62 | | | $ | (26) | | | $ | 68 | | | $ | (70) | |
| FG VIEs | FG VIEs | | 28 | | | 42 | | | (6) | | | (10) | | | (16) | | | (17) | | FG VIEs | | 295 | | (1) | 314 | | (1) | (14) | | | (6) | | | (9) | | | (10) | |
| Credit derivatives | Credit derivatives | | 4 | | | 5 | | | 1 | | | (2) | | | 5 | | | 7 | | Credit derivatives | | 3 | | | 3 | | | 1 | | | — | | | 1 | | | 4 | |
| Total | Total | | $ | 727 | | | $ | 411 | | | $ | (72) | | | $ | (94) | | | $ | (148) | | | $ | (101) | | Total | | $ | 560 | | | $ | 522 | | | $ | 49 | | | $ | (32) | | | $ | 60 | | | $ | (76) | |
| | Net exposure rated BIG | Net exposure rated BIG | | $ | 5,869 | | | $ | 7,440 | | | Net exposure rated BIG | | $ | 5,718 | | | $ | 5,976 | | |
____________________
(1) The increase in net expected loss to be paid is duefor FG VIEs primarily relates to the receipt in third quarter 2022 of $147 million in cash and $672 million of original notional of CVI from the Commonwealth, pursuant to the GO/PBA Plan and the termstrusts established as part of the HTA PSA.2022 Puerto Rico Resolutions (Puerto Rico Trusts). See Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).
Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit)
ByRoll Forward by Sector
| | | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) | | | | | | | | | | | | | | | | | | | | | | |
| | As of | | Third Quarter | | Nine Months | | Second Quarter 2023 |
| Sector | Sector | September 30, 2022 | | December 31, 2021 | | 2022 | | 2021 | | 2022 | | 2021 | Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2023 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | (in millions) | | | (in millions) |
| Public finance: | | Public finance: | |
| U.S. public finance | U.S. public finance | $ | 626 | | | $ | 197 | | | $ | 24 | | | $ | (29) | | | $ | (16) | | | $ | (13) | | U.S. public finance | | $ | 380 | | | $ | 57 | | | $ | (4) | | | $ | 433 | |
| Non-U.S. public finance | Non-U.S. public finance | 6 | | | 12 | | | (2) | | | (2) | | | (6) | | | (15) | | Non-U.S. public finance | | 13 | | | (3) | | | — | | | 10 | |
| Structured finance | | |
| Public finance | | Public finance | | 393 | | | 54 | | | (4) | | | 443 | |
| Structured finance: | | Structured finance: | | | | | | | | |
| U.S. RMBS | U.S. RMBS | 52 | | | 150 | | | (95) | | | (65) | | | (127) | | | (82) | | U.S. RMBS | | 82 | | | (9) | | | — | | | 73 | |
| Other structured finance | Other structured finance | 43 | | | 52 | | | 1 | | | 2 | | | 1 | | | 9 | | Other structured finance | | 42 | | | 4 | | | (2) | | | 44 | |
| Structured finance | Structured finance | 95 | | | 202 | | | (94) | | | (63) | | | (126) | | | (73) | | Structured finance | | 124 | | | (5) | | | (2) | | | 117 | |
| Total | Total | $ | 727 | | | $ | 411 | | | $ | (72) | | | $ | (94) | | | $ | (148) | | | $ | (101) | | Total | | $ | 517 | | | $ | 49 | | | $ | (6) | | | $ | 560 | |
| | Effect of changes in the risk-free rates included in economic loss development (benefit) | | (25) | | | (1) | | | $ | (114) | | | $ | (34) | | |
Third | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter 2022 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 181 | | | $ | 8 | | | $ | 21 | | | $ | 210 | |
| Non-U.S. public finance | | 10 | | | (2) | | | (1) | | | 7 | |
| Public finance | | 191 | | | 6 | | | 20 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 195 | | | (39) | | | 23 | | | 179 | |
| Other structured finance | | 46 | | | 1 | | | (1) | | | 46 | |
| Structured finance | | 241 | | | (38) | | | 22 | | | 225 | |
| Total | | $ | 432 | | | $ | (32) | | | $ | 42 | | | $ | 442 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 2023 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 403 | | | $ | 58 | | | $ | (28) | | | $ | 433 | |
| Non-U.S. public finance | | 9 | | | 1 | | | — | | | 10 | |
| Public finance | | 412 | | | 59 | | | (28) | | | 443 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 66 | | | (4) | | | 11 | | | 73 | |
| Other structured finance | | 44 | | | 5 | | | (5) | | | 44 | |
| Structured finance | | 110 | | | 1 | | | 6 | | | 117 | |
| Total | | $ | 522 | | | $ | 60 | | | $ | (22) | | | $ | 560 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 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 June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 197 | | | $ | (40) | | | $ | 53 | | | $ | 210 | |
| Non-U.S. public finance | | 12 | | | (4) | | | (1) | | | 7 | |
| Public finance | | 209 | | | (44) | | | 52 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 150 | | | (32) | | | 61 | | | 179 | |
| Other structured finance | | 52 | | | — | | | (6) | | | 46 | |
| Structured finance | | 202 | | | (32) | | | 55 | | | 225 | |
| Total | | $ | 411 | | | $ | (76) | | | $ | 107 | | | $ | 442 | |
____________________
(1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets.”
Second Quarter 20222023 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in thirdsecond quarter 20222023 was $24$57 million and was primarily attributable to healthcare$78 million for certain Puerto Rico and Puerto Ricohealthcare exposures, partially offset by the effecthigher projected recoveries of changes$21 million in discount rates. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $4.2 billion as of September 30, 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.other municipal exposures.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $95$9 million and was primarily attributable to a $27 million benefit related to the purchase of a loss mitigation security, a $26 million benefit related to updates in the projected conditional default rate (CDR) curves, a $17 million benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, a $16 million benefit related to improved performance in certain transactions, a $12 million benefit related to changes in discount rates and a $7 million benefit related to higher recoveries for secured second lien charged-off loans, a $5 million benefit related to improved performance in certain transactions, and $3 million benefit related to changes in discount rates, partially offset by losses of $10$6 million related to lower excess spread.
See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.
ThirdSecond Quarter 20212022 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in second quarter 2022 was $8 million, and was primarily attributable to Puerto Rico exposures, partially offset by the effect of changes in discount rate. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par
outstanding of $3.6 billion as of June 30, 2022 compared with $5.4 billion as of both September 30, 2021 and December 31, 2020.2021. The Company projected that its totalreduction in net expected recovery across its troubled U.S. public finance exposures as of September 30, 2021 would be $9 million, compared with a net expected loss of $305 million as of December 31, 2020. The economic benefit on U.S. exposures in third quarter 2021 was $29 million, whichpar was primarily attributabledue to certain Puerto Rico exposures.PRCCDA, PRIFA and GO/PBA.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $65$39 million and was mainly attributable to $56 million benefit for higher recoveries on charged-off second lien loans, and $19 million benefit for increased recoveries on certain deferred principal balances in first lien loans. In third quarter 2021, the Company also refined several assumptions based on consistently observed trends. The primary change was to include remaining COVID-19 forbearance loans in the relevant delinquency categories rather than applying a separate liquidation rate assumption to these loans.The change in assumption for COVID-19 forbearance loans, changes to the severity, CDR and other assumptions, netted together, partially offset the benefit from recoveries on charged-off loans and deferred principal balances for third quarter 2021.
Nine Months 2022Net Economic Loss Development
Public Finance: The economic benefit on U.S. public finance exposures in nine months 2022 was $16 million, which was primarily attributable to changes in discount rates and higher projected revenues for certain exposures, partially offset by healthcare and Puerto Rico exposures.
U.S. RMBS: The net benefit attributable to U.S. RMBS was $127 million and was mainly related to a $56$23 million benefit related to changes in discount rates, a $43$17 million benefit related to improved performance in certain transactions, a $27 million benefit related to the purchase of a loss mitigation security, a $26 million benefit related to updates in the projected CDR curves, a $25$14 million benefit related to higher recoveries for secured second lien charged-off loans, a $17 million benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, and an $12$11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $79$26 million related to lower excess spread.
NineSix Months 20212023Net Economic Loss Development
The economic loss development on U.S. public finance exposures in six months 2023 was $58 million, which was primarily attributable to $81 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $23 million in other municipal exposures. The net benefit attributable to U.S. RMBS was $4 million and was mainly attributable to a $14 million benefit related to higher recoveries for second lien charged-off loans, and a $9 million benefit related to improved performance in certain transactions, partially offset by a $15 million loss related to the return of certain funds previously received, a $2 million loss related to changes in discount rates and a $2 million loss related to lower excess spread.
Six Months 2022 Net Economic Loss Development
Public Finance: The economic benefit on U.S. public finance exposures in ninesix months 20212022 was $13$40 million, which was primarily attributable to changes in discount rates, improved cash flows for certain transactions and improvement in certain Puerto Rico exposures, partially offset by deterioration in a student housing transaction. The economic benefit was approximately $15 million for non-U.S. public finance exposures mainly due to the impact of higher Euro InterBank Offered Rate (Euribor) and, separately, improved traffic and availability in certain road exposures.
U.S. RMBS: rates. The net benefit attributable to U.S. RMBS was $82$32 million and was mainly related to a $67 million benefit related to higher recoveries on charged-off second lien loans, a $22$45 million benefit related to changes in discount rates, and changes in assumptionsa $27 million benefit related to recovery ofimproved performance in certain deferred principal balances intransactions, an $18 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien loans of $19 million,U.S. RMBS transactions, partially offset by $35losses of $69 million inrelated to lower excess spread. Additional benefits from transaction improvement, changes to loss severity in certain sectors, and the reduction in the CDR floor were partially offset by higher assumed liquidation rates for remaining COVID-19 related forbearances.
Other Structured Finance: The economic loss development attributable to structured finance, excluding U.S. RMBS, was $9 million, which was primarily attributable to LAE for certain transactions.
Insurance Segment Loss Expense
The primary differences between net economic loss development and the amount reported as “loss and LAE”LAE (benefit)” in the consolidated statements of operations are that loss and LAE:LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (ii) eliminates loss and LAE related to FG VIEs; and (iii) does not include estimated losses on credit derivatives.
Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives, without giving effect to eliminations related to the consolidation of FG VIEs.
For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.
While expected loss to be paid (recovered) is an important measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.
The amount of Insurance segment loss expense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense.expense (benefit).
Insurance Segment
Loss Expense (Benefit)
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| U.S. public finance | U.S. public finance | $ | 4 | | | $ | (23) | | | $ | 70 | | | $ | 7 | | U.S. public finance | $ | 45 | | | $ | 11 | | | $ | 46 | | | $ | 66 | |
| Non-U.S. public finance | — | | | — | | | — | | | (9) | | |
| Structured finance | | |
| | Structured finance: | | Structured finance: | |
| U.S. RMBS | U.S. RMBS | (82) | | | (58) | | | (104) | | | (68) | | U.S. RMBS | (3) | | | (28) | | | 3 | | | (22) | |
| Other structured finance | Other structured finance | 3 | | | 3 | | | 2 | | | 10 | | Other structured finance | 2 | | | — | | | 4 | | | (1) | |
| Structured finance | Structured finance | (79) | | | (55) | | | (102) | | | (58) | | Structured finance | (1) | | | (28) | | | 7 | | | (23) | |
| Total Insurance segment loss expense (benefit) | Total Insurance segment loss expense (benefit) | $ | (75) | | | $ | (78) | | | $ | (32) | | | $ | (60) | | Total Insurance segment loss expense (benefit) | $ | 44 | | | $ | (17) | | | $ | 53 | | | $ | 43 | |
The difference between public finance loss expense and economic benefit in ninesix months 2022 was primarily attributable to the release of unearned premium reserve associated withrelated to PRCCDA, PRIFA and GO/PBA exposures. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were recognized for the remaining deferred premium revenue on the extinguished Puerto
Rico policies that previously had expected losses. The benefit in U.S. RMBS in all periods presented is primarily related to second lien transactions.exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance.
Other Operating Expenses
The decreaseincrease in other“other operating expensesexpenses” in ninesix months 20222023 compared with ninesix months 20212022 was primarily attributable to the write-off of a $16 million intangible asset attributable to MAC insurance licensesan increase in the first quarter of 2021. MAC was merged withvalue added taxes and into AGM on April 1, 2021. See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for additional information.increases in certain employee benefit related costs.
Financial Strength Ratings
Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of 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 (S&P) | | Kroll Bond Rating
Agency | | Moody’s Investors Service, Inc. (Moody’s) | | A.M. Best Company,
Inc. |
| AGM | AA (stable) (7/8/22)13/23) | | AA+ (stable) (10/21/22) | | A1 (stable) (3/18/22) | | — |
| AGC | AA (stable) (7/8/22)13/23) | | AA+ (stable) (10/21/22) | | (1) | | — |
| Assured Guaranty Re Ltd. (AG Re) | AA (stable) (7/8/22)13/23) | | — | | — | | — |
| Assured Guaranty Re Overseas Ltd. (AGRO) | AA (stable) (7/8/22)13/23) | | — | | — | | A+ (stable) (7/22/22)21/23) |
| Assured Guaranty UK Limited (AGUK) | AA (stable) (7/8/22)13/23) | | AA+ (stable) (10/21/22) | | A1 (stable) (3/18/22) | | — |
| Assured Guaranty (Europe) SA (AGE) | AA (stable) (7/8/22)13/23) | | AA+ (stable) (10/21/22) | | — | | — |
____________________
(1) AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. On March 18, 2022, Moody’s upgraded the financial strength rating ofMoody's rates 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 —”— Insurance Subsidiaries” section below.
Asset Management Segment Results
Asset Management Segment Results
| | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) | | (in millions) |
| Segment revenues | Segment revenues | | Segment revenues | |
| Management fees (1) | Management fees (1) | $ | 18 | | | 17 | | | 66 | | | 55 | | Management fees (1) | 18 | | | 27 | | | 35 | | | 48 | |
| Performance fees | Performance fees | 2 | | | — | | | 20 | | | 1 | | Performance fees | 9 | | | 2 | | | 29 | | | 18 | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | Foreign exchange gains (losses) on remeasurement and other income (loss) | 1 | | | 2 | | | 2 | | | 4 | | Foreign exchange gains (losses) on remeasurement and other income (loss) | 3 | | | (1) | | | 7 | | | 1 | |
| Total segment revenues | Total segment revenues | 21 | | | 19 | | | 88 | | | 60 | | Total segment revenues | 30 | | | 28 | | | 71 | | | 67 | |
| Segment expenses | Segment expenses | | Segment expenses | |
| Interest expense | | Interest expense | 1 | | | — | | | 1 | | | — | |
| Employee compensation and benefit expenses | Employee compensation and benefit expenses | 16 | | | 19 | | | 62 | | | 53 | | Employee compensation and benefit expenses | 25 | | | 17 | | | 59 | | | 46 | |
| Other operating expenses (1) (2) | Other operating expenses (1) (2) | 8 | | | 10 | | | 29 | | | 29 | | Other operating expenses (1) (2) | 7 | | | 11 | | | 15 | | | 21 | |
| Total segment expenses | Total segment expenses | 24 | | | 29 | | | 91 | | | 82 | | Total segment expenses | 33 | | | 28 | | | 75 | | | 67 | |
| Segment adjusted operating income (loss) before income taxes | Segment adjusted operating income (loss) before income taxes | (3) | | | (10) | | | (3) | | | (22) | | Segment adjusted operating income (loss) before income taxes | (3) | | | — | | | (4) | | | — | |
| Less: Provision (benefit) for income taxes | Less: Provision (benefit) for income taxes | — | | | (3) | | | — | | | (6) | | Less: Provision (benefit) for income taxes | (1) | | | — | | | (1) | | | — | |
| Segment adjusted operating income (loss) | Segment adjusted operating income (loss) | $ | (3) | | | $ | (7) | | | $ | (3) | | | $ | (16) | | Segment adjusted operating income (loss) | $ | (2) | | | $ | — | | | $ | (3) | | | $ | — | |
_____________________
(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 for second quarter 2022, $2 million for third quarter 2022, $3six months 2023 and $6 million for third quarter 2021, $8 million for ninesix months 2022,2022. The Company ceased amortizing the intangible assets when the asset management assets and $9 million for nine months 2021.liabilities were reclassified to held-for-sale.
Management and Performance Fees
Management fees arein second quarter 2023 were primarily generated by CLOs, opportunity funds and liquid strategies, and the wind-down funds.strategies. CLO fees arerepresented the net management fees that AssuredIM retainsretained after rebating the portion of these fees that pertainspertained to the CLO Equityequity that iswas 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.
Management Fees
| | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) | | (in millions) |
| CLOs | CLOs | $ | 12 | | | $ | 12 | | | $ | 36 | | | $ | 36 | | CLOs | $ | 13 | | | $ | 12 | | | $ | 25 | | | $ | 24 | |
| Opportunity funds and liquid strategies | Opportunity funds and liquid strategies | 6 | | | 4 | | | 29 | | | 13 | | Opportunity funds and liquid strategies | 5 | | | 15 | | | 10 | | | 23 | |
| Wind-down funds | Wind-down funds | — | | | 1 | | | 1 | | | 6 | | Wind-down funds | — | | | — | | | — | | | 1 | |
| Total management fees | Total management fees | $ | 18 | | | $ | 17 | | | $ | 66 | | | $ | 55 | | Total management fees | $ | 18 | | | $ | 27 | | | $ | 35 | | | $ | 48 | |
FeesPerformance fees and related compensation expenses relate to tax distributions from opportunity fundsthe healthcare and asset-based funds.
Expenses
Employee compensation and benefit expenses increased in second quarter 2023 and six months 2023 primarily due to expenses related to the Sound Point Transaction and higher third party AUMcompensation due to the increase in healthcare funds. Fees from the wind-down funds decreased as distributions to investors continued. As of September 30, 2022, AUM of the wind-down funds was $0.2 billion compared with $0.8 billion as of September 30, 2021 and $0.6 billion as of December 31, 2021.performance fees.
Performance fees and increased compensation expenses in nine months 2022 were attributable to the healthcare and asset-based funds.
Assets Under Management
TheUntil July 1, 2023, the effective date of the Sound Point Transaction and the AHP Transaction, the Company usesused AUM as a metricone of the metrics to measure progress in its Asset Management segment. Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM. However, the Company believes that AUM is a useful metric for assessing the relative size and scope of the Company’s asset management business. The Company uses measures of its AUM in its decision-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.Segment. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following:AssuredIM.
•In the amountfirst half of aggregate collateral balance2023, while the Sound Point Transaction and principal cashAHP Transaction were pending, the Company was limited in its ability to raise third party AUM due to regulatory and practical considerations. AUM as of AssuredIM’s CLOs, including CLO Equity that may be heldJune 30, 2023 was $16.4 billion. As of July 1, 2023, the management of approximately $15.1 billion of AUM (of which $385 million was attributable to the Company) was transferred to Sound Point. Also in July 2023, the management of approximately $1.3 billion in remaining AUM (of which $185 million was attributable to the Company) was transferred with the sale of AHP to an entity owned and controlled by AssuredIM Funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji), which was soldits managing partner, and AHP will continue to manage the healthcare funds. See Note 1, Business and Basis of Presentation.
In second quarter 2023, (i) the management of approximately $159 billion in AUM in respect of certain wind-down and opportunity funds in their harvest period were transferred to a third party in second quarter 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advisesliquidator and continues to provide personnel and other services to BM Fuji associated with the(ii) management of BM Fuji-advisedapproximately $513 million at fair value in investment grade municipal bonds and CLOs pursuantunder an IMA was transferred to a sub-advisory agreementan internal manager 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 Securities and Exchange Commission (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 behalfone 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
Third Quarter 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CLOs (1) | | Opportunity Funds (2) | | Liquid Strategies | | Wind-Down Funds | | Total |
| | (in millions) |
| AUM, June 30, 2022 | $ | 15,176 | | | $ | 2,050 | | | $ | 372 | | | $ | 339 | | | $ | 17,937 | |
| Inflows - third party | — | | | 1 | | | — | | | — | | | 1 | |
| Inflows - intercompany | 115 | | | — | | | 1 | | | — | | | 116 | |
| Outflows: | | | | | | | | | |
| Redemptions | — | | | — | | | — | | | — | | | — | |
| Distributions | (154) | | | (47) | | | — | | | (114) | | | (315) | |
| Total outflows | (154) | | | (47) | | | — | | | (114) | | | (315) | |
| Net flows | (39) | | | (46) | | | 1 | | | (114) | | | (198) | |
| Change in value | (186) | | | 14 | | | (6) | | | (17) | | | (195) | |
| AUM, September 30, 2022 | $ | 14,951 | | | $ | 2,018 | | | $ | 367 | | | $ | 208 | | | $ | 17,544 | |
Roll Forward of Assets Under Management
Nine Months 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CLOs (1) | | Opportunity Funds (2) | | Liquid Strategies (3) | | Wind-Down Funds | | Total |
| | (in millions) |
| AUM, December 31, 2021 | $ | 14,699 | | | $ | 1,824 | | | $ | 389 | | | $ | 582 | | | $ | 17,494 | |
| Inflows - third party | 1,049 | | | 292 | | | 21 | | | — | | | 1,362 | |
| Inflows - intercompany | 165 | | | — | | | 105 | | | — | | | 270 | |
| Outflows: | | | | | | | | | |
| Redemptions | — | | | — | | | — | | | — | | | — | |
| Distributions | (511) | | | (190) | | | (125) | | | (389) | | | (1,215) | |
| Total outflows | (511) | | | (190) | | | (125) | | | (389) | | | (1,215) | |
| Net flows | 703 | | | 102 | | | 1 | | | (389) | | | 417 | |
| Change in value | (451) | | | 92 | | | (23) | | | 15 | | | (367) | |
| AUM, September 30, 2022 | $ | 14,951 | | | $ | 2,018 | | | $ | 367 | | | $ | 208 | | | $ | 17,544 | |
_____________________
(1)CLOs inflows and outflows include $105 million in third quarter 2022 and nine months 2022 related to the transfer of assets between two CLO funds.
(2) Opportunity funds inflows in nine months 2022 are primarily related to the healthcare strategy fund. Distributions from opportunity funds include $41 million and $115 million in third quarter 2022 and nine months 2022, respectively, related to the AssuredIM Funds created prior to BlueMountain Acquisition. As of September 30, 2022, AUM related to these funds was $74 million.
(3) Liquid strategies inflows and outflows in nine months 2022 relate to the transfer of assets from an existing municipal bond fund to a new municipal relative value fund.
Components of Assets Under Management
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CLOs (1) | | Opportunity Funds | | Liquid Strategies | | Wind-Down Funds | | Total |
| | (in millions) |
| As of September 30, 2022: | | | | | | | | | |
| Funded AUM | $ | 14,857 | | | $ | 1,304 | | | $ | 367 | | | $ | 186 | | | $ | 16,714 | |
| Unfunded AUM | 94 | | | 714 | | | — | | | 22 | | | 830 | |
| | | | | | | | | |
| Fee-earning AUM | $ | 14,575 | | | $ | 1,766 | | | $ | 367 | | | $ | 110 | | | $ | 16,818 | |
| Non-fee earning AUM | 376 | | | 252 | | | — | | | 98 | | | 726 | |
| | | | | | | | | |
| Intercompany AUM | | | | | | | | | |
| Funded AUM | $ | 574 | | | $ | 192 | | | $ | 346 | | | $ | — | | | $ | 1,112 | |
| Unfunded AUM | 93 | | | 125 | | | — | | | — | | | 218 | |
| | | | | | | | | |
| 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.external fixed-maturity security managers.
Corporate Division Results
Corporate Division Results
| | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Revenues | Revenues | $ | 1 | | | 1 | | | 3 | | | 1 | | Revenues | $ | 2 | | | $ | 1 | | | $ | 4 | | | $ | 2 | |
| Expenses | Expenses | | Expenses | |
| Interest expense | Interest expense | 22 | | | 25 | | | 66 | | | 74 | | Interest expense | 24 | | | 23 | | | 47 | | | 44 | |
| Loss on extinguishment of debt | — | | | 175 | | | — | | | 175 | | |
| Employee compensation and benefit expenses | Employee compensation and benefit expenses | 7 | | | 5 | | | 20 | | | 15 | | Employee compensation and benefit expenses | 9 | | | 7 | | | 18 | | | 13 | |
| Other operating expenses | Other operating expenses | 5 | | | 6 | | | 18 | | | 15 | | Other operating expenses | 27 | | | 6 | | | 43 | | | 13 | |
| Total expenses | Total expenses | 34 | | | 211 | | | 104 | | | 279 | | Total expenses | 60 | | | 36 | | | 108 | | | 70 | |
| Equity in earnings (losses) of investees | Equity in earnings (losses) of investees | — | | | 1 | | | — | | | 1 | | Equity in earnings (losses) of investees | — | | | — | | | — | | | — | |
| Adjusted operating income (loss) before income taxes | Adjusted operating income (loss) before income taxes | (33) | | | (209) | | | (101) | | | (277) | | Adjusted operating income (loss) before income taxes | (58) | | | (35) | | | (104) | | | (68) | |
| Less: Provision (benefit) for income taxes | Less: Provision (benefit) for income taxes | (3) | | | (40) | | | (3) | | | (45) | | Less: Provision (benefit) for income taxes | (8) | | | — | | | (10) | | | — | |
| Adjusted operating income (loss) | Adjusted operating income (loss) | $ | (30) | | | $ | (169) | | | $ | (98) | | | $ | (232) | | Adjusted operating income (loss) | $ | (50) | | | $ | (35) | | | $ | (94) | | | $ | (68) | |
The Corporate division loss in third quarter 2021 was primarily due to the loss on extinguishment of debt of $175 million on a pre-tax basis ($138 million after-tax) associated with the redemption of AGMH and AGUS debt, which represented the difference between the amount paid to redeem the debt and the carrying value of the debt. The loss on
extinguishment of debt primarily consisted of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the acquisition of AGMH in 2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS 5% Senior Notes. See Item 1. Financial Statements, Note 11, Long-Term Debt and Credit Facilities.
Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $2$3 million in both thirdsecond quarter 2023 and second quarter 2022, and third quarter 2021, and $7$5 million in both ninesix months 2023 and six months 2022, and nine months 2021. Intersegment interest expense relatesrelated primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition.Subsidiaries.
Corporate division employee compensation and benefits expenses are an allocation of expenses based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other expenses includegovernance including Board of Director expenses, legal fees and other direct or allocated expenses. In second quarter 2023 and six months 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction, and for six months 2023 a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $21 million for second quarter 2023 and $25 million for six months 2023.
Other (Effect of Consolidating 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.“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: (i) entities whose debt obligations the insurance subsidiaries insure; (ii) custodial trusts established in connection with the
consummation of the March2022 Puerto Rico Resolutions; and (iii) 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.
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: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (ii) eliminating the premiums and losseslosses/recoveries associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs.
Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows, and includes: (i) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs; (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investeesinvestees; and (iv) establishing non-controllingnoncontrolling interest for amounts not owned by the Company. The economic effect of the U.S Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“assets of CIVs,” “liabilities of CIVs,”fair value gains (losses) on consolidated investment vehicles” and redeemable and non-redeemable non-controlling“noncontrolling 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: (i) the revenues and expenses of the FG VIEs and the CIVs; and (ii) the consolidation adjustments and eliminations 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)
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Effect on Financial Statement Line Item | Effect on Financial Statement Line Item | (in millions) | Effect on Financial Statement Line Item | (in millions) |
| Fair value gains (losses) on FG VIEs (1) | Fair value gains (losses) on FG VIEs (1) | $ | 11 | | | $ | 5 | | | $ | 27 | | | $ | 18 | | Fair value gains (losses) on FG VIEs (1) | $ | (3) | | | $ | 10 | | | $ | (8) | | | $ | 16 | |
| Fair value gains (losses) on CIVs | Fair value gains (losses) on CIVs | 8 | | | 16 | | | 25 | | | 53 | | Fair value gains (losses) on CIVs | 6 | | | 3 | | | 64 | | | 17 | |
| Equity in earnings (losses) of investees (2) | Equity in earnings (losses) of investees (2) | (9) | | | (11) | | | 15 | | | (35) | | Equity in earnings (losses) of investees (2) | — | | | 34 | | | (28) | | | 24 | |
| Other (3) | Other (3) | (8) | | | (13) | | | (32) | | | (26) | | Other (3) | (25) | | | (13) | | | (39) | | | (24) | |
| Effect on income before tax | Effect on income before tax | 2 | | | (3) | | | 35 | | | 10 | | Effect on income before tax | (22) | | | 34 | | | (11) | | | 33 | |
| Less: Tax provision (benefit) | Less: Tax provision (benefit) | 1 | | | (2) | | | 3 | | | (1) | | Less: Tax provision (benefit) | (5) | | | 2 | | | (6) | | | 2 | |
| Effect on net income (loss) | Effect on net income (loss) | 1 | | | (1) | | | 32 | | | 11 | | Effect on net income (loss) | (17) | | | 32 | | | (5) | | | 31 | |
| Less: Effect on noncontrolling interests (4) | Less: Effect on noncontrolling interests (4) | (6) | | | 3 | | | 25 | | | 11 | | Less: Effect on noncontrolling interests (4) | 1 | | | 22 | | | 17 | | | 31 | |
| Effect on net income (loss) attributable to AGL | Effect on net income (loss) attributable to AGL | $ | 7 | | | $ | (4) | | | $ | 7 | | | $ | — | | Effect on net income (loss) attributable to AGL | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
| | By Type of VIE | By Type of VIE | | By Type of VIE | |
| FG VIEs | FG VIEs | $ | 6 | | | $ | (4) | | | $ | 9 | | | $ | (1) | | FG VIEs | $ | (13) | | | $ | 1 | | | $ | (15) | | | $ | 3 | |
| CIVs | CIVs | 1 | | | — | | | (2) | | | 1 | | CIVs | (5) | | | 9 | | | (7) | | | (3) | |
| Effect on net income (loss) attributable to AGL | Effect on net income (loss) attributable to AGL | $ | 7 | | | $ | (4) | | | $ | 7 | | | $ | — | | Effect on net income (loss) attributable to AGL | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
____________________
(1) Changes in fair 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, foreign exchange gains (losses) on remeasurement, other income (loss), loss and LAE (benefit) and other operating expenses.
(4) Represents the proportion of consolidated AssuredIM Funds’ income that is not attributable to AGAS’ or any other subsidiaries’ ownership interest.
Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
to Adjusted Operating Income (Loss)
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Net income (loss) attributable to AGL | Net income (loss) attributable to AGL | $ | 11 | | | $ | 17 | | | $ | 30 | | | $ | 126 | | Net income (loss) attributable to AGL | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| Less pre-tax adjustments: | Less pre-tax adjustments: | | Less pre-tax adjustments: | |
| Realized gains (losses) on investments | Realized gains (losses) on investments | (14) | | | 3 | | | (39) | | | 4 | | Realized gains (losses) on investments | (9) | | | (28) | | | (11) | | | (25) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (49) | | | 9 | | | (46) | | | (41) | | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 90 | | | 6 | | | 103 | | | 3 | |
| Fair value gains (losses) on CCS | Fair value gains (losses) on CCS | 1 | | | (3) | | | 12 | | | (28) | | Fair value gains (losses) on CCS | 1 | | | 10 | | | (15) | | | 11 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (78) | | | (27) | | | (180) | | | (21) | | Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 26 | | | (73) | | | 46 | | | (102) | |
| Total pre-tax adjustments | Total pre-tax adjustments | (140) | | | (18) | | | (253) | | | (86) | | Total pre-tax adjustments | 108 | | | (85) | | | 123 | | | (113) | |
| Less tax effect on pre-tax adjustments | Less tax effect on pre-tax adjustments | 18 | | | 1 | | | 30 | | | 15 | | Less tax effect on pre-tax adjustments | (19) | | | 8 | | | (21) | | | 12 | |
| Adjusted operating income (loss) | Adjusted operating income (loss) | $ | 133 | | | $ | 34 | | | $ | 253 | | | $ | 197 | | Adjusted operating income (loss) | $ | 36 | | | $ | 30�� | | | $ | 104 | | | $ | 120 | |
| | Gain (loss) related to FG VIE and CIV consolidation, net of tax, included in adjusted operating income | $ | 7 | | | $ | (4) | | | $ | 7 | | | $ | — | | |
| Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(5), $2, $(6) and $2) included in adjusted operating income | | Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(5), $2, $(6) and $2) included in adjusted operating income | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
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 | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Gross realized gains on sales available-for-sale securities | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | |
| Gross realized losses on sales available-for-sale securities | (10) | | | — | | | (33) | | | (2) | | |
| Gross realized gains on sales of available-for-sale securities | | Gross realized gains on sales of available-for-sale securities | $ | 7 | | | $ | — | | | $ | 19 | | | $ | — | |
| Gross realized losses on sales of available-for-sale securities | | Gross realized losses on sales of available-for-sale securities | (6) | | | (21) | | | (15) | | | (23) | |
| Net foreign currency gains (losses) | Net foreign currency gains (losses) | — | | | (2) | | | (3) | | | — | | Net foreign currency gains (losses) | — | | | (3) | | | — | | | (3) | |
| Change in credit impairment and intent to sell | (4) | | | 5 | | | (13) | | | 1 | | |
| Change in allowance for credit losses and intent to sell | | Change in allowance for credit losses and intent to sell | (10) | | | (4) | | | (15) | | | (9) | |
| Other net realized gains (losses) | Other net realized gains (losses) | — | | | — | | | 10 | | | 3 | | Other net realized gains (losses) | — | | | — | | | — | | | 10 | |
| Net realized investment gains (losses) | Net realized investment gains (losses) | $ | (14) | | | $ | 3 | | | $ | (39) | | | $ | 4 | | Net realized investment gains (losses) | $ | (9) | | | $ | (28) | | | $ | (11) | | | $ | (25) | |
Gross realized gains and losses on sales of available-for-sale securities in third quarter 2022 and nine months 2022 wereall periods primarily attributablerelated to sales of New Recovery Bonds received as part of the 2022 Puerto Rico recovery bonds. Other net realized gains in nine months 2022 relate primarily to the sale of one of the Company’s alternative investments.Resolutions.
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. Except for underlying credit impairment, which is recognized as loss expense in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.
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.inputs. 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 SeptemberJune 30, 2022,2023, 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.
ThirdSecond quarter 20222023 and six months 2023 non-credit impairment unrealized fair value losses were generated primarily as a result of wider asset spreads and a tightening of AGC spreads. Nine months 2022 non-credit impairment unrealized fair value losses on credit derivatives were generated primarily as a result of wider asset spreads, partially offset by a widening of AGC spreads and changes in discount rates.
Third quarter 2021 non-credit impairmentimpairment-related unrealized fair value gains were primarily generated by lower collateral asset spreads. For six months 2023, the increased cost to buy protection on AGC, as the market cost of AGC’s credit derivatives were mainly attributableprotection increased during the period, also contributed to the termination of several CDS policies, including several trust preferred securities transactions and one RMBS transaction.
NineSecond quarter 2022 and six months 20212022 non-credit impairmentimpairment-related unrealized fair value losses on credit derivativesgains were generated primarily as a result of the tighteningincreased cost to buy protection on AGC, as the market cost of AGC spreads,AGC’s credit protection increased during the period, and changes in discount rates. These gains were partially offset by general price improvements of the underlying collateral and the termination of several CDS policies, including several trust preferred securities transactions and one RMBS transaction. Except for underlying credit impairment, which is recognized as loss expense (benefit)an increase in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining termspread of that portfolio.certain underlying reference obligations.
Sensitivity to ChangesAdjusted Operating Income
Adjusted operating income in Credit Spread
second quarter 2023 was $36 million, compared with $30 million in second quarter 2022. The following table summarizes the estimated change inincrease was primarily due to fair value gains on the trading portfolio and higher net balanceinvestment income, offset in part by higher losses and transaction expenses related to the Sound Point Transaction and the AHP transaction. Adjusted operating income in six months 2023 was $104 million, compared with $120 million in six months 2022. The decrease was primarily due to lower net earned premiums in six months 2023, compared with six months 2022 which included premium accelerations related to the 2022 Puerto Rico Resolutions, and higher operating expenses, partially offset by fair value gains on the trading portfolio and CIVs. See “— Results of Operations — Reconciliation to GAAP” for the reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Book Value and Adjusted Book Value
Shareholders’ equity attributable to AGL as of June 30, 2023 increased compared with December 31, 2022, as net income and other comprehensive income were partially offset by dividends and share repurchases. Adjusted operating shareholders’ equity and adjusted book value increased primarily due to operating income offset in part by dividends and share repurchases, and in the case of adjusted book value, the increase was also due to new business production. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value.
Other Matters
Inflation
By some key measures, consumer price inflation in the U.S. and the U.K. was higher in recent years than it has been in decades, and interest rates generally increased. Consumer price inflation in the U.K. impacts the Company directly by increasing exposure for certain index-linked U.K. debt with par that accretes with increasing inflation, and also increasing projected future installment premiums on the portion of such exposure that pays at least some of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments, and may be accompanied by higher interest rates that could impact the Company in several ways.
After acknowledging the need to combat inflation, the FOMC of the Federal Reserve Board decided at its March 2022 meeting to start again raising the target federal funds rate, and raised the rate 11 times from March 2022 through July 26, 2023. At its July 25-26, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 5.25% to 5.5%, and stated that its decision to raise the target range of the federal funds rate was in support of its goals of achieving maximum employment and inflation at the rate of 2% over the longer run. In determining the extent to which additional federal funds target rate increases are needed to return inflation to 2% over time, the FOMC indicated it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Higher interest rates impact the Company in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit derivative positions assuming an immediate shiftenhancement products more attractive in the net spreads assumed bymarket and increase the Company. The netlevel of premiums it can charge for that product. Despite the increases in interest rates in 2022 and first half of 2023, the pace of credit spread is affected bywidening was more modest and market penetration of municipal bond insurance in the spreadU.S. public finance market remained relatively flat compared to 2021. Over time, higher interest rates also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. However, higher interest rates may, in turn, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact the underlying collateral and the credit spreads on AGC.finances of some insured obligors.
Effect of Changes in Credit Spread
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 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 | | $ | (264) | | | $ | (70) | | | $ | (250) | | | $ | (96) | |
| Base Scenario | | (194) | | | — | | | (154) | | | — | |
| Decrease of 25 bps | | (128) | | | 66 | | | (83) | | | 71 | |
| All transactions priced at floor | | (28) | | | 166 | | | (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 CCSSee “Overview — Economic Environment”.
Fair value gains on CCS in third quarter 2022 and nine months 2022 were primarily due to a significant increase in LIBOR. Fair value losses on CCS in third quarter 2021 and nine months 2021 were primarily due to a tightening in market spreads during the periods. Fair valueRussia’s Invasion of CCS is heavily affected by, and in part fluctuates with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.Ukraine
Foreign Exchange Gain (Loss) on Remeasurement
Foreign exchange gainsRussia’s invasion of Ukraine has led to the imposition of economic sanctions by many western countries against Russia and lossescertain Russian individuals, dislocation in all periods primarily relateglobal energy markets, massive refugee movements, and payment default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to remeasurement of long-dated premiums receivables, for whichreduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company records the present value of future installment premiums, and are mainly due to changes in the exchange ratecannot predict all of the pound sterling and, to a lesser extent,potential effects of the euro relative toconflict on the U.S. dollar.
Non-GAAP Financial Measures
The Company discloses both: (a) financial measures determined in accordance with GAAP; 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 ofworld 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 $271 million in net par outstanding as of June 30, 2023, comprising $216 million net par exposure to the sovereign debt of Poland and $55 million net par exposure to a toll road in Hungary. The Company believesrates the toll road exposure BIG.
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 company. The final regulations are not expected to have a material impact to the Company’s business operation or its presentationshareholders and the proposed regulations are continuing to be evaluated.
Results of non-GAAPOperations
Critical Accounting Estimates
The preparation of financial measures providesstatements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the condensed consolidated financial statements.
Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is necessary for analystsreasonable under the circumstances. There can be no assurance that actual results will conform to calculate their estimates and assumptions and that reported results of Assured Guaranty’s financial resultsoperations will not be materially different in their research reports on Assured Guarantythe future to reflect changes in these estimates and for investors, analysts and the financial news mediaassumptions from time to evaluate Assured Guaranty’s financial results.time.
GAAP requiresThe accounting policies that the Company believes are most dependent on the application of judgment, estimates and assumptions are listed below. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, of the Company’s 2022 Annual Report on Form 10-K, for the Company’s significant accounting policies which includes a reference to consolidate entitiesthe applicable note where it is deemed to befurther details regarding the primary beneficiary which include:significant estimates and assumptions are provided, as well as Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s 2022 Annual Report on Form 10-K, for further details regarding sensitivity analysis.
•FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and
•CIVs in whichExpected loss to be paid (recovered)
•Fair value of certain subsidiaries investassets and which are managedliabilities, primarily:
▪Investments
▪Assets and liabilities of CIVs
▪Assets and liabilities of FG VIEs
▪Credit derivatives
•Recoverability of goodwill and other intangible assets
•Credit impairment of financial instruments
•Revenue recognition
•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities)
Results of Operations by AssuredIM.Segment
The Company disclosesanalyzes the effectoperating performance of FG VIEeach segment using each segment’s adjusted operating income as described in Item 1, Financial Statements, Note 2, Segment Information.
Insurance Segment Results
Insurance Segment Results
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| Segment revenues | | | | | | | |
| Net earned premiums and credit derivative revenues | $ | 88 | | | $ | 86 | | | $ | 172 | | | $ | 305 | |
| Net investment income | 90 | | | 66 | | | 172 | | | 129 | |
| Fair value gains (losses) on trading securities | 40 | | | (18) | | | 38 | | | (22) | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | 6 | | | 5 | | | 32 | | | 5 | |
| Total segment revenues | 224 | | | 139 | | | 414 | | | 417 | |
| Segment expenses | | | | | | | |
| Loss expense (benefit) | 44 | | | (17) | | | 53 | | | 43 | |
| Interest expense | — | | | — | | | — | | | 1 | |
| Amortization of DAC | 3 | | | 3 | | | 6 | | | 7 | |
| Employee compensation and benefit expenses | 36 | | | 35 | | | 75 | | | 73 | |
| Other operating expenses | 27 | | | 20 | | | 55 | | | 39 | |
| Total segment expenses | 110 | | | 41 | | | 189 | | | 163 | |
| Equity in earnings (losses) of investees | 5 | | | (34) | | | 35 | | | (35) | |
| Segment adjusted operating income (loss) before income taxes | 119 | | | 64 | | | 260 | | | 219 | |
| Less: Provision (benefit) for income taxes | 13 | | | 9 | | | 37 | | | 31 | |
| Segment adjusted operating income (loss) | $ | 106 | | | $ | 55 | | | $ | 223 | | | $ | 188 | |
Net Earned Premiums and CIV consolidation that is embeddedCredit Derivative Revenues
Premiums are earned over the contractual lives, or in each non-GAAPthe case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial measure, as applicable.guaranty insurance contracts. The Company believes this informationperiodically 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 decrease each year unless replaced by a higher amount of new business, or books of business acquired in business combinations. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information.
Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policies under the 2022 Puerto Rico Resolutions.
Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations have been more common in the structured finance asset class, but may also be useful to analystsoccur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and investors evaluating Assuredthe reduction of any remaining premiums receivable.
Guaranty’sInsurance Segment
Net Earned Premiums and Credit Derivative Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net earned premiums: | | | | | | | |
| Financial guaranty insurance: | | | | | | | |
| Public finance | | | | | | | |
| Scheduled net earned premiums (1) | $ | 61 | | | $ | 63 | | | $ | 123 | | | $ | 134 | |
| Accelerations: | | | | | | | |
| Refundings | 8 | | | 5 | | | 12 | | | 133 | |
| Terminations | — | | | — | | | — | | | — | |
| Total accelerations | 8 | | | 5 | | | 12 | | | 133 | |
| Total public finance | 69 | | | 68 | | | 135 | | | 267 | |
| Structured finance scheduled net earned premiums (1) | 16 | | | 14 | | | 31 | | | 29 | |
| Specialty insurance and reinsurance | 1 | | | 1 | | | 2 | | | 2 | |
| Total net earned premiums | 86 | | | 83 | | | 168 | | | 298 | |
| | | | | | | |
| Credit derivative revenues: | | | | | | | |
| Scheduled net earned premiums | 2 | | | 3 | | | 4 | | | 5 | |
| Accelerations | — | | | — | | | — | | | 2 | |
| Total credit derivative revenues | 2 | | | 3 | | | 4 | | | 7 | |
| Total net earned premiums and credit derivative revenues | $ | 88 | | | $ | 86 | | | $ | 172 | | | $ | 305 | |
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues increased in second quarter 2023 compared with second quarter 2022 primarily due to higher refundings. Net earned premiums and credit derivative revenues decreased in six months 2023 compared with six months 2022 primarily due to refundings of $104 million related to the resolution of PRCCDA, PRIFA and GO/PBA exposures that occurred in March 2022 discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of June 30, 2023, $3.7 billion of net deferred premium revenue on financial results. guaranty insurance remained to be earned over the life of the insurance contracts.
New Business Production
Gross Written Premiums and
New Business Production
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| GWP | | | | | | | |
| Public Finance—U.S. | $ | 78 | | | $ | 57 | | | $ | 100 | | | $ | 106 | |
| Public Finance—non-U.S. | 9 | | | 6 | | | 45 | | | 22 | |
| Structured Finance—U.S. | 5 | | | 1 | | | 33 | | | 6 | |
| Structured Finance—non-U.S. | 3 | | | 1 | | | 3 | | | 1 | |
| Total GWP | $ | 95 | | | $ | 65 | | | $ | 181 | | | $ | 135 | |
| PVP (1): | | | | | | | |
| Public Finance—U.S. | $ | 77 | | | $ | 57 | | | $ | 99 | | | $ | 106 | |
| Public Finance—non-U.S. | 6 | | | 18 | | | 36 | | | 30 | |
| Structured Finance—U.S. | 3 | | | — | | | 30 | | | 2 | |
| Structured Finance—non-U.S. (2) | 5 | | | 1 | | | 38 | | | 7 | |
| Total PVP | $ | 91 | | | $ | 76 | | | $ | 203 | | | $ | 145 | |
Gross Par Written (1): | | | | | | | |
| Public Finance—U.S. | $ | 7,747 | | | $ | 6,429 | | | $ | 10,654 | | | $ | 10,360 | |
| Public Finance—non-U.S. | 249 | | | 207 | | | 609 | | | 430 | |
| Structured Finance—U.S. | 252 | | | 16 | | | 834 | | | 76 | |
| Structured Finance—non-U.S. (2) | 726 | | | 43 | | | 2,240 | | | 300 | |
| Total gross par written | $ | 8,974 | | | $ | 6,695 | | | $ | 14,337 | | | $ | 11,166 | |
| Average rating on new business written | A- | | A | | A | | A- |
____________________
(1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “— Non-GAAP Financial Measures — PVP or Present Value of New Business Production.”
(2) Six months 2023 and 2022 PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under Accounting Standards Codification (ASC) 460, Guarantees.
Second Quarter 2023
U.S. public finance GWP and PVP in second quarter 2023 were higher than the comparable GWP and PVP in second quarter 2022, due to $47 million in assumed GWP and $46 million in assumed PVP in second quarter 2023. These were offset in part by lower direct GWP and PVP of $31 million, primarily due to a decrease in secondary market business in second quarter 2023. The average rating of U.S. public finance par written was A- in second quarter 2023 and A in second quarter 2022. The Company’s direct par written represented 64% of the total U.S. municipal market insured issuance in second quarter 2023, compared with 54% in second quarter 2022, and the Company’s penetration of all municipal issuance was 6.5% in second quarter 2023 compared with 4.8% in second quarter 2022.
In non-U.S. infrastructure markets, the Company wrote a guaranty on a U.K. regulated utility and, in the structured finance asset class, the Company wrote several subscription finance guaranties in second quarter 2023.
Six Months 2023
U.S. public finance GWP and PVP in six months 2023 were comparable to GWP and PVP in six months 2022, with higher assumed business offsetting lower direct business that was primarily due to a decrease in secondary market business in six months 2023. The average rating of U.S. public finance par written was A- in both six months 2023 and six months 2022. The Company’s direct par written represented 63% of the total U.S. municipal market insured issuance in six months 2023, compared with 56% in six months 2022, and the Company’s penetration of all municipal issuance was 5.7% in six months 2023 compared with 4.9% in six months 2022.
In six months 2023, non-U.S. public finance GWP and PVP were higher than GWP and PVP in six months 2022. In six months 2023, new business primarily included the guaranty of a long-term sale and leaseback transaction with Glasgow City Council and several regulated utility transactions.
In six months 2023, structured finance GWP and PVP were $36 million and $68 million, respectively, compared with GWP and PVP of $7 million and $9 million, respectively, in six months 2022. Structured finance PVP in six months 2023 includes an insurance securitization and several subscription finance guaranties, as well as an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties for which no GWP was reported under GAAP because it is not accounted for as insurance.
Business activity in the non-U.S. public finance and structured finance sectors typically has long lead times and therefore may vary from period to period.
Income from Investments
Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments and the size of such portfolio. The investment yield on fixed-maturity securities is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.
CVIs issued by Puerto Rico and received as part of the 2022 Puerto Rico Resolutions are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the consolidated statements on operations. The fair value of such instruments as of June 30, 2023 was $340 million.
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 investees.
Insurance Segment
Income from Investments
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net investment income | | | | | | | |
| Fixed-maturity securities, available-for-sale: | | | | | | | |
| Externally managed (1) | $ | 53 | | | $ | 49 | | | $ | 105 | | | $ | 98 | |
| Loss Mitigation Securities | 12 | | | 7 | | | 24 | | | 17 | |
| Puerto Rico, New Recovery Bonds | 1 | | | 3 | | | 4 | | | 4 | |
| Other (2) | 4 | | | 4 | | | 7 | | | 7 | |
| Short-term investments | 16 | | | 1 | | | 28 | | | 1 | |
| Intercompany loans | 3 | | | 3 | | | 5 | | | 5 | |
| Other investment assets | 2 | | | — | | | 2 | | | — | |
| Investment income | 91 | | | 67 | | | 175 | | | 132 | |
| Investment expenses | (1) | | | (1) | | | (3) | | | (3) | |
| Net investment income | $ | 90 | | | $ | 66 | | | $ | 172 | | | $ | 129 | |
| | | | | | | |
| Fair value gains (losses) on trading securities | $ | 40 | | | $ | (18) | | | $ | 38 | | | $ | (22) | |
| | | | | | | |
| Equity in earnings (losses) of investees | | | | | | | |
| AssuredIM Funds | $ | — | | | $ | (33) | | | $ | 28 | | | $ | (22) | |
| Other | 5 | | | (1) | | | 7 | | | (13) | |
| Equity in earnings (losses) of investees | $ | 5 | | | $ | (34) | | | $ | 35 | | | $ | (35) | |
____________________
(1) Amounts for 2022 include income on the portion of the CLO portfolio that was previously managed by AssuredIM.
(2) Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM.
Net investment income for second quarter 2023 and six months 2023 increased compared to second quarter 2022 and six months 2022, primarily due to the increase in short-term rates and higher average short-term balances, as well as higher income on floating rate CLO investments. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.89% as of June 30, 2023 and 2.95% as of June 30, 2022.
Equity in earnings of AssuredIM Funds were gains in six months 2023 and were primarily attributable to higher valuations of assets held in the CLO and healthcare funds. Equity in earnings of AssuredIM Funds in second quarter 2022 and six months 2022 were losses and were primarily attributable to lower valuations of assets held in CLO funds and the dilutive impact of the subsequent close of a healthcare fund.
Foreign Exchange Gains (Losses) on Remeasurement and Other Income (Loss)
The increase in “foreign exchange gains (losses) on remeasurement and other income (loss)” in six months 2023 compared with six months 2022 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million. See Item 1, Financial Statements, Note 12, Commitments and Contingencies, for additional information.
Economic Loss Development
The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), of the Company’s 2022 Annual Report on Form 10-K. The GAAP accounting policies for measurement and recognition for each type of contract are described in the notes listed below in Part II, Item 8, Financial Statements and Supplementary Data, of the Company’s 2022 Annual Report on Form 10-K:
•Note 5 for contracts accounted for as insurance;
•Note 6 for contracts accounted for as credit derivatives;
•Note 8 for FG VIEs; and
•Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities.
In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.
Current risk-free rates are used to discount expected losses at the end of each reporting period. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) were 4.34% and 4.08% as of June 30, 2023 and December 31, 2022, respectively.
The composition of economic loss development (benefit) by accounting model and by sector is 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 | | Second Quarter | | Six Months |
| Accounting Model | | June 30, 2023 | | December 31, 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) |
| Insurance | | $ | 262 | | | $ | 205 | | | $ | 62 | | | $ | (26) | | | $ | 68 | | | $ | (70) | |
| FG VIEs | | 295 | | (1) | 314 | | (1) | (14) | | | (6) | | | (9) | | | (10) | |
| Credit derivatives | | 3 | | | 3 | | | 1 | | | — | | | 1 | | | 4 | |
| Total | | $ | 560 | | | $ | 522 | | | $ | 49 | | | $ | (32) | | | $ | 60 | | | $ | (76) | |
| | | | | | | | | | | | |
| Net exposure rated BIG | | $ | 5,718 | | | $ | 5,976 | | | | | | | | | |
____________________
(1) The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts). See Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter 2023 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2023 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 380 | | | $ | 57 | | | $ | (4) | | | $ | 433 | |
| Non-U.S. public finance | | 13 | | | (3) | | | — | | | 10 | |
| Public finance | | 393 | | | 54 | | | (4) | | | 443 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 82 | | | (9) | | | — | | | 73 | |
| Other structured finance | | 42 | | | 4 | | | (2) | | | 44 | |
| Structured finance | | 124 | | | (5) | | | (2) | | | 117 | |
| Total | | $ | 517 | | | $ | 49 | | | $ | (6) | | | $ | 560 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter 2022 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 181 | | | $ | 8 | | | $ | 21 | | | $ | 210 | |
| Non-U.S. public finance | | 10 | | | (2) | | | (1) | | | 7 | |
| Public finance | | 191 | | | 6 | | | 20 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 195 | | | (39) | | | 23 | | | 179 | |
| Other structured finance | | 46 | | | 1 | | | (1) | | | 46 | |
| Structured finance | | 241 | | | (38) | | | 22 | | | 225 | |
| Total | | $ | 432 | | | $ | (32) | | | $ | 42 | | | $ | 442 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 2023 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 403 | | | $ | 58 | | | $ | (28) | | | $ | 433 | |
| Non-U.S. public finance | | 9 | | | 1 | | | — | | | 10 | |
| Public finance | | 412 | | | 59 | | | (28) | | | 443 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 66 | | | (4) | | | 11 | | | 73 | |
| Other structured finance | | 44 | | | 5 | | | (5) | | | 44 | |
| Structured finance | | 110 | | | 1 | | | 6 | | | 117 | |
| Total | | $ | 522 | | | $ | 60 | | | $ | (22) | | | $ | 560 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 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 June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 197 | | | $ | (40) | | | $ | 53 | | | $ | 210 | |
| Non-U.S. public finance | | 12 | | | (4) | | | (1) | | | 7 | |
| Public finance | | 209 | | | (44) | | | 52 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 150 | | | (32) | | | 61 | | | 179 | |
| Other structured finance | | 52 | | | — | | | (6) | | | 46 | |
| Structured finance | | 202 | | | (32) | | | 55 | | | 225 | |
| Total | | $ | 411 | | | $ | (76) | | | $ | 107 | | | $ | 442 | |
____________________
(1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets.”
Second Quarter 2023 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in second quarter 2023 was $57 million and was primarily attributable to $78 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $21 million in other municipal exposures.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $9 million and was primarily attributable to a $7 million benefit related to higher recoveries for secured second lien charged-off loans, a $5 million benefit related to improved performance in certain transactions, and $3 million benefit related to changes in discount rates, partially offset by losses of $6 million related to lower excess spread.
See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.
Second Quarter 2022 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in second quarter 2022 was $8 million, and was primarily attributable to Puerto Rico exposures, partially offset by the effect of changes in discount rate. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.6 billion as of June 30, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to PRCCDA, PRIFA and GO/PBA.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $39 million and was primarily attributable to a $23 million benefit related to changes in discount rates, a $17 million benefit related to improved performance in certain transactions, a $14 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $26 million related to lower excess spread.
Six Months 2023Net Economic Loss Development
The economic loss development on U.S. public finance exposures in six months 2023 was $58 million, which was primarily attributable to $81 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $23 million in other municipal exposures. The net benefit attributable to U.S. RMBS was $4 million and was mainly attributable to a $14 million benefit related to higher recoveries for second lien charged-off loans, and a $9 million benefit related to improved performance in certain transactions, partially offset by a $15 million loss related to the return of certain funds previously received, a $2 million loss related to changes in discount rates and a $2 million loss related to lower excess spread.
Six Months 2022 Net Economic Loss Development
The economic benefit on U.S. public finance exposures in six months 2022 was $40 million, which was primarily attributable to changes in discount rates. The net benefit attributable to U.S. RMBS was $32 million and was mainly related to a $45 million benefit related to changes in discount rates, a $27 million benefit related to improved performance in certain transactions, an $18 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $69 million related to lower excess spread.
Insurance Segment Loss Expense
The primary differences between net economic loss development and the amount reported as “loss and LAE (benefit)” in the consolidated statements of operations are that loss and LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (ii) eliminates loss and LAE related to FG VIEs; and (iii) does not include estimated losses on credit derivatives.
Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives, without giving effect to eliminations related to the consolidation of FG VIEs.
For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.
While expected loss to be paid (recovered) is an important measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.
The amount of Insurance segment loss expense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense (benefit).
Insurance Segment
Loss Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| U.S. public finance | $ | 45 | | | $ | 11 | | | $ | 46 | | | $ | 66 | |
| | | | | | | |
| Structured finance: | | | | | | | |
| U.S. RMBS | (3) | | | (28) | | | 3 | | | (22) | |
| Other structured finance | 2 | | | — | | | 4 | | | (1) | |
| Structured finance | (1) | | | (28) | | | 7 | | | (23) | |
| Total Insurance segment loss expense (benefit) | $ | 44 | | | $ | (17) | | | $ | 53 | | | $ | 43 | |
The difference between public finance loss expense and economic benefit in six months 2022 was primarily attributable to the release of unearned premium reserve related to PRCCDA, PRIFA and GO/PBA exposures. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were recognized for the remaining deferred premium revenue on the extinguished Puerto
Rico exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance.
Other Operating Expenses
The increase in “other operating expenses” in six months 2023 compared with six months 2022 was primarily attributable to an increase in value added taxes and increases in certain employee benefit related costs.
Financial Strength Ratings
Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of 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 (S&P) | | Kroll Bond Rating
Agency | | Moody’s Investors Service, Inc. (Moody’s) | | A.M. Best Company,
Inc. |
| AGM | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | A1 (stable) (3/18/22) | | — |
| AGC | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | (1) | | — |
| Assured Guaranty Re Ltd. (AG Re) | AA (stable) (7/13/23) | | — | | — | | — |
| Assured Guaranty Re Overseas Ltd. (AGRO) | AA (stable) (7/13/23) | | — | | — | | A+ (stable) (7/21/23) |
| Assured Guaranty UK Limited (AGUK) | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | A1 (stable) (3/18/22) | | — |
| Assured Guaranty (Europe) SA (AGE) | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | — | | — |
____________________
(1) AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. Moody's rates AGC A2 (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 — Insurance Subsidiaries” section below.
Asset Management Segment Results
Asset Management Segment Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
| Segment revenues | | | | | | | |
| Management fees (1) | 18 | | | 27 | | | 35 | | | 48 | |
| Performance fees | 9 | | | 2 | | | 29 | | | 18 | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | 3 | | | (1) | | | 7 | | | 1 | |
| Total segment revenues | 30 | | | 28 | | | 71 | | | 67 | |
| Segment expenses | | | | | | | |
| Interest expense | 1 | | | — | | | 1 | | | — | |
| Employee compensation and benefit expenses | 25 | | | 17 | | | 59 | | | 46 | |
| Other operating expenses (1) (2) | 7 | | | 11 | | | 15 | | | 21 | |
| Total segment expenses | 33 | | | 28 | | | 75 | | | 67 | |
| Segment adjusted operating income (loss) before income taxes | (3) | | | — | | | (4) | | | — | |
| Less: Provision (benefit) for income taxes | (1) | | | — | | | (1) | | | — | |
| Segment adjusted operating income (loss) | $ | (2) | | | $ | — | | | $ | (3) | | | $ | — | |
_____________________
(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 for second quarter 2022, $2 million for six months 2023 and $6 million for six months 2022. The Company ceased amortizing the intangible assets when the asset management assets and liabilities were reclassified to held-for-sale.
Management and Performance Fees
Management fees in second quarter 2023 were primarily generated by CLOs, opportunity funds and liquid strategies. CLO fees represented the net management fees that AssuredIM retained after rebating the portion of these fees that pertained to the CLO equity that was held directly by AssuredIM Funds.
Management Fees
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
| CLOs | $ | 13 | | | $ | 12 | | | $ | 25 | | | $ | 24 | |
| Opportunity funds and liquid strategies | 5 | | | 15 | | | 10 | | | 23 | |
| Wind-down funds | — | | | — | | | — | | | 1 | |
| Total management fees | $ | 18 | | | $ | 27 | | | $ | 35 | | | $ | 48 | |
Performance fees and related compensation expenses relate to tax distributions from the healthcare and asset-based funds.
Expenses
Employee compensation and benefit expenses increased in second quarter 2023 and six months 2023 primarily due to expenses related to the Sound Point Transaction and higher compensation due to the increase in performance fees.
Assets Under Management
Until July 1, 2023, the effective date of the Sound Point Transaction and the AHP Transaction, the Company used AUM as one of the metrics to measure progress in its Asset Management Segment. AUM refers to the assets managed, advised or serviced by AssuredIM.
In the casefirst half of 2023, while the Sound Point Transaction and AHP Transaction were pending, the Company was limited in its ability to raise third party AUM due to regulatory and practical considerations. AUM as of June 30, 2023 was $16.4 billion. As of July 1, 2023, the management of approximately $15.1 billion of AUM (of which $385 million was attributable to the Company) was transferred to Sound Point. Also in July 2023, the management of approximately $1.3 billion in remaining AUM (of which $185 million was attributable to the Company) was transferred with the sale of AHP to an entity owned and controlled by its managing partner, and AHP will continue to manage the healthcare funds. See Note 1, Business and Basis of Presentation.
In second quarter 2023, (i) the management of approximately $159 billion in AUM in respect of certain wind-down and opportunity funds in their harvest period were transferred to a third party liquidator and (ii) management of approximately $513 million at fair value in investment grade municipal bonds and CLOs under an IMA was transferred to an internal manager and to one of the Company’s external fixed-maturity security managers.
Corporate Division Results
Corporate Division Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Revenues | $ | 2 | | | $ | 1 | | | $ | 4 | | | $ | 2 | |
| Expenses | | | | | | | |
| Interest expense | 24 | | | 23 | | | 47 | | | 44 | |
| Employee compensation and benefit expenses | 9 | | | 7 | | | 18 | | | 13 | |
| Other operating expenses | 27 | | | 6 | | | 43 | | | 13 | |
| Total expenses | 60 | | | 36 | | | 108 | | | 70 | |
| Equity in earnings (losses) of investees | — | | | — | | | — | | | — | |
| Adjusted operating income (loss) before income taxes | (58) | | | (35) | | | (104) | | | (68) | |
| Less: Provision (benefit) for income taxes | (8) | | | — | | | (10) | | | — | |
| Adjusted operating income (loss) | $ | (50) | | | $ | (35) | | | $ | (94) | | | $ | (68) | |
Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $3 million in both second quarter 2023 and second quarter 2022, and $5 million in both six months 2023 and six months 2022, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries.
Corporate division employee compensation and benefits expenses are an allocation of expenses based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance including Board of Director expenses, legal fees and other direct or allocated expenses. In second quarter 2023 and six months 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction, and for six months 2023 a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $21 million for second quarter 2023 and $25 million for six months 2023.
Other (Effect of Consolidating 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: (i) entities whose debt obligations the insurance subsidiaries insure; (ii) custodial trusts established in connection with the
consummation of the 2022 Puerto Rico Resolutions; and (iii) 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.
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: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (ii) eliminating the premiums and losses/recoveries associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs.
Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows, and includes: (i) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs; (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees; and (iv) establishing noncontrolling interest for amounts not owned by the Company. The economic effect of the U.S Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“fair value gains (losses) on consolidated investment vehicles” and “noncontrolling 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: (i) the revenues and expenses of the FG VIEs and the CIVs; and (ii) the consolidation adjustments and eliminations between consolidated FG VIEs or CIVs and the economic effect on the Companyoperating and investment subsidiaries.
Effect of each of the consolidatedConsolidating FG VIEs and CIVs is reflected primarily inon the resultsCondensed Consolidated Statements of the Insurance segment.Operations
Increase (Decrease)
Management | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Effect on Financial Statement Line Item | (in millions) |
| Fair value gains (losses) on FG VIEs (1) | $ | (3) | | | $ | 10 | | | $ | (8) | | | $ | 16 | |
| Fair value gains (losses) on CIVs | 6 | | | 3 | | | 64 | | | 17 | |
| Equity in earnings (losses) of investees (2) | — | | | 34 | | | (28) | | | 24 | |
| Other (3) | (25) | | | (13) | | | (39) | | | (24) | |
| Effect on income before tax | (22) | | | 34 | | | (11) | | | 33 | |
| Less: Tax provision (benefit) | (5) | | | 2 | | | (6) | | | 2 | |
| Effect on net income (loss) | (17) | | | 32 | | | (5) | | | 31 | |
| Less: Effect on noncontrolling interests (4) | 1 | | | 22 | | | 17 | | | 31 | |
| Effect on net income (loss) attributable to AGL | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
| | | | | | | |
| By Type of VIE | | | | | | | |
| FG VIEs | $ | (13) | | | $ | 1 | | | $ | (15) | | | $ | 3 | |
| CIVs | (5) | | | 9 | | | (7) | | | (3) | |
| Effect on net income (loss) attributable to AGL | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
____________________
(1) Changes in fair value of the CompanyFG VIEs’ assets and AGL’s Board of Directors use non-GAAP financial measures further adjustedliabilities that are attributable to removefactors other than (i) changes in the effect ofCompany’s own credit risk on FG VIE liabilities with recourse, and CIV consolidation (which(ii) unrealized gains and losses on available-for-sale fixed maturity securities.
(2) Represents the Company refers to as its core financial measures)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, foreign exchange gains (losses) on remeasurement, other income (loss), as well as GAAP financial measuresloss and LAE (benefit) and other factors,operating expenses.
(4) Represents the proportion of consolidated AssuredIM Funds’ income that is not attributable to evaluateAGAS’ or any other subsidiaries’ ownership interest.
Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
to Adjusted Operating Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net income (loss) attributable to AGL | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| Less pre-tax adjustments: | | | | | | | |
| Realized gains (losses) on investments | (9) | | | (28) | | | (11) | | | (25) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 90 | | | 6 | | | 103 | | | 3 | |
| Fair value gains (losses) on CCS | 1 | | | 10 | | | (15) | | | 11 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 26 | | | (73) | | | 46 | | | (102) | |
| Total pre-tax adjustments | 108 | | | (85) | | | 123 | | | (113) | |
| Less tax effect on pre-tax adjustments | (19) | | | 8 | | | (21) | | | 12 | |
| Adjusted operating income (loss) | $ | 36 | | | $ | 30�� | | | $ | 104 | | | $ | 120 | |
| | | | | | | |
| Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(5), $2, $(6) and $2) included in adjusted operating income | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
Net Realized Investment Gains (Losses)
The table below presents the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating 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.net realized investment gains (losses).
Net Realized Investment Gains (Losses)
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 measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy. | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Gross realized gains on sales of available-for-sale securities | $ | 7 | | | $ | — | | | $ | 19 | | | $ | — | |
| Gross realized losses on sales of available-for-sale securities | (6) | | | (21) | | | (15) | | | (23) | |
| Net foreign currency gains (losses) | — | | | (3) | | | — | | | (3) | |
| Change in allowance for credit losses and intent to sell | (10) | | | (4) | | | (15) | | | (9) | |
| Other net realized gains (losses) | — | | | — | | | — | | | 10 | |
| Net realized investment gains (losses) | $ | (9) | | | $ | (28) | | | $ | (11) | | | $ | (25) | |
AdjustedGross realized gains and losses on sales in all periods primarily related to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.
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 further adjustedbecause 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. Except for underlying credit impairment, which is recognized as loss expense in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.
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 FG VIE and CIV consolidation enables investors and analysts to evaluateoffsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.
The following paragraphs define each non-GAAP financial measure disclosed byvaluation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs. 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, describe why it is useful. Toas of June 30, 2023, market prices for the extent there isCompany’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.
Second quarter 2023 and six months 2023 non-credit impairment-related unrealized fair value gains were primarily generated by lower collateral asset spreads. For six months 2023, the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period, also contributed to the gain.
Second quarter 2022 and six months 2022 non-credit impairment-related unrealized fair value gains were generated primarily as a directly comparable GAAP financial measure, a reconciliationresult of the non-GAAP financial measureincreased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period, and changes in discount rates. These gains were partially offset by an increase in the most directly comparable GAAP financial measure is presented below.credit spread of certain underlying reference obligations.
Adjusted Operating Income
Adjusted operating income in second quarter 2023 was $36 million, compared with $30 million in second quarter 2022. The increase was primarily due to fair value gains on the trading portfolio and higher net investment income, offset in part by higher losses and transaction expenses related to the Sound Point Transaction and the AHP transaction. Adjusted operating income in six months 2023 was $104 million, compared with $120 million in six months 2022. The decrease was primarily due to lower net earned premiums in six months 2023, compared with six months 2022 which included premium accelerations related to the 2022 Puerto Rico Resolutions, and higher operating expenses, partially offset by fair value gains on the trading portfolio and CIVs. See “— Results of Operations — Reconciliation to GAAP” for the reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Book Value and Adjusted Book Value
Shareholders’ equity attributable to AGL as of June 30, 2023 increased compared with December 31, 2022, as net income and other comprehensive income were partially offset by dividends and share repurchases. Adjusted operating shareholders’ equity and adjusted book value increased primarily due to operating income offset in part by dividends and share repurchases, and in the case of adjusted book value, the increase was also due to new business production. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value.
Other Matters
Inflation
By some key measures, consumer price inflation in the U.S. and the U.K. was higher in recent years than it has been in decades, and interest rates generally increased. Consumer price inflation in the U.K. impacts the Company directly by increasing exposure for certain index-linked U.K. debt with par that accretes with increasing inflation, and also increasing projected future installment premiums on the portion of such exposure that pays at least some of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments, and may be accompanied by higher interest rates that could impact the Company in several ways.
After acknowledging the need to combat inflation, the FOMC of the Federal Reserve Board decided at its March 2022 meeting to start again raising the target federal funds rate, and raised the rate 11 times from March 2022 through July 26, 2023. At its July 25-26, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 5.25% to 5.5%, and stated that its decision to raise the target range of the federal funds rate was in support of its goals of achieving maximum employment and inflation at the rate of 2% over the longer run. In determining the extent to which additional federal funds target rate increases are needed to return inflation to 2% over time, the FOMC indicated it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Higher interest rates impact the Company in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product. Despite the increases in interest rates in 2022 and first half of 2023, the pace of credit spread widening was more modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat compared to 2021. Over time, higher interest rates also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. However, higher interest rates may, in turn, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact the finances of some insured obligors.
See “Overview — Economic Environment”.
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 payment default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to reduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company cannot predict all of the potential effects of the conflict on the world or on the Company.
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 $271 million in net par outstanding as of June 30, 2023, comprising $216 million net par exposure to the sovereign debt of Poland and $55 million net par exposure to a toll road in Hungary. The Company rates the toll road exposure BIG.
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 company. The final regulations are not expected to have a material impact to the Company’s business operation or its shareholders and the proposed regulations are continuing to be evaluated.
Results of Operations
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the condensed consolidated financial statements.
Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially different in the future to reflect changes in these estimates and assumptions from time to time.
The accounting policies that the Company believes are most dependent on the application of judgment, estimates and assumptions are listed below. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, of the Company’s 2022 Annual Report on Form 10-K, for the Company’s significant accounting policies which includes a reference to the applicable 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 2022 Annual Report on Form 10-K, for further details regarding sensitivity analysis.
•Expected loss to be paid (recovered)
•Fair value of certain assets and liabilities, primarily:
▪Investments
▪Assets and liabilities of CIVs
▪Assets and liabilities of FG VIEs
▪Credit derivatives
•Recoverability of goodwill and other intangible assets
•Credit impairment of financial instruments
•Revenue recognition
•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities)
Results of Operations by Segment
The Company analyzes the operating performance of each segment using each segment’s adjusted operating income as described in Item 1, Financial Statements, Note 2, Segment Information.
Insurance Segment Results
Insurance Segment Results
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| Segment revenues | | | | | | | |
| Net earned premiums and credit derivative revenues | $ | 88 | | | $ | 86 | | | $ | 172 | | | $ | 305 | |
| Net investment income | 90 | | | 66 | | | 172 | | | 129 | |
| Fair value gains (losses) on trading securities | 40 | | | (18) | | | 38 | | | (22) | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | 6 | | | 5 | | | 32 | | | 5 | |
| Total segment revenues | 224 | | | 139 | | | 414 | | | 417 | |
| Segment expenses | | | | | | | |
| Loss expense (benefit) | 44 | | | (17) | | | 53 | | | 43 | |
| Interest expense | — | | | — | | | — | | | 1 | |
| Amortization of DAC | 3 | | | 3 | | | 6 | | | 7 | |
| Employee compensation and benefit expenses | 36 | | | 35 | | | 75 | | | 73 | |
| Other operating expenses | 27 | | | 20 | | | 55 | | | 39 | |
| Total segment expenses | 110 | | | 41 | | | 189 | | | 163 | |
| Equity in earnings (losses) of investees | 5 | | | (34) | | | 35 | | | (35) | |
| Segment adjusted operating income (loss) before income taxes | 119 | | | 64 | | | 260 | | | 219 | |
| Less: Provision (benefit) for income taxes | 13 | | | 9 | | | 37 | | | 31 | |
| Segment adjusted operating income (loss) | $ | 106 | | | $ | 55 | | | $ | 223 | | | $ | 188 | |
Net Earned Premiums and Credit Derivative Revenues
Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of 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 decrease each year unless replaced by a higher amount of new business, or books of business acquired in business combinations. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information.
Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policies under the 2022 Puerto Rico Resolutions.
Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations have been more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable.
Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net earned premiums: | | | | | | | |
| Financial guaranty insurance: | | | | | | | |
| Public finance | | | | | | | |
| Scheduled net earned premiums (1) | $ | 61 | | | $ | 63 | | | $ | 123 | | | $ | 134 | |
| Accelerations: | | | | | | | |
| Refundings | 8 | | | 5 | | | 12 | | | 133 | |
| Terminations | — | | | — | | | — | | | — | |
| Total accelerations | 8 | | | 5 | | | 12 | | | 133 | |
| Total public finance | 69 | | | 68 | | | 135 | | | 267 | |
| Structured finance scheduled net earned premiums (1) | 16 | | | 14 | | | 31 | | | 29 | |
| Specialty insurance and reinsurance | 1 | | | 1 | | | 2 | | | 2 | |
| Total net earned premiums | 86 | | | 83 | | | 168 | | | 298 | |
| | | | | | | |
| Credit derivative revenues: | | | | | | | |
| Scheduled net earned premiums | 2 | | | 3 | | | 4 | | | 5 | |
| Accelerations | — | | | — | | | — | | | 2 | |
| Total credit derivative revenues | 2 | | | 3 | | | 4 | | | 7 | |
| Total net earned premiums and credit derivative revenues | $ | 88 | | | $ | 86 | | | $ | 172 | | | $ | 305 | |
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues increased in second quarter 2023 compared with second quarter 2022 primarily due to higher refundings. Net earned premiums and credit derivative revenues decreased in six months 2023 compared with six months 2022 primarily due to refundings of $104 million related to the resolution of PRCCDA, PRIFA and GO/PBA exposures that occurred in March 2022 discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of June 30, 2023, $3.7 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
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| GWP | | | | | | | |
| Public Finance—U.S. | $ | 78 | | | $ | 57 | | | $ | 100 | | | $ | 106 | |
| Public Finance—non-U.S. | 9 | | | 6 | | | 45 | | | 22 | |
| Structured Finance—U.S. | 5 | | | 1 | | | 33 | | | 6 | |
| Structured Finance—non-U.S. | 3 | | | 1 | | | 3 | | | 1 | |
| Total GWP | $ | 95 | | | $ | 65 | | | $ | 181 | | | $ | 135 | |
| PVP (1): | | | | | | | |
| Public Finance—U.S. | $ | 77 | | | $ | 57 | | | $ | 99 | | | $ | 106 | |
| Public Finance—non-U.S. | 6 | | | 18 | | | 36 | | | 30 | |
| Structured Finance—U.S. | 3 | | | — | | | 30 | | | 2 | |
| Structured Finance—non-U.S. (2) | 5 | | | 1 | | | 38 | | | 7 | |
| Total PVP | $ | 91 | | | $ | 76 | | | $ | 203 | | | $ | 145 | |
Gross Par Written (1): | | | | | | | |
| Public Finance—U.S. | $ | 7,747 | | | $ | 6,429 | | | $ | 10,654 | | | $ | 10,360 | |
| Public Finance—non-U.S. | 249 | | | 207 | | | 609 | | | 430 | |
| Structured Finance—U.S. | 252 | | | 16 | | | 834 | | | 76 | |
| Structured Finance—non-U.S. (2) | 726 | | | 43 | | | 2,240 | | | 300 | |
| Total gross par written | $ | 8,974 | | | $ | 6,695 | | | $ | 14,337 | | | $ | 11,166 | |
| Average rating on new business written | A- | | A | | A | | A- |
____________________
(1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “— Non-GAAP Financial Measures — PVP or Present Value of New Business Production.”
(2) Six months 2023 and 2022 PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under Accounting Standards Codification (ASC) 460, Guarantees.
Second Quarter 2023
U.S. public finance GWP and PVP in second quarter 2023 were higher than the comparable GWP and PVP in second quarter 2022, due to $47 million in assumed GWP and $46 million in assumed PVP in second quarter 2023. These were offset in part by lower direct GWP and PVP of $31 million, primarily due to a decrease in secondary market business in second quarter 2023. The average rating of U.S. public finance par written was A- in second quarter 2023 and A in second quarter 2022. The Company’s direct par written represented 64% of the total U.S. municipal market insured issuance in second quarter 2023, compared with 54% in second quarter 2022, and the Company’s penetration of all municipal issuance was 6.5% in second quarter 2023 compared with 4.8% in second quarter 2022.
In non-U.S. infrastructure markets, the Company wrote a guaranty on a U.K. regulated utility and, in the structured finance asset class, the Company wrote several subscription finance guaranties in second quarter 2023.
Six Months 2023
U.S. public finance GWP and PVP in six months 2023 were comparable to GWP and PVP in six months 2022, with higher assumed business offsetting lower direct business that was primarily due to a decrease in secondary market business in six months 2023. The average rating of U.S. public finance par written was A- in both six months 2023 and six months 2022. The Company’s direct par written represented 63% of the total U.S. municipal market insured issuance in six months 2023, compared with 56% in six months 2022, and the Company’s penetration of all municipal issuance was 5.7% in six months 2023 compared with 4.9% in six months 2022.
In six months 2023, non-U.S. public finance GWP and PVP were higher than GWP and PVP in six months 2022. In six months 2023, new business primarily included the guaranty of a long-term sale and leaseback transaction with Glasgow City Council and several regulated utility transactions.
In six months 2023, structured finance GWP and PVP were $36 million and $68 million, respectively, compared with GWP and PVP of $7 million and $9 million, respectively, in six months 2022. Structured finance PVP in six months 2023 includes an insurance securitization and several subscription finance guaranties, as well as an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties for which no GWP was reported under GAAP because it is not accounted for as insurance.
Business activity in the non-U.S. public finance and structured finance sectors typically has long lead times and therefore may vary from period to period.
Income from Investments
Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments and the size of such portfolio. The investment yield on fixed-maturity securities is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.
CVIs issued by Puerto Rico and received as part of the 2022 Puerto Rico Resolutions are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the consolidated statements on operations. The fair value of such instruments as of June 30, 2023 was $340 million.
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 investees.
Insurance Segment
Income from Investments
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net investment income | | | | | | | |
| Fixed-maturity securities, available-for-sale: | | | | | | | |
| Externally managed (1) | $ | 53 | | | $ | 49 | | | $ | 105 | | | $ | 98 | |
| Loss Mitigation Securities | 12 | | | 7 | | | 24 | | | 17 | |
| Puerto Rico, New Recovery Bonds | 1 | | | 3 | | | 4 | | | 4 | |
| Other (2) | 4 | | | 4 | | | 7 | | | 7 | |
| Short-term investments | 16 | | | 1 | | | 28 | | | 1 | |
| Intercompany loans | 3 | | | 3 | | | 5 | | | 5 | |
| Other investment assets | 2 | | | — | | | 2 | | | — | |
| Investment income | 91 | | | 67 | | | 175 | | | 132 | |
| Investment expenses | (1) | | | (1) | | | (3) | | | (3) | |
| Net investment income | $ | 90 | | | $ | 66 | | | $ | 172 | | | $ | 129 | |
| | | | | | | |
| Fair value gains (losses) on trading securities | $ | 40 | | | $ | (18) | | | $ | 38 | | | $ | (22) | |
| | | | | | | |
| Equity in earnings (losses) of investees | | | | | | | |
| AssuredIM Funds | $ | — | | | $ | (33) | | | $ | 28 | | | $ | (22) | |
| Other | 5 | | | (1) | | | 7 | | | (13) | |
| Equity in earnings (losses) of investees | $ | 5 | | | $ | (34) | | | $ | 35 | | | $ | (35) | |
____________________
(1) Amounts for 2022 include income on the portion of the CLO portfolio that was previously managed by AssuredIM.
(2) Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM.
Net investment income for second quarter 2023 and six months 2023 increased compared to second quarter 2022 and six months 2022, primarily due to the increase in short-term rates and higher average short-term balances, as well as higher income on floating rate CLO investments. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.89% as of June 30, 2023 and 2.95% as of June 30, 2022.
Equity in earnings of AssuredIM Funds were gains in six months 2023 and were primarily attributable to higher valuations of assets held in the CLO and healthcare funds. Equity in earnings of AssuredIM Funds in second quarter 2022 and six months 2022 were losses and were primarily attributable to lower valuations of assets held in CLO funds and the dilutive impact of the subsequent close of a healthcare fund.
Foreign Exchange Gains (Losses) on Remeasurement and Other Income (Loss)
The increase in “foreign exchange gains (losses) on remeasurement and other income (loss)” in six months 2023 compared with six months 2022 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million. See Item 1, Financial Statements, Note 12, Commitments and Contingencies, for additional information.
Economic Loss Development
The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), of the Company’s 2022 Annual Report on Form 10-K. The GAAP accounting policies for measurement and recognition for each type of contract are described in the notes listed below in Part II, Item 8, Financial Statements and Supplementary Data, of the Company’s 2022 Annual Report on Form 10-K:
•Note 5 for contracts accounted for as insurance;
•Note 6 for contracts accounted for as credit derivatives;
•Note 8 for FG VIEs; and
•Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities.
In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.
Current risk-free rates are used to discount expected losses at the end of each reporting period. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) were 4.34% and 4.08% as of June 30, 2023 and December 31, 2022, respectively.
The composition of economic loss development (benefit) by accounting model and by sector is 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 | | Second Quarter | | Six Months |
| Accounting Model | | June 30, 2023 | | December 31, 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) |
| Insurance | | $ | 262 | | | $ | 205 | | | $ | 62 | | | $ | (26) | | | $ | 68 | | | $ | (70) | |
| FG VIEs | | 295 | | (1) | 314 | | (1) | (14) | | | (6) | | | (9) | | | (10) | |
| Credit derivatives | | 3 | | | 3 | | | 1 | | | — | | | 1 | | | 4 | |
| Total | | $ | 560 | | | $ | 522 | | | $ | 49 | | | $ | (32) | | | $ | 60 | | | $ | (76) | |
| | | | | | | | | | | | |
| Net exposure rated BIG | | $ | 5,718 | | | $ | 5,976 | | | | | | | | | |
____________________
(1) The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts). See Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter 2023 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2023 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 380 | | | $ | 57 | | | $ | (4) | | | $ | 433 | |
| Non-U.S. public finance | | 13 | | | (3) | | | — | | | 10 | |
| Public finance | | 393 | | | 54 | | | (4) | | | 443 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 82 | | | (9) | | | — | | | 73 | |
| Other structured finance | | 42 | | | 4 | | | (2) | | | 44 | |
| Structured finance | | 124 | | | (5) | | | (2) | | | 117 | |
| Total | | $ | 517 | | | $ | 49 | | | $ | (6) | | | $ | 560 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter 2022 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of March 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 181 | | | $ | 8 | | | $ | 21 | | | $ | 210 | |
| Non-U.S. public finance | | 10 | | | (2) | | | (1) | | | 7 | |
| Public finance | | 191 | | | 6 | | | 20 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 195 | | | (39) | | | 23 | | | 179 | |
| Other structured finance | | 46 | | | 1 | | | (1) | | | 46 | |
| Structured finance | | 241 | | | (38) | | | 22 | | | 225 | |
| Total | | $ | 432 | | | $ | (32) | | | $ | 42 | | | $ | 442 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 2023 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | | Economic Loss
Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 403 | | | $ | 58 | | | $ | (28) | | | $ | 433 | |
| Non-U.S. public finance | | 9 | | | 1 | | | — | | | 10 | |
| Public finance | | 412 | | | 59 | | | (28) | | | 443 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 66 | | | (4) | | | 11 | | | 73 | |
| Other structured finance | | 44 | | | 5 | | | (5) | | | 44 | |
| Structured finance | | 110 | | | 1 | | | 6 | | | 117 | |
| Total | | $ | 522 | | | $ | 60 | | | $ | (22) | | | $ | 560 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months 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 June 30, 2022 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 197 | | | $ | (40) | | | $ | 53 | | | $ | 210 | |
| Non-U.S. public finance | | 12 | | | (4) | | | (1) | | | 7 | |
| Public finance | | 209 | | | (44) | | | 52 | | | 217 | |
| Structured finance: | | | | | | | | |
| U.S. RMBS | | 150 | | | (32) | | | 61 | | | 179 | |
| Other structured finance | | 52 | | | — | | | (6) | | | 46 | |
| Structured finance | | 202 | | | (32) | | | 55 | | | 225 | |
| Total | | $ | 411 | | | $ | (76) | | | $ | 107 | | | $ | 442 | |
____________________
(1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets.”
Second Quarter 2023 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in second quarter 2023 was $57 million and was primarily attributable to $78 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $21 million in other municipal exposures.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $9 million and was primarily attributable to a $7 million benefit related to higher recoveries for secured second lien charged-off loans, a $5 million benefit related to improved performance in certain transactions, and $3 million benefit related to changes in discount rates, partially offset by losses of $6 million related to lower excess spread.
See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.
Second Quarter 2022 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in second quarter 2022 was $8 million, and was primarily attributable to Puerto Rico exposures, partially offset by the effect of changes in discount rate. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.6 billion as of June 30, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to PRCCDA, PRIFA and GO/PBA.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $39 million and was primarily attributable to a $23 million benefit related to changes in discount rates, a $17 million benefit related to improved performance in certain transactions, a $14 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $26 million related to lower excess spread.
Six Months 2023Net Economic Loss Development
The economic loss development on U.S. public finance exposures in six months 2023 was $58 million, which was primarily attributable to $81 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $23 million in other municipal exposures. The net benefit attributable to U.S. RMBS was $4 million and was mainly attributable to a $14 million benefit related to higher recoveries for second lien charged-off loans, and a $9 million benefit related to improved performance in certain transactions, partially offset by a $15 million loss related to the return of certain funds previously received, a $2 million loss related to changes in discount rates and a $2 million loss related to lower excess spread.
Six Months 2022 Net Economic Loss Development
The economic benefit on U.S. public finance exposures in six months 2022 was $40 million, which was primarily attributable to changes in discount rates. The net benefit attributable to U.S. RMBS was $32 million and was mainly related to a $45 million benefit related to changes in discount rates, a $27 million benefit related to improved performance in certain transactions, an $18 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $69 million related to lower excess spread.
Insurance Segment Loss Expense
The primary differences between net economic loss development and the amount reported as “loss and LAE (benefit)” in the consolidated statements of operations are that loss and LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (ii) eliminates loss and LAE related to FG VIEs; and (iii) does not include estimated losses on credit derivatives.
Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives, without giving effect to eliminations related to the consolidation of FG VIEs.
For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.
While expected loss to be paid (recovered) is an important measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.
The amount of Insurance segment loss expense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense (benefit).
Insurance Segment
Loss Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| U.S. public finance | $ | 45 | | | $ | 11 | | | $ | 46 | | | $ | 66 | |
| | | | | | | |
| Structured finance: | | | | | | | |
| U.S. RMBS | (3) | | | (28) | | | 3 | | | (22) | |
| Other structured finance | 2 | | | — | | | 4 | | | (1) | |
| Structured finance | (1) | | | (28) | | | 7 | | | (23) | |
| Total Insurance segment loss expense (benefit) | $ | 44 | | | $ | (17) | | | $ | 53 | | | $ | 43 | |
The difference between public finance loss expense and economic benefit in six months 2022 was primarily attributable to the release of unearned premium reserve related to PRCCDA, PRIFA and GO/PBA exposures. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were recognized for the remaining deferred premium revenue on the extinguished Puerto
Rico exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance.
Other Operating Expenses
The increase in “other operating expenses” in six months 2023 compared with six months 2022 was primarily attributable to an increase in value added taxes and increases in certain employee benefit related costs.
Financial Strength Ratings
Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of 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 (S&P) | | Kroll Bond Rating
Agency | | Moody’s Investors Service, Inc. (Moody’s) | | A.M. Best Company,
Inc. |
| AGM | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | A1 (stable) (3/18/22) | | — |
| AGC | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | (1) | | — |
| Assured Guaranty Re Ltd. (AG Re) | AA (stable) (7/13/23) | | — | | — | | — |
| Assured Guaranty Re Overseas Ltd. (AGRO) | AA (stable) (7/13/23) | | — | | — | | A+ (stable) (7/21/23) |
| Assured Guaranty UK Limited (AGUK) | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | A1 (stable) (3/18/22) | | — |
| Assured Guaranty (Europe) SA (AGE) | AA (stable) (7/13/23) | | AA+ (stable) (10/21/22) | | — | | — |
____________________
(1) AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. Moody's rates AGC A2 (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 — Insurance Subsidiaries” section below.
Asset Management Segment Results
Asset Management Segment Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
| Segment revenues | | | | | | | |
| Management fees (1) | 18 | | | 27 | | | 35 | | | 48 | |
| Performance fees | 9 | | | 2 | | | 29 | | | 18 | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | 3 | | | (1) | | | 7 | | | 1 | |
| Total segment revenues | 30 | | | 28 | | | 71 | | | 67 | |
| Segment expenses | | | | | | | |
| Interest expense | 1 | | | — | | | 1 | | | — | |
| Employee compensation and benefit expenses | 25 | | | 17 | | | 59 | | | 46 | |
| Other operating expenses (1) (2) | 7 | | | 11 | | | 15 | | | 21 | |
| Total segment expenses | 33 | | | 28 | | | 75 | | | 67 | |
| Segment adjusted operating income (loss) before income taxes | (3) | | | — | | | (4) | | | — | |
| Less: Provision (benefit) for income taxes | (1) | | | — | | | (1) | | | — | |
| Segment adjusted operating income (loss) | $ | (2) | | | $ | — | | | $ | (3) | | | $ | — | |
_____________________
(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 for second quarter 2022, $2 million for six months 2023 and $6 million for six months 2022. The Company ceased amortizing the intangible assets when the asset management assets and liabilities were reclassified to held-for-sale.
Management and Performance Fees
Management fees in second quarter 2023 were primarily generated by CLOs, opportunity funds and liquid strategies. CLO fees represented the net management fees that AssuredIM retained after rebating the portion of these fees that pertained to the CLO equity that was held directly by AssuredIM Funds.
Management Fees
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
| CLOs | $ | 13 | | | $ | 12 | | | $ | 25 | | | $ | 24 | |
| Opportunity funds and liquid strategies | 5 | | | 15 | | | 10 | | | 23 | |
| Wind-down funds | — | | | — | | | — | | | 1 | |
| Total management fees | $ | 18 | | | $ | 27 | | | $ | 35 | | | $ | 48 | |
Performance fees and related compensation expenses relate to tax distributions from the healthcare and asset-based funds.
Expenses
Employee compensation and benefit expenses increased in second quarter 2023 and six months 2023 primarily due to expenses related to the Sound Point Transaction and higher compensation due to the increase in performance fees.
Assets Under Management
Until July 1, 2023, the effective date of the Sound Point Transaction and the AHP Transaction, the Company used AUM as one of the metrics to measure progress in its Asset Management Segment. AUM refers to the assets managed, advised or serviced by AssuredIM.
In the first half of 2023, while the Sound Point Transaction and AHP Transaction were pending, the Company was limited in its ability to raise third party AUM due to regulatory and practical considerations. AUM as of June 30, 2023 was $16.4 billion. As of July 1, 2023, the management of approximately $15.1 billion of AUM (of which $385 million was attributable to the Company) was transferred to Sound Point. Also in July 2023, the management of approximately $1.3 billion in remaining AUM (of which $185 million was attributable to the Company) was transferred with the sale of AHP to an entity owned and controlled by its managing partner, and AHP will continue to manage the healthcare funds. See Note 1, Business and Basis of Presentation.
In second quarter 2023, (i) the management of approximately $159 billion in AUM in respect of certain wind-down and opportunity funds in their harvest period were transferred to a third party liquidator and (ii) management of approximately $513 million at fair value in investment grade municipal bonds and CLOs under an IMA was transferred to an internal manager and to one of the Company’s external fixed-maturity security managers.
Corporate Division Results
Corporate Division Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Revenues | $ | 2 | | | $ | 1 | | | $ | 4 | | | $ | 2 | |
| Expenses | | | | | | | |
| Interest expense | 24 | | | 23 | | | 47 | | | 44 | |
| Employee compensation and benefit expenses | 9 | | | 7 | | | 18 | | | 13 | |
| Other operating expenses | 27 | | | 6 | | | 43 | | | 13 | |
| Total expenses | 60 | | | 36 | | | 108 | | | 70 | |
| Equity in earnings (losses) of investees | — | | | — | | | — | | | — | |
| Adjusted operating income (loss) before income taxes | (58) | | | (35) | | | (104) | | | (68) | |
| Less: Provision (benefit) for income taxes | (8) | | | — | | | (10) | | | — | |
| Adjusted operating income (loss) | $ | (50) | | | $ | (35) | | | $ | (94) | | | $ | (68) | |
Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $3 million in both second quarter 2023 and second quarter 2022, and $5 million in both six months 2023 and six months 2022, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries.
Corporate division employee compensation and benefits expenses are an allocation of expenses based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance including Board of Director expenses, legal fees and other direct or allocated expenses. In second quarter 2023 and six months 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction, and for six months 2023 a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $21 million for second quarter 2023 and $25 million for six months 2023.
Other (Effect of Consolidating 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: (i) entities whose debt obligations the insurance subsidiaries insure; (ii) custodial trusts established in connection with the
consummation of the 2022 Puerto Rico Resolutions; and (iii) 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.
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: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (ii) eliminating the premiums and losses/recoveries associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs.
Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows, and includes: (i) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs; (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees; and (iv) establishing noncontrolling interest for amounts not owned by the Company. The economic effect of the U.S Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“fair value gains (losses) on consolidated investment vehicles” and “noncontrolling 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: (i) the revenues and expenses of the FG VIEs and the CIVs; and (ii) the consolidation adjustments and eliminations 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)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Effect on Financial Statement Line Item | (in millions) |
| Fair value gains (losses) on FG VIEs (1) | $ | (3) | | | $ | 10 | | | $ | (8) | | | $ | 16 | |
| Fair value gains (losses) on CIVs | 6 | | | 3 | | | 64 | | | 17 | |
| Equity in earnings (losses) of investees (2) | — | | | 34 | | | (28) | | | 24 | |
| Other (3) | (25) | | | (13) | | | (39) | | | (24) | |
| Effect on income before tax | (22) | | | 34 | | | (11) | | | 33 | |
| Less: Tax provision (benefit) | (5) | | | 2 | | | (6) | | | 2 | |
| Effect on net income (loss) | (17) | | | 32 | | | (5) | | | 31 | |
| Less: Effect on noncontrolling interests (4) | 1 | | | 22 | | | 17 | | | 31 | |
| Effect on net income (loss) attributable to AGL | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
| | | | | | | |
| By Type of VIE | | | | | | | |
| FG VIEs | $ | (13) | | | $ | 1 | | | $ | (15) | | | $ | 3 | |
| CIVs | (5) | | | 9 | | | (7) | | | (3) | |
| Effect on net income (loss) attributable to AGL | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
____________________
(1) Changes in fair 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, foreign exchange gains (losses) on remeasurement, other income (loss), loss and LAE (benefit) and other operating expenses.
(4) Represents the proportion of consolidated AssuredIM Funds’ income that is not attributable to AGAS’ or any other subsidiaries’ ownership interest.
Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
to Adjusted Operating Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net income (loss) attributable to AGL | $ | 125 | | | $ | (47) | | | $ | 206 | | | $ | 19 | |
| Less pre-tax adjustments: | | | | | | | |
| Realized gains (losses) on investments | (9) | | | (28) | | | (11) | | | (25) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 90 | | | 6 | | | 103 | | | 3 | |
| Fair value gains (losses) on CCS | 1 | | | 10 | | | (15) | | | 11 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 26 | | | (73) | | | 46 | | | (102) | |
| Total pre-tax adjustments | 108 | | | (85) | | | 123 | | | (113) | |
| Less tax effect on pre-tax adjustments | (19) | | | 8 | | | (21) | | | 12 | |
| Adjusted operating income (loss) | $ | 36 | | | $ | 30�� | | | $ | 104 | | | $ | 120 | |
| | | | | | | |
| Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(5), $2, $(6) and $2) included in adjusted operating income | $ | (18) | | | $ | 10 | | | $ | (22) | | | $ | — | |
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Gross realized gains on sales of available-for-sale securities | $ | 7 | | | $ | — | | | $ | 19 | | | $ | — | |
| Gross realized losses on sales of available-for-sale securities | (6) | | | (21) | | | (15) | | | (23) | |
| Net foreign currency gains (losses) | — | | | (3) | | | — | | | (3) | |
| Change in allowance for credit losses and intent to sell | (10) | | | (4) | | | (15) | | | (9) | |
| Other net realized gains (losses) | — | | | — | | | — | | | 10 | |
| Net realized investment gains (losses) | $ | (9) | | | $ | (28) | | | $ | (11) | | | $ | (25) | |
Gross realized gains and losses on sales in all periods primarily related to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.
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. Except for underlying credit impairment, which is recognized as loss expense in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.
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. 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 June 30, 2023, 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.
Second quarter 2023 and six months 2023 non-credit impairment-related unrealized fair value gains were primarily generated by lower collateral asset spreads. For six months 2023, the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period, also contributed to the gain.
Second quarter 2022 and six months 2022 non-credit impairment-related unrealized fair value gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period, and changes in discount rates. These gains were partially offset by an increase in the credit spread of certain underlying reference obligations.
Sensitivity to Changes in Credit Spread
The following table summarizes the estimated change in fair value on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC.
Effect of Changes in Credit Spread
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2023 | | As of December 31, 2022 |
| 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 | | $ | (126) | | | $ | (69) | | | $ | (233) | | | $ | (71) | |
| Base Scenario | | (57) | | | — | | | (162) | | | — | |
| Decrease of 25 bps | | (40) | | | 17 | | | (99) | | | 63 | |
| All transactions priced at floor | | (20) | | | 37 | | | (27) | | | 135 | |
____________________
(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 losses on CCS in six months 2023 were primarily due to a tightening in market spreads. Fair value gains on CCS in second quarter 2022 and six months 2022 were primarily due to a significant increase in London Interbank Offered Rate (LIBOR). Fair value gains (losses) of CCS are heavily affected by, and in part fluctuate with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.
Foreign Exchange Gain (Loss) on Remeasurement
Foreign exchange gains and losses in all periods primarily relate to remeasurement of long-dated premiums receivable, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and, to a lesser extent, the euro relative to the U.S. dollar. Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves were gains of $26 million and $46 million in second quarter 2023 and six months 2023, respectively, and losses of $73 million and $102 million in second quarter 2022 and six months 2022, respectively. Approximately 72% and 74% of gross premiums receivable, net of commissions payable at June 30, 2023 and December 31, 2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Premiums on European infrastructure and structured finance transactions typically are paid, in whole or in part, on an installment basis, whereas premiums on U.S. public finance transactions are often paid upfront.
The following table presents the foreign exchange rates as of the balance sheet dates.
Foreign Exchange Rates
U.S. Dollar Per Foreign Currency
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2023 | | As of December 31, 2022 | | As of June 30, 2022 | | As of December 31, 2021 |
| Pound sterling | $1.270 | | $1.208 | | $1.218 | | $1.353 |
| Euro | $1.091 | | $1.071 | | $1.048 | | $1.137 |
Non-GAAP Financial Measures
The Company discloses both: (i) financial measures determined in accordance with GAAP; and (ii) financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company.
The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.
GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include:
•FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and
•CIVs in which certain subsidiaries invest.
The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment.
Management of the Company and AGL’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 core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating 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; and (4) PVP.
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 measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy.
Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation, enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.
The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.
Adjusted Operating Income
Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:
1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.
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.
3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss.
4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.
5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
See “— Results of Operations — Reconciliation to GAAP”, for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Adjusted Operating Shareholders’ Equity and Adjusted Book Value
Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.
Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:
1) 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) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss.
3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). 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 adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following:
1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.
2) Addition of the net present value of estimated net future revenue. See below.
3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.
4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
Reconciliation of Shareholders’ Equity Attributable to AGL
to Adjusted Operating Shareholders’ Equity and Adjusted Book Value
| | | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | | After-Tax | | Per Share | | After-Tax | | Per Share | | After-Tax | | Per Share | | After-Tax | | Per Share |
| | | (dollars in millions, except share amounts) | | (dollars in millions, except share amounts) |
| Shareholders’ equity attributable to AGL | Shareholders’ equity attributable to AGL | $ | 4,929 | | | $ | 81.17 | | | $ | 6,292 | | | $ | 93.19 | | Shareholders’ equity attributable to AGL | $ | 5,276 | | | $ | 89.65 | | | $ | 5,064 | | | $ | 85.80 | |
| Less pre-tax adjustments: | Less pre-tax adjustments: | | Less pre-tax adjustments: | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (101) | | | (1.66) | | | (54) | | | (0.80) | | Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 31 | | | 0.52 | | | (71) | | | (1.21) | |
| Fair value gains (losses) on CCS | Fair value gains (losses) on CCS | 35 | | | 0.58 | | | 23 | | | 0.34 | | Fair value gains (losses) on CCS | 32 | | | 0.54 | | | 47 | | | 0.80 | |
| Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | (672) | | | (11.07) | | | 404 | | | 5.99 | | |
| Unrealized gain (loss) on investment portfolio | | Unrealized gain (loss) on investment portfolio | (463) | | | (7.88) | | | (523) | | | (8.86) | |
| Less taxes | Less taxes | 92 | | | 1.50 | | | (72) | | | (1.07) | | Less taxes | 48 | | | 0.83 | | | 68 | | | 1.15 | |
| Adjusted operating shareholders’ equity | Adjusted operating shareholders’ equity | 5,575 | | | 91.82 | | | 5,991 | | | 88.73 | | Adjusted operating shareholders’ equity | 5,628 | | | 95.64 | | | 5,543 | | | 93.92 | |
| Pre-tax adjustments: | Pre-tax adjustments: | | Pre-tax adjustments: | |
| Less: Deferred acquisition costs | Less: Deferred acquisition costs | 142 | | | 2.33 | | | 131 | | | 1.95 | | Less: Deferred acquisition costs | 155 | | | 2.63 | | | 147 | | | 2.48 | |
| Plus: Net present value of estimated net future revenue | Plus: Net present value of estimated net future revenue | 159 | | | 2.62 | | | 160 | | | 2.37 | | Plus: Net present value of estimated net future revenue | 192 | | | 3.27 | | | 157 | | | 2.66 | |
| Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed | 3,373 | | | 55.54 | | | 3,402 | | | 50.40 | | |
| Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed | | Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed | 3,445 | | | 58.53 | | | 3,428 | | | 58.10 | |
| Plus taxes | Plus taxes | (594) | | | (9.78) | | | (599) | | | (8.88) | | Plus taxes | (623) | | | (10.60) | | | (602) | | | (10.22) | |
| Adjusted book value | Adjusted book value | $ | 8,371 | | | $ | 137.87 | | | 8,823 | | | 130.67 | | Adjusted book value | $ | 8,487 | | | $ | 144.21 | | | 8,379 | | | 141.98 | |
| | Gain (loss) related to FG VIE and CIV consolidation included in: | Gain (loss) related to FG VIE and CIV consolidation included in: | | Gain (loss) related to FG VIE and CIV consolidation included in: | |
| Adjusted operating shareholders’ equity (net of tax provision of $6 and $5) | $ | 27 | | | $ | 0.44 | | | $ | 32 | | | $ | 0.47 | | |
| Adjusted book value (net of tax provision of $4 and $3) | 16 | | | 0.27 | | | 23 | | | 0.34 | | |
| Adjusted operating shareholders’ equity (net of tax provision (benefit) of $(1) and $4) | | Adjusted operating shareholders’ equity (net of tax provision (benefit) of $(1) and $4) | $ | (3) | | | $ | (0.04) | | | $ | 17 | | | $ | 0.28 | |
| Adjusted book value (net of tax provision (benefit) of $(3) and $3) | | Adjusted book value (net of tax provision (benefit) of $(3) and $3) | (7) | | | (0.12) | | | 11 | | | 0.19 | |
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 revenue for non-financial guaranty insurance contracts. This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes.
Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than loss mitigation securities.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 in the Insurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premiums and fees on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), regardless of form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums.
Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as loss mitigation securities.Loss Mitigation Securities. The
discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction.
Actual installment premiums may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.
Reconciliation of GWP to PVP
| | | Third Quarter 2022 | | Third Quarter 2021 | | Second Quarter 2023 | | Second Quarter 2022 |
| | 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 | GWP | $ | 54 | | | $ | 44 | | | $ | (2) | | | $ | (2) | | | $ | 94 | | | $ | 52 | | | $ | 21 | | | $ | 29 | | | $ | 4 | | | $ | 106 | | GWP | $ | 78 | | | $ | 9 | | | $ | 5 | | | $ | 3 | | | $ | 95 | | | $ | 57 | | | $ | 6 | | | $ | 1 | | | $ | 1 | | | $ | 65 | |
| Less: Installment GWP and other GAAP adjustments (1) | Less: Installment GWP and other GAAP adjustments (1) | — | | | 44 | | | (3) | | | (2) | | | 39 | | | (1) | | | 22 | | | 27 | | | 4 | | | 52 | | Less: Installment GWP and other GAAP adjustments (1) | 41 | | | 9 | | | 5 | | | 3 | | | 58 | | | — | | | 6 | | | 1 | | | 1 | | | 8 | |
| Upfront GWP | Upfront GWP | 54 | | | — | | | 1 | | | — | | | 55 | | | 53 | | | (1) | | | 2 | | | — | | | 54 | | Upfront GWP | 37 | | | — | | | — | | | — | | | 37 | | | 57 | | | — | | | — | | | — | | | 57 | |
| Plus: Installment premiums and other (2) | Plus: Installment premiums and other (2) | 3 | | | 37 | | | — | | | — | | | 40 | | | 2 | | | 18 | | | 19 | | | 3 | | | 42 | | Plus: Installment premiums and other (2) | 40 | | | 6 | | | 3 | | | 5 | | | 54 | | | — | | | 18 | | | — | | | 1 | | | 19 | |
| PVP | PVP | $ | 57 | | | $ | 37 | | | $ | 1 | | | $ | — | | | $ | 95 | | | $ | 55 | | | $ | 17 | | | $ | 21 | | | $ | 3 | | | $ | 96 | | PVP | $ | 77 | | | $ | 6 | | | $ | 3 | | | $ | 5 | | | $ | 91 | | | $ | 57 | | | $ | 18 | | | $ | — | | | $ | 1 | | | $ | 76 | |
| | | Nine Months 2022 | | Nine Months 2021 | | Six Months 2023 | | Six Months 2022 |
| | 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 | GWP | $ | 160 | | | $ | 66 | | | $ | 4 | | | $ | (1) | | | $ | 229 | | | $ | 160 | | | $ | 70 | | | $ | 43 | | | $ | 4 | | | $ | 277 | | GWP | $ | 100 | | | $ | 45 | | | $ | 33 | | | $ | 3 | | | $ | 181 | | | $ | 106 | | | $ | 22 | | | $ | 6 | | | $ | 1 | | | $ | 135 | |
| Less: Installment GWP and other GAAP adjustments (1) | Less: Installment GWP and other GAAP adjustments (1) | — | | | 66 | | | 1 | | | (1) | | | 66 | | | 33 | | | 49 | | | 39 | | | 4 | | | 125 | | Less: Installment GWP and other GAAP adjustments (1) | 49 | | | 42 | | | 33 | | | 3 | | | 127 | | | — | | | 22 | | | 4 | | | 1 | | | 27 | |
| Upfront GWP | Upfront GWP | 160 | | | — | | | 3 | | | — | | | 163 | | | 127 | | | 21 | | | 4 | | | — | | | 152 | | Upfront GWP | 51 | | | 3 | | | — | | | — | | | 54 | | | 106 | | | — | | | 2 | | | — | | | 108 | |
| Plus: Installment premiums and other (2) | Plus: Installment premiums and other (2) | 3 | | | 67 | | | — | | | 7 | | | 77 | | | 38 | | | 42 | | | 28 | | | 3 | | | 111 | | Plus: Installment premiums and other (2) | 48 | | | 33 | | | 30 | | | 38 | | | 149 | | | — | | | 30 | | | — | | | 7 | | | 37 | |
| PVP | PVP | $ | 163 | | | $ | 67 | | | $ | 3 | | | $ | 7 | | | $ | 240 | | | $ | 165 | | | $ | 63 | | | $ | 32 | | | $ | 3 | | | $ | 263 | | PVP | $ | 99 | | | $ | 36 | | | $ | 30 | | | $ | 38 | | | $ | 203 | | | $ | 106 | | | $ | 30 | | | $ | 2 | | | $ | 7 | | | $ | 145 | |
___________________
(1) Includes the present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions and other GAAP adjustments.
(2) Includes the present value of future premiums and fees on new business paid in installments, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturities such as loss mitigation securities. ThisLoss Mitigation Securities. Six months 2023 and 2022 also includesinclude the present value of future premiums and fees associated with a financial guaranteeother guaranties written by the Company that, under GAAP, isare accounted for under Accounting Standards Codification (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 sector, net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or
traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or FG VIE consolidation), along with each sector’s average rating.
Financial Guaranty Portfolio
Net Par Outstanding and Average Internal Rating by Sector
| | | | | As of September 30, 2022 | | As of December 31, 2021 | | | As of June 30, 2023 | | As of December 31, 2022 |
| Sector | Sector | | Net Par
Outstanding | | Average
Rating | | Net Par
Outstanding | | Average
Rating | Sector | | Net Par
Outstanding | | Average
Rating | | Net Par
Outstanding | | Average
Rating |
| | | | (dollars in millions) | | | (dollars in millions) |
| Public finance: | Public finance: | | | | | Public finance: | | | | |
| U.S. public finance: | U.S. public finance: | | | | U.S. public finance: | | | |
| General obligation | General obligation | | $ | 71,751 | | | A- | | $ | 72,896 | | | A- | General obligation | | $ | 74,874 | | | A- | | $ | 71,868 | | | A- |
| Tax backed | Tax backed | | 34,265 | | | A- | | 35,726 | | | A- | Tax backed | | 32,911 | | | A- | | 33,752 | | | A- |
| Municipal utilities | Municipal utilities | | 26,059 | | | A- | | 25,556 | | | A- | Municipal utilities | | 28,185 | | | A- | | 26,436 | | | A- |
| Transportation | Transportation | | 19,204 | | | BBB+ | | 17,241 | | | BBB+ | Transportation | | 20,317 | | | A- | | 19,688 | | | A- |
| Healthcare | Healthcare | | 10,747 | | | BBB+ | | 9,588 | | | BBB+ | Healthcare | | 11,661 | | | BBB+ | | 11,304 | | | BBB+ |
| Infrastructure finance | | Infrastructure finance | | 8,667 | | | A- | | 6,955 | | | A- |
| Higher education | Higher education | | 6,888 | | | A- | | 6,927 | | | A- | Higher education | | 7,237 | | | A- | | 7,137 | | | A- |
| Infrastructure finance | | 6,391 | | | A- | | 6,329 | | | A- | |
| Housing revenue | Housing revenue | | 966 | | | BBB- | | 1,000 | | | BBB- | Housing revenue | | 937 | | | BBB- | | 959 | | | BBB- |
| Investor-owned utilities | Investor-owned utilities | | 333 | | | A- | | 611 | | | A- | Investor-owned utilities | | 331 | | | A- | | 332 | | | A- |
| Renewable energy | Renewable energy | | 183 | | | A- | | 193 | | | A- | Renewable energy | | 171 | | | A- | | 180 | | | A- |
| Other public finance | Other public finance | | 1,055 | | | BBB | | 1,152 | | | A- | Other public finance | | 1,032 | | | BBB | | 1,025 | | | BBB |
| Total U.S. public finance | Total U.S. public finance | | 177,842 | | | A- | | 177,219 | | | A- | Total U.S. public finance | | 186,323 | | | A- | | 179,636 | | | A- |
| Non-U.S public finance: | Non-U.S public finance: | | | | Non-U.S public finance: | | | |
| Regulated utilities | Regulated utilities | | 16,340 | | | BBB+ | | 18,814 | | | BBB+ | Regulated utilities | | 19,836 | | | BBB+ | | 17,855 | | | BBB+ |
| Infrastructure finance | Infrastructure finance | | 12,616 | | | BBB | | 16,475 | | | BBB | Infrastructure finance | | 14,756 | | | BBB | | 13,915 | | | BBB |
| Sovereign and sub-sovereign | Sovereign and sub-sovereign | | 9,082 | | | A+ | | 10,886 | | | A+ | Sovereign and sub-sovereign | | 9,862 | | | A+ | | 9,526 | | | A+ |
| Renewable energy | Renewable energy | | 2,022 | | | A- | | 2,398 | | | A- | Renewable energy | | 2,073 | | | A- | | 2,086 | | | A- |
| Pooled infrastructure | Pooled infrastructure | | 1,003 | | | AAA | | 1,372 | | | AAA | Pooled infrastructure | | 1,131 | | | AAA | | 1,081 | | | AAA |
| Total non-U.S. public finance | Total non-U.S. public finance | | 41,063 | | | BBB+ | | 49,945 | | | BBB+ | Total non-U.S. public finance | | 47,658 | | | BBB+ | | 44,463 | | | BBB+ |
| Total public finance | Total public finance | | 218,905 | | | A- | | 227,164 | | | A- | Total public finance | | 233,981 | | | A- | | 224,099 | | | A- |
| Structured finance: | Structured finance: | | | | Structured finance: | | | |
| U.S. structured finance: | U.S. structured finance: | | | | U.S. structured finance: | | | |
| Life insurance transactions | Life insurance transactions | | 3,272 | | | AA- | | 3,431 | | | AA- | Life insurance transactions | | 4,406 | | | AA- | | 3,879 | | | AA- |
| RMBS | RMBS | | 2,006 | | | BBB- | | 2,391 | | | BB+ | RMBS | | 1,863 | | | BBB- | | 1,956 | | | BBB- |
| Pooled corporate obligations | Pooled corporate obligations | | 498 | | | AA+ | | 534 | | | AA+ | Pooled corporate obligations | | 606 | | | AAA | | 625 | | | AAA |
| Financial products | Financial products | | 470 | | | AA- | | 770 | | | AA- | Financial products | | 450 | | | AA- | | 453 | | | AA- |
| Consumer receivables | Consumer receivables | | 470 | | | A+ | | 583 | | | A+ | Consumer receivables | | 373 | | | A | | 437 | | | A |
| Other structured finance | Other structured finance | | 733 | | | BBB+ | | 665 | | | BBB+ | Other structured finance | | 1,129 | | | BBB+ | | 878 | | | BBB+ |
| Total U.S. structured finance | Total U.S. structured finance | | 7,449 | | | A | | 8,374 | | | A | Total U.S. structured finance | | 8,827 | | | A | | 8,228 | | | A |
| Non-U.S. structured finance: | Non-U.S. structured finance: | | | | Non-U.S. structured finance: | | | |
| Pooled corporate obligations | Pooled corporate obligations | | 304 | | | AAA | | 351 | | | AAA | Pooled corporate obligations | | 352 | | | AAA | | 344 | | | AAA |
| RMBS | RMBS | | 248 | | | A- | | 325 | | | A | RMBS | | 263 | | | A- | | 263 | | | A- |
| Other structured finance | Other structured finance | | 165 | | | AA+ | | 178 | | | AA | Other structured finance | | 590 | | | A+ | | 324 | | | AA- |
| Total non-U.S structured finance | | 717 | | | AA | | 854 | | | AA | |
| Total non-U.S. structured finance | | Total non-U.S. structured finance | | 1,205 | | | AA- | | 931 | | | AA |
| Total structured finance | Total structured finance | | 8,166 | | | A | | 9,228 | | | A | Total structured finance | | 10,032 | | | A | | 9,159 | | | A |
| Total net par outstanding | Total net par outstanding | | $ | 227,071 | | | A- | | $ | 236,392 | | | A- | Total net par outstanding | | $ | 244,013 | | | A- | | $ | 233,258 | | | A- |
Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary
financial guarantor. The second-to-pay insured par outstanding as of Septemberboth June 30, 20222023 and December 31, 20212022 was $4.4 billion and $4.9 billion, respectively.$4.3 billion. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were BIGnot investment grade was $27$16 million and $43$19 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Exposure to Puerto Rico
The Company had insured exposure to general obligation bondsobligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations ofas well as its related authorities and public corporationsgeneral obligation bonds aggregating $2.1$1.3 billion net par outstanding as of SeptemberJune 30, 2022,2023, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR).
The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.
Exposure to Puerto Rico Byby Company
As of SeptemberJune 30, 20222023
| | | Net Par Outstanding | | | Net Par Outstanding | |
| | | | AGM | | AGC | | AG Re | | Eliminations (1) | | Total
Net Par Outstanding | | Gross
Par Outstanding | | | AGM | | AGC | | AG Re | | Eliminations (1) | | Total
Net Par Outstanding | | Gross
Par Outstanding |
| | | | (in millions) | | | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | |
| Defaulted Puerto Rico Exposures | | Defaulted Puerto Rico Exposures | |
| PREPA | | PREPA | | $ | 446 | | | $ | 69 | | | $ | 205 | | | $ | — | | | $ | 720 | | | $ | 730 | |
| Total Defaulted | | Total Defaulted | | 446 | | | 69 | | | 205 | | | — | | | 720 | | | 730 | |
| Resolved Puerto Rico Exposures | | Resolved Puerto Rico Exposures | |
PRHTA (Transportation revenue) | | PRHTA (Transportation revenue) | | 49 | | | 181 | | | 105 | | | (42) | | | 293 | | | 293 | |
PRHTA (Highway revenue) | | PRHTA (Highway revenue) | | 140 | | | 30 | | | 12 | | | — | | | 182 | | | 182 | |
| Commonwealth of Puerto Rico - GO (2) | Commonwealth of Puerto Rico - GO (2) | | $ | — | | | $ | 19 | | | $ | 6 | | | $ | — | | | $ | 25 | | | $ | 25 | | Commonwealth of Puerto Rico - GO (2) | | — | | | 19 | | | 6 | | | — | | | 25 | | | 25 | |
| PBA (2) | PBA (2) | | 1 | | | 4 | | | — | | | (1) | | | 4 | | | 4 | | PBA (2) | | 1 | | | 4 | | | — | | | (1) | | | 4 | | | 4 | |
| Total GO/PBA Plan | | 1 | | | 23 | | | 6 | | | (1) | | | 29 | | | 29 | | |
PRHTA (Transportation revenue) | | 222 | | | 453 | | | 175 | | | (79) | | | 771 | | | 771 | | |
PRHTA (Highway revenue) | | 344 | | | 51 | | | 23 | | | — | | | 418 | | | 418 | | |
| Total HTA PSA | | 566 | | | 504 | | | 198 | | | (79) | | | 1,189 | | | 1,189 | | |
| Total Subject to a Plan or Support Agreement | | 567 | | | 527 | | | 204 | | | (80) | | | 1,218 | | | 1,218 | | |
| | Total Resolved | | Total Resolved | | 190 | | | 234 | | | 123 | | | (43) | | | 504 | | | 504 | |
| Other Puerto Rico Exposures | Other Puerto Rico Exposures | | Other Puerto Rico Exposures | |
| PREPA | | 446 | | | 69 | | | 205 | | | — | | | 720 | | | 730 | | |
| MFA (3) | MFA (3) | | 101 | | | 6 | | | 24 | | | — | | | 131 | | | 138 | | MFA (3) | | 96 | | | 6 | | | 22 | | | — | | | 124 | | | 130 | |
| PRASA and U of PR (3) | PRASA and U of PR (3) | | — | | | 2 | | | — | | | — | | | 2 | | | 2 | | PRASA and U of PR (3) | | — | | | 1 | | | — | | | — | | | 1 | | | 1 | |
| Total Other Puerto Rico Exposures | | 547 | | | 77 | | | 229 | | | — | | | 853 | | | 870 | | |
| Total Other | | Total Other | | 96 | | | 7 | | | 22 | | | — | | | 125 | | | 131 | |
| Total exposure to Puerto Rico | Total exposure to Puerto Rico | | $ | 1,114 | | | $ | 604 | | | $ | 433 | | | $ | (80) | | | $ | 2,071 | | | $ | 2,088 | | Total exposure to Puerto Rico | | $ | 732 | | | $ | 310 | | | $ | 350 | | | $ | (43) | | | $ | 1,349 | | | $ | 1,365 | |
___________________
(1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary.
(2)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 Resolved pursuant to the same Plan of Adjustment,2022 Puerto Rico Resolutions. Consideration received under the Company fully paid claims on all of its directlyGO/PBA and HTA Plans related to the remaining insured PBA bonds, other than certain PBA bonds whose holders made certain elections.exposure is reported in FG VIEs’ assets (see Item 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles).
(3) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.
The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of debt 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 debt service due in any given period and the amount paid by the obligors.
Amortization Schedule of Net Par of Puerto Rico
As of SeptemberJune 30, 20222023
| | | Scheduled Net Par Amortization | | Scheduled Net Par Amortization |
| | | 2022 (4Q) | 2023 (1Q) | 2023 (2Q) | 2023 (3Q) | 2023 (4Q) | 2024 | 2025 | 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 | Total | | 2023 (3Q) | 2023 (4Q) | 2024 | 2025 | 2026 | 2027 | 2028 - 2032 | 2033 - 2037 | 2038 - 2041 | Total |
| | | (in millions) | | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | |
| Defaulted Puerto Rico Exposures | | Defaulted Puerto Rico Exposures | |
| PREPA | | PREPA | $ | 95 | | $ | — | | $ | 93 | | $ | 68 | | $ | 105 | | $ | 105 | | $ | 241 | | $ | 13 | | $ | — | | $ | 720 | |
| Total Defaulted | | Total Defaulted | 95 | | — | | 93 | | 68 | | 105 | | 105 | | 241 | | 13 | | — | | 720 | |
| Resolved Puerto Rico Exposures | | Resolved Puerto Rico Exposures | |
| PRHTA (Transportation revenue) | | PRHTA (Transportation revenue) | 10 | | — | | — | | 8 | | 7 | | — | | 12 | | 126 | | 130 | | 293 | |
| PRHTA (Highway revenue) | | PRHTA (Highway revenue) | — | | — | | — | | — | | — | | — | | 81 | | 101 | | — | | 182 | |
| Commonwealth of Puerto Rico - GO | Commonwealth of Puerto Rico - GO | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | | $ | 23 | | $ | — | | $ | — | | $ | — | | $ | 25 | | Commonwealth of Puerto Rico - GO | — | | — | | — | | — | | 2 | | 4 | | 19 | | — | | — | | 25 | |
| PBA | PBA | — | | — | | — | | 2 | | — | | — | | 2 | | — | | — | | — | | — | | — | | 4 | | PBA | 2 | | — | | — | | 2 | | — | | — | | — | | — | | — | | 4 | |
| Total - GO/PBA Plan | — | | — | | — | | 2 | | — | | — | | 2 | | 2 | | 23 | | — | | — | | — | | 29 | | |
| PRHTA (Transportation revenue) | — | | — | | — | | 34 | | — | | 4 | | 29 | | 24 | | 164 | | 310 | | 201 | | 5 | | 771 | | |
| PRHTA (Highway revenue) | — | | — | | — | | 32 | | — | | 33 | | 34 | | 1 | | 78 | | 240 | | — | | — | | 418 | | |
| Total - HTA PSA | — | | — | | — | | 66 | | — | | 37 | | 63 | | 25 | | 242 | | 550 | | 201 | | 5 | | 1,189 | | |
| Total Subject to a Plan or Support Agreement | — | | — | | — | | 68 | | — | | 37 | | 65 | | 27 | | 265 | | 550 | | 201 | | 5 | | 1,218 | | |
| | Total Resolved | | Total Resolved | 12 | | — | | — | | 10 | | 9 | | 4 | | 112 | | 227 | | 130 | | 504 | |
| Other Puerto Rico Exposures | Other Puerto Rico Exposures | | Other Puerto Rico Exposures | |
| PREPA | — | | — | | — | | 95 | | — | | 93 | | 68 | | 106 | | 332 | | 26 | | — | | — | | 720 | | |
| MFA | MFA | — | | — | | — | | 18 | | — | | 18 | | 18 | | 37 | | 40 | | — | | — | | — | | 131 | | MFA | 17 | | — | | 16 | | 16 | | 35 | | 15 | | 25 | | — | | — | | 124 | |
| PRASA and U of PR | PRASA and U of PR | — | | — | | — | | — | | — | | 1 | | — | | — | | — | | 1 | | — | | — | | 2 | | PRASA and U of PR | — | | — | | 1 | | — | | — | | — | | — | | — | | — | | 1 | |
| Total Other Puerto Rico Exposures | Total Other Puerto Rico Exposures | — | | — | | — | | 113 | | — | | 112 | | 86 | | 143 | | 372 | | 27 | | — | | — | | 853 | | Total Other Puerto Rico Exposures | 17 | | — | | 17 | | 16 | | 35 | | 15 | | 25 | | — | | — | | 125 | |
| | Total | Total | $ | — | | $ | — | | $ | — | | $ | 181 | | $ | — | | $ | 149 | | $ | 151 | | $ | 170 | | $ | 637 | | $ | 577 | | $ | 201 | | $ | 5 | | $ | 2,071 | | Total | $ | 124 | | $ | — | | $ | 110 | | $ | 94 | | $ | 149 | | $ | 124 | | $ | 378 | | $ | 240 | | $ | 130 | | $ | 1,349 | |
Amortization Schedule of Net Debt Service of Puerto Rico
As of SeptemberJune 30, 20222023
| | | Scheduled Net Debt Service Amortization | | Scheduled Net Debt Service Amortization |
| | | 2022 (4Q) | 2023 (1Q) | 2023 (2Q) | 2023 (3Q) | 2023 (4Q) | 2024 | 2025 | 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 | Total | | 2023 (3Q) | 2023 (4Q) | 2024 | 2025 | 2026 | 2027 | 2028 - 2032 | 2033 - 2037 | 2038 - 2041 | Total |
| | | (in millions) | | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | |
| Defaulted Puerto Rico Exposures | | Defaulted Puerto Rico Exposures | |
| PREPA | | PREPA | $ | 109 | | $ | 3 | | $ | 122 | | $ | 92 | | $ | 126 | | $ | 122 | | $ | 275 | | $ | 14 | | $ | — | | $ | 863 | |
| Total Defaulted | | Total Defaulted | 109 | | 3 | | 122 | | 92 | | 126 | | 122 | | 275 | | 14 | | — | | 863 | |
| Resolved Puerto Rico Exposures | | Resolved Puerto Rico Exposures | |
| PRHTA (Transportation revenue) | | PRHTA (Transportation revenue) | 17 | | — | | 15 | | 23 | | 22 | | 14 | | 80 | | 180 | | 148 | | 499 | |
| PRHTA (Highway revenue) | | PRHTA (Highway revenue) | 5 | | — | | 9 | | 10 | | 10 | | 10 | | 124 | | 115 | | — | | 283 | |
| Commonwealth of Puerto Rico - GO | Commonwealth of Puerto Rico - GO | $ | — | | $ | 1 | | $ | — | | $ | 1 | | $ | — | | $ | 1 | | $ | 1 | | $ | 3 | | $ | 27 | | $ | — | | $ | — | | $ | — | | $ | 34 | | Commonwealth of Puerto Rico - GO | 1 | | — | | 1 | | 1 | | 3 | | 6 | | 21 | | — | | — | | 33 | |
| PBA | PBA | — | | — | | — | | 3 | | — | | — | | 2 | | — | | — | | — | | — | | — | | 5 | | PBA | 2 | | — | | — | | 3 | | — | | — | | — | | — | | — | | 5 | |
| Total - GO/PBA Plan | — | | 1 | | — | | 4 | | — | | 1 | | 3 | | 3 | | 27 | | — | | — | | — | | 39 | | |
| PRHTA (Transportation revenue) | — | | 20 | | — | | 53 | | — | | 42 | | 67 | | 61 | | 322 | | 423 | | 237 | | 5 | | 1,230 | | |
| PRHTA (Highway revenue) | — | | 11 | | — | | 43 | | — | | 53 | | 52 | | 18 | | 159 | | 279 | | — | | — | | 615 | | |
| Total - HTA PSA | — | | 31 | | — | | 96 | | — | | 95 | | 119 | | 79 | | 481 | | 702 | | 237 | | 5 | | 1,845 | | |
| Total Subject to a Plan or Support Agreement | — | | 32 | | — | | 100 | | — | | 96 | | 122 | | 82 | | 508 | | 702 | | 237 | | 5 | | 1,884 | | |
| | Total Resolved | | Total Resolved | 25 | | — | | 25 | | 37 | | 35 | | 30 | | 225 | | 295 | | 148 | | 820 | |
| Other Puerto Rico Exposures | Other Puerto Rico Exposures | | Other Puerto Rico Exposures | |
| PREPA | 3 | | 14 | | 2 | | 109 | | 3 | | 122 | | 92 | | 126 | | 381 | | 29 | | — | | — | | 881 | | |
| MFA | MFA | — | | 3 | | — | | 21 | | — | | 24 | | 23 | | 41 | | 45 | | — | | — | | — | | 157 | | MFA | 20 | | — | | 22 | | 20 | | 39 | | 16 | | 28 | | — | | — | | 145 | |
| PRASA and U of PR | PRASA and U of PR | — | | — | | — | | — | | — | | 1 | | — | | — | | — | | 1 | | — | | — | | 2 | | PRASA and U of PR | — | | — | | 1 | | — | | — | | — | | — | | — | | — | | 1 | |
| Total Other Puerto Rico Exposures | Total Other Puerto Rico Exposures | 3 | | 17 | | 2 | | 130 | | 3 | | 147 | | 115 | | 167 | | 426 | | 30 | | — | | — | | 1,040 | | Total Other Puerto Rico Exposures | 20 | | — | | 23 | | 20 | | 39 | | 16 | | 28 | | — | | — | | 146 | |
| | Total | Total | $ | 3 | | $ | 49 | | $ | 2 | | $ | 230 | | $ | 3 | | $ | 243 | | $ | 237 | | $ | 249 | | $ | 934 | | $ | 732 | | $ | 237 | | $ | 5 | | $ | 2,924 | | Total | $ | 154 | | $ | 3 | | $ | 170 | | $ | 149 | | $ | 200 | | $ | 168 | | $ | 528 | | $ | 309 | | $ | 148 | | $ | 1,829 | |
Financial Guaranty Exposure to U.S. RMBS
The following table presents information in respect of the U.S. RMBS exposures to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered). U.S. RMBS exposures represent 0.9%0.8% of the total net par outstanding, and BIG U.S. RMBS represent 17.8%17.2% of total BIG net par outstanding.outstanding as of June 30, 2023.
Distribution of U.S. RMBS by Year Insured and Type of Exposure as of SeptemberJune 30, 20222023
| Year
insured: | 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 | 2004 and prior | | $ | 10 | | | $ | 9 | | | $ | — | | | $ | 354 | | | $ | 15 | | | $ | 388 | | 2004 and prior | | $ | 9 | | | $ | 8 | | | $ | — | | | $ | 321 | | | $ | 11 | | | $ | 349 | |
| 2005 | 2005 | | 23 | | | 125 | | | 16 | | | 186 | | | 56 | | | 406 | | 2005 | | 21 | | | 116 | | | 15 | | | 181 | | | 47 | | | 380 | |
| 2006 | 2006 | | 26 | | | 26 | | | 1 | | | 46 | | | 112 | | | 211 | | 2006 | | 23 | | | 24 | | | 1 | | | 40 | | | 101 | | | 189 | |
| 2007 | 2007 | | — | | | 199 | | | 16 | | | 600 | | | 154 | | | 969 | | 2007 | | — | | | 187 | | | 16 | | | 571 | | | 141 | | | 915 | |
| 2008 | 2008 | | — | | | — | | | — | | | 32 | | | — | | | 32 | | 2008 | | — | | | — | | | — | | | 30 | | | — | | | 30 | |
| Total exposures | Total exposures | | $ | 59 | | | $ | 359 | | | $ | 33 | | | $ | 1,218 | | | $ | 337 | | | $ | 2,006 | | Total exposures | | $ | 53 | | | $ | 335 | | | $ | 32 | | | $ | 1,143 | | | $ | 300 | | | $ | 1,863 | |
| | Exposures rated BIG | Exposures rated BIG | | $ | 40 | | | $ | 211 | | | $ | 16 | | | $ | 645 | | | $ | 117 | | | $ | 1,029 | | Exposures rated BIG | | $ | 32 | | | $ | 200 | | | $ | 15 | | | $ | 614 | | | $ | 109 | | | $ | 970 | |
Liquidity and Capital Resources
AGL and its U.S. Holding Companies
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 and its 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 AGL and the U.S. Holding Companies include:
•principal and interest on debt issued by AGUS and AGMH;
•dividends on AGL’s common shares; and
•the payment of operating expenses.
AGL and its U.S. Holding Companies may also require liquidity to:
•make capital investments in their operating subsidiaries;
•fund acquisitions of new businesses;
•purchase or redeem the Company’s outstanding debt; or
•repurchase AGL’s common shares pursuant to AGL’s share repurchase authorization.
In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one timeand a half times its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See “— Overview— Key Business Strategies, Capital Management” above for information on common share repurchases.
Long-Term Debt Obligations
The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Supplementary Data, Note 13,12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, and Guarantor and U.S. Holding Companies' Summarized Financial Information, below.
U.S. Holding Companies
Long-Term Debt and Intercompany Loans
| | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
| | | | (in millions) | | | (in millions) |
| | Effective Interest Rate | | Final Maturity | | Principal Amount | | Effective Interest Rate | | Final Maturity | | Principal Amount |
| AGUS - long-term debt | AGUS - long-term debt | | | | | | | | AGUS - long-term debt | | | | | | | |
| 7% Senior Notes | 7% Senior Notes | 6.40% | | 2034 | | $ | 200 | | | $ | 200 | | 7% Senior Notes | 6.40% | | 2034 | | $ | 200 | | | $ | 200 | |
| 5% Senior Notes | 5% Senior Notes | 5.00% | | 2024 | | 330 | | | 330 | | 5% Senior Notes | 5.00% | | 2024 | | 330 | | | 330 | |
| 3.15% Senior Notes | 3.15% Senior Notes | 3.15% | | 2031 | | 500 | | | 500 | | 3.15% Senior Notes | 3.15% | | 2031 | | 500 | | | 500 | |
| 3.6% Senior Notes | 3.6% Senior Notes | 3.60% | | 2051 | | 400 | | | 400 | | 3.6% Senior Notes | 3.60% | | 2051 | | 400 | | | 400 | |
Series A Enhanced Junior Subordinated Debentures | Series A Enhanced Junior Subordinated Debentures | 3 month LIBOR +2.38% | | 2066 | | 150 | | | 150 | | 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 | | |
| AGUS long-term debt | | AGUS long-term debt | | 1,580 | | | 1,580 | |
| AGUS - intercompany loans from: | | AGUS - intercompany loans from: | |
| AGC and AGM | AGC and AGM | 3.50% | | 2030 | | 250 | | | 250 | | AGC and AGM | 3.50% | | 2029 | | 250 | | | 250 | |
AGRO | AGRO | 6 month LIBOR +3.00% | | 2023 | | 20 | | | 20 | | AGRO | 5.00% | | 2028 | | 20 | | | 20 | |
| AGUS intercompany loans subtotal | | 270 | | | 270 | | |
| Total AGUS | | 1,850 | | | 1,850 | | |
| AGUS intercompany loans | | AGUS intercompany loans | | 270 | | | 270 | |
| Total AGUS long-term debt and intercompany loans | | Total AGUS long-term debt and intercompany loans | | 1,850 | | | 1,850 | |
| AGMH | AGMH | | | AGMH | | |
Junior Subordinated Debentures | Junior Subordinated Debentures | 6.40% | | 2066 | | 300 | | | 300 | | Junior Subordinated Debentures | 6.40% | | 2066 | | 300 | | | 300 | |
| Total AGMH | | 300 | | | 300 | | |
| Total AGMH long-term debt | | Total AGMH long-term debt | | 300 | | | 300 | |
AGMH’s long-term debt purchased by AGUS (1)(4) | AGMH’s long-term debt purchased by AGUS (1)(4) | | (154) | | | (154) | | AGMH’s long-term debt purchased by AGUS (1)(4) | | (154) | | | (154) | |
| U.S. Holding Company debt | | $ | 1,996 | | | $ | 1,996 | | |
| U.S. Holding Company long-term debt | | U.S. Holding Company long-term debt | | $ | 1,996 | | | $ | 1,996 | |
____________________
(1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
TheUntil June 30, 2023, the Series A Enhanced Junior Subordinated Debentures paypaid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Secured Overnight Finance Rate (SOFR).
(2) In second quarter 2023, the final maturity of the AGRO loan was extended from 2023 to 2028 and the floating rate interest rate was converted to a fixed rate of 5%.
(3) 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 LIBORSOFR plus 2.215%. The continuation
(4) Represents principal amount of LIBOR on the current basis will not be guaranteed after June 2023. See the Risk Factor captioned “The Company may be adversely impactedJunior Subordinated Debentures issued 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.AGMH that has been purchased by AGUS.
From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility.
For more information, see the Company’s 20212022 Annual Report on Form 10-K, Part II.II, Item 8. Financial Statements and Supplementary Data, Note 13,12, 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 September 30, 2022 | | As of June 30, 2023 |
| | AGL | | U.S. Holding Companies | | AGL | | U.S. Holding Companies |
| | (in millions) | | (in millions) |
| Assets | Assets | | Assets | |
| Fixed-maturity securities (1) | Fixed-maturity securities (1) | $ | 58 | | | $ | 4 | | Fixed-maturity securities (1) | $ | 21 | | | $ | 4 | |
| Short-term investments, other invested assets and cash | Short-term investments, other invested assets and cash | 33 | | | 121 | | Short-term investments, other invested assets and cash | 35 | | | 73 | |
| Receivables from affiliates (2) | Receivables from affiliates (2) | 41 | | | — | | Receivables from affiliates (2) | 57 | | | — | |
| Receivable from U.S. Holding Companies | Receivable from U.S. Holding Companies | 70 | | | — | | Receivable from U.S. Holding Companies | 27 | | | — | |
| Other assets | Other assets | 2 | | | 51 | | Other assets | 5 | | | 42 | |
| Liabilities | Liabilities | | Liabilities | |
| Long-term debt | Long-term debt | — | | | 1,673 | | Long-term debt | — | | | 1,677 | |
| Loans payable to affiliates | Loans payable to affiliates | — | | | 270 | | Loans payable to affiliates | — | | | 270 | |
| Payable to affiliates (2) | Payable to affiliates (2) | 10 | | | 17 | | Payable to affiliates (2) | 12 | | | 13 | |
| Payable to AGL | Payable to AGL | — | | | 70 | | Payable to AGL | — | | | 27 | |
| Other liabilities | Other liabilities | 6 | | | 97 | | Other liabilities | 10 | | | 56 | |
____________________
(1) As of SeptemberJune 30, 2022,2023, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’AGUS’s investment in AGMH’s debt) were 6.29.6 years and 4.84.2 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
| | | | | | | | | | | |
| Six Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Revenues | $ | 1 | | | 2 |
| Expenses | | | |
| Interest expense | — | | | 47 | |
| Other expenses | 27 | | | 31 | |
| Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (26) | | | (76) | |
| Net income (loss) | (26) | | | (65) | |
| | | | | | | | | | | |
| Nine Months 2022 |
| AGL | | U.S. Holding Companies |
| (in millions) |
| Revenues | $ | 1 | | | 2 |
| Expenses | | | |
| Interest expense | — | | | 66 | |
| Other expenses | 31 | | | 7 | |
| Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (30) | | | (71) | |
| Net income (loss) | (30) | | | (64) | |
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
SignificantSelected Cash Flow Items
| | | Nine Months 2022 | | Six Months 2023 |
| | AGL | | U.S. Holding Companies | | AGL | | U.S. Holding Companies |
| | (in millions) | | (in millions) |
| Dividends received from subsidiaries (1) | Dividends received from subsidiaries (1) | $ | 385 | | | $ | 341 | | Dividends received from subsidiaries (1) | $ | 112 | | | $ | 93 | |
| Interest paid | Interest paid | — | | | (47) | | Interest paid | — | | | (41) | |
| Investments in subsidiaries | Investments in subsidiaries | — | | | (15) | | Investments in subsidiaries | — | | | (12) | |
| Return of capital from subsidiaries | — | | | 9 | | |
| Dividends paid to AGL | Dividends paid to AGL | — | | | (385) | | Dividends paid to AGL | — | | | (83) | |
| Dividends paid | Dividends paid | (49) | | | — | | Dividends paid | (35) | | | — | |
| Repurchases of common shares (2) | Repurchases of common shares (2) | (400) | | | — | | Repurchases of common shares (2) | (26) | | | — | |
____________________
(1) AGL’s dividends include dividends from AGUS.
(2) See Item 1, Financial Statements, Note 14,13, 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 information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 13,12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
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,parent,
•reinsurance premiums,
•principal of, and interest on, surplus notes, where applicable, and
•capital investments in their own subsidiaries, where appropriate.
Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios, 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 SeptemberJune 30, 2022,2023, 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, 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 toFor example, the Company that significant federal fundingmade substantial claim payments in 2021 may have mitigated2022 in connection with the financial stress from direct and indirect consequencesresolution 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.certain Puerto Rico credits. 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 ofis continuing its efforts to resolve 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 September 30, 2022, the Company has financial guaranty exposure to the general obligation bonds ofone remaining unresolved Puerto Rico and various obligations of its related authorities and public corporations aggregating $2.1 billioninsured exposure that is in payment default, PREPA. The Company had $720 million net par outstanding all of which is rated BIG.to PREPA on June 30, 2023. As set forthdescribed in Item 1, Financial Statements, Note 3, Outstanding Exposure, its $1.2 billion net outstanding par exposure to PRHTA is subject to a plan of adjustment filed by the FOMB with the Federal District Court of Puerto Rico on May 2, 2022 (HTA Plan). The Company anticipates making substantial claim payments in connection with the consummationimplementation of the GO/PBA Plan and the HTA Plan, should consummation occur,certain insured bondholders elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and is taking this into accountCVIs, as relevant, that constitute distributions under the GO/PBA Plan or HTA Plan. For those who made the election, distributions under the GO/PBA Plan and HTA Plan are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in projecting its liquidity needs.
Whilethe custodial trust, and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions under the GO/PBA Plan or HTA Plan, as applicable, are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company hasretains the capacityright to generate sufficient liquidity internallysatisfy its obligations under the insurance policy with respect to fund the fullrelated legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. As of June 30, 2023, the gross claim payments it would be requiredCompany’s remaining net par outstanding for HTA and GO/PBA Puerto Rico exposures was $504 million, which consisted of bonds where the holders elected to payreceive custody receipts and exposures assumed from third-party financial guarantors. On July 28, 2023, the Company directed the trustee to notify certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds of its intent to satisfy on August 31, 2023 its obligations under the HTA Plan,legacy insured bonds with respect to $108 million net par outstanding as of July 28, 2023 and, following payment of such obligations, AGC and AGM will receive the Company may enter into a secured short-term loan facilityNew Recovery Bonds and/or CVIs with notional amounts and maturity values totaling $94 million as of July 28, 2023 held as collateral with respect 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, Long-Term Debt and 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.custodial trusts.
In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.
If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.
Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on
the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $429$398 million as of SeptemberJune 30, 2022.2023. 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 SeptemberJune 30, 2022,2023, 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 if the reference obligation were restructured. Furthermore, some CDS documentation requires the Company to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis.
Distributions From Insurance Subsidiaries
The 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 16,15, Insurance Company Regulatory Requirements, of the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 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 20222023 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $266$270 million, of which approximately $93$61 million is available for distribution in the fourththird quarter of 2022.2023.
•The maximum amount available during 20222023 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $207$102 million, of which approximately $42 millionnone is available for distribution in the fourththird quarter of 2022.2023.
•Based on the applicable law and regulations, in 20222023 AG Re (a subsidiary of AGL) paid dividends of $29 million in the first half of the year and 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$209 million as of SeptemberJune 30, 2022.2023. 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 $166$167 million as of SeptemberJune 30, 2022,2023, and (ii) the amount of statutory surplus, which as of SeptemberJune 30, 20222023 was a deficit of $45$25 million.
•Based on the applicable law and regulations, in 20222023 AGRO (an indirect subsidiary of AG Re) has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $106$98 million as of SeptemberJune 30, 2022.2023. 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 $369$394 million as of SeptemberJune 30, 2022,2023, and (ii) the amount of statutory surplus, which as of SeptemberJune 30, 20222023 was $248$265 million.
Distributions From Insurance Company Subsidiaries
| | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) | | (in millions) |
| Dividends paid by AGC to AGUS | Dividends paid by AGC to AGUS | $ | 16 | | | $ | 15 | | | $ | 165 | | | $ | 52 | | Dividends paid by AGC to AGUS | $ | 24 | | | $ | 24 | | | $ | 44 | | | $ | 149 | |
| Dividends paid by AGM to AGMH | Dividends paid by AGM to AGMH | 77 | | | 104 | | | 173 | | | 186 | | Dividends paid by AGM to AGMH | — | | | — | | | 40 | | | 96 | |
| Dividends paid by AG Re to AGL | | Dividends paid by AG Re to AGL | 29 | | | — | | | 29 | | | — | |
| Dividends from AGUK to AGM | | Dividends from AGUK to AGM | 127 | | | — | | | 127 | | | — | |
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 8,7, Management’s Discussion and Analysis of Financial StatementsCondition and Supplementary Data, Note 6, Contracts Accounted for asResults of Operations - Liquidity and Capital Resources - Insurance Subsidiaries, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
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)(i) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (b)(ii) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (c)(iii) upon certain changes of control of the Assuming Subsidiary. Upon termination due to one of the above events, the Assuming Subsidiary typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the assumed business (plus in certain cases, an additional required amount), after which the Assuming Subsidiary would be released from liability with respect to such business.
As of SeptemberJune 30, 2022,2023, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $264$267 million, including $229$241 million by AGC and $35$26 million by AG Re.
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty’s financial statements.
The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC’s or AGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.
Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. TheUntil June 30, 2023, the annualized rate on the AGC CCS iswas one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities iswas one-month LIBOR plus 200 bps. In July 2023, the reference to 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 asin such CCS was replaced with a reference rate” under Operational Risks in Part I, Item 1A, Risk Factors, in the Company’s Annual Reportrate based on Form 10-K for the year ended December 31, 2021.SOFR.
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. Approximately 66%62% of the total investment portfolio is managed by external parties. EachIn accordance with the Company’s investment guidelines, each of the three external investment managers mustis required to maintain the Company’s investment portfolio with an overall credit quality rated at a minimum average rating of A+/A1/A+ by S&P , Moody’s and &P/Moody’s/Fitch Ratings Inc., respectively.
Changes in interest rates affect the value of the Company’s fixed-maturity securities. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of investment-grade, liquid instruments. Other invested assets include other alternative investments.investments, which are generally less liquid. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 1, Financial Statements, Note 7, Investments, and Note 9, Fair Value Measurement.
Investment Portfolio
Carrying Value
| | | As of | | As of |
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) | | (in millions) |
| Fixed-maturity securities, available-for-sale (1) | Fixed-maturity securities, available-for-sale (1) | $ | 6,780 | | | $ | 8,202 | | Fixed-maturity securities, available-for-sale (1) | $ | 6,488 | | | $ | 7,119 | |
| Fixed-maturity securities, trading (2) | Fixed-maturity securities, trading (2) | 393 | | | — | | Fixed-maturity securities, trading (2) | 340 | | | 303 | |
| Short-term investments | Short-term investments | 1,177 | | | 1,225 | | Short-term investments | 1,650 | | | 810 | |
| Other invested assets | Other invested assets | 130 | | | 181 | | Other invested assets | 146 | | | 133 | |
| Total | Total | $ | 8,480 | | | $ | 9,608 | | Total | $ | 8,624 | | | $ | 8,365 | |
____________________
(1) As of SeptemberJune 30, 2023 and December 31, 2022, fixed maturity securities includes $64$36 million and $358 million, respectively, of new recovery bondsNew Recovery Bonds received in connection with the consummation of the March2022 Puerto Rico Resolutions.
(2) Represents CVIs received under the March2022 Puerto Rico Resolutions and the HTA PSA.Resolutions.
The Company’s available-for-sale fixed-maturity securities had a duration of 4.13.9 years and 4.74.4 years as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Available-for-Sale Fixed-Maturity Securities By Contractual Maturity
The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Distribution of Available-for-Sale Fixed-Maturity Securities by Contractual Maturity
As of SeptemberJune 30, 20222023
| | | | Amortized
Cost | | Estimated
Fair Value | | Amortized
Cost | | Estimated
Fair Value |
| | | (in millions) | | (in millions) |
| Due within one year | Due within one year | $ | 242 | | | $ | 234 | | Due within one year | $ | 286 | | | $ | 280 | |
| Due after one year through five years | Due after one year through five years | 1,775 | | | 1,575 | | Due after one year through five years | 1,537 | | | 1,430 | |
| Due after five years through 10 years | Due after five years through 10 years | 1,651 | | | 1,503 | | Due after five years through 10 years | 1,696 | | | 1,597 | |
| Due after 10 years | Due after 10 years | 3,115 | | | 2,827 | | Due after 10 years | 2,871 | | | 2,625 | |
| Mortgage-backed securities: | Mortgage-backed securities: | | | | Mortgage-backed securities: | | | |
| RMBS | RMBS | 432 | | | 361 | | RMBS | 440 | | | 352 | |
| Commercial mortgage-backed securities (CMBS) | 291 | | | 280 | | |
| Commercial mortgage-backed securities | | Commercial mortgage-backed securities | 214 | | | 204 | |
| Total | Total | $ | 7,506 | | | $ | 6,780 | | Total | $ | 7,044 | | | $ | 6,488 | |
Available-for-Sale and Trading Fixed-Maturity Securities By Rating
The following table summarizes the ratings distributions of the Company’s available-for-sale fixed-maturity securities as of SeptemberJune 30, 20222023 and December 31, 2021.2022. Ratings generally reflect the lower of Moody’s and S&P classifications, except for bonds purchased for loss mitigation and certain other securities,(i) Loss Mitigation Securities, which use Assured Guaranty’s internal ratings classifications, or are not rated, such as the(ii) Puerto Rico securities received under the March2022 Puerto Rico Resolutions.Resolutions, which are not rated.
Distribution of Available-for-Sale Fixed-Maturity Securities by Rating
| | | As of | | As of |
| Rating | Rating | | September 30, 2022 | | December 31, 2021 | Rating | | June 30, 2023 | | December 31, 2022 |
| AAA | AAA | | 14.8 | % | | 14.6 | % | AAA | | 13.9 | % | | 14.2 | % |
| AA | AA | | 38.5 | | | 38.2 | | AA | | 38.6 | | | 37.1 | |
| A | A | | 25.0 | | | 25.1 | | A | | 26.9 | | | 24.4 | |
| BBB | BBB | | 11.6 | | | 13.7 | | BBB | | 11.4 | | | 11.0 | |
| BIG (1) | BIG (1) | | 8.3 | | | 7.5 | | BIG (1) | | 7.5 | | | 7.4 | |
| Not rated (2) | Not rated (2) | | 1.8 | | | 0.9 | | Not rated (2) | | 1.7 | | | 5.9 | |
| Total | Total | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % |
____________________
(1)Includes primarily loss mitigation securities.Loss Mitigation Securities. See Item 1, Financial Statements, Note 7, Investments, for additional information.
(2)As of September 30, 2022, primarily represent new recovery bondsPrimarily includes New Recovery Bonds received in connection with the consummation of the March2022 Puerto Rico Resolutions.
The Company also had $393$340 million and $303 million in trading fixed-maturity securities as of SeptemberJune 30, 2023 and December 31, 2022, respectively, representing CVIs received under the March2022 Puerto Rico Resolutions, and the HTA PSA, which are not rated.
Other Investments
Other invested assets, which are generally less liquid than fixed-maturity securities managed by external managers and AssuredIM, 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’ percentage ownership of AssuredIM Funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, all of the funds in which AGAS directly invests are consolidated in the Company’s consolidated financial statements. In July 2023, the management of the CLO fund and asset-based funds was transferred from AssuredIM to Sound Point. The amounts in the table below representpresent the fair value of AGAS’ interests in the AssuredIM Funds. See Commitments below.
Fair Value of AGAS’ Interest in AssuredIM Funds
| | | | | | | | | | | | | | |
| | As of |
| Strategy | | September 30, 2022 | | December 31, 2021 |
| | | (in millions) |
| CLOs | | $ | 279 | | | $ | 228 | |
| Municipal bonds | | 104 | | | 107 | |
| Healthcare | | 86 | | | 115 | |
| Asset-based | | 105 | | | 93 | |
| Total | | $ | 574 | | | $ | 543 | |
| | | | | | | | | | | | | | |
| | As of |
| Strategy | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) |
| CLOs | | $ | 189 | | | $ | 272 | |
| Municipal bonds (1) | | — | | | 105 | |
| Healthcare | | 74 | | | 91 | |
| Asset-based | | 87 | | | 101 | |
| Total | | $ | 350 | | | $ | 569 | |
____________________
(1) In the first quarter of 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund.
Equity in Earnings (Losses) of Investees of AGAS’ Investment in AssuredIM Funds
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| Strategy | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (in millions) |
| CLOs | | $ | 6 | | | $ | 9 | | | $ | (10) | | | $ | 27 | |
| Municipal bonds | | — | | | — | | | (4) | | | 2 | |
| Healthcare | | 3 | | | 12 | | | (6) | | | 35 | |
| Asset-based | | — | | | 2 | | | 7 | | | 6 | |
| Total | | $ | 9 | | | $ | 23 | | | $ | (13) | | | $ | 70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | Six Months |
| Strategy | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) |
| CLOs | | $ | (3) | | | $ | (23) | | | $ | 16 | | | $ | (16) | |
| Municipal bonds | | — | | | — | | | — | | | (4) | |
| Healthcare | | 1 | | | (12) | | | 9 | | | (9) | |
| Asset-based | | 2 | | | 2 | | | 3 | | | 7 | |
| Total | | $ | — | | | $ | (33) | | | $ | 28 | | | $ | (22) | |
Beginning in the third quarter of 2023, the Company will record an equity method investment in Sound Point pursuant to the Sound Point Transaction described in Item 1, Financial Statements, Note 1, Business and Basis of Presentation
Restricted Assets
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 $211$230 million and $243$222 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, 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 $1,174$1,149 million and $1,231$1,169 million, based on fair value, as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Commitments
TheUpon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval, which includes $510 million of investment capital (at fair value), and $991 million in unfunded commitments. See Note 1, Business and Basis of Presentation for a description of the Sound Point Transaction.
Of the $1.5 billion to be invested, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million in AssuredIM Funds. Adding inception-to-dateplus previously distributed gains the U.S. Insurance Subsidiaries may investof $114 million for a total of up to $810 million in AssuredIM Funds. As of September 30, 2022, the Insurance segment had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. The Company had unfunded commitments of $92$864 million as of SeptemberJune 30, 2022 related2023. As of July 1, 2023, AGAS commitments to certainfunds previously managed by AssuredIM were $553 million (of which $333 million was funded with a net asset value (NAV) of $350 million). This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance and healthcare structured capital and are managed by Sound Point or by AHP. As of June 30, 2023, all of the Company’s alternative investments other than AssuredIM Funds.funds in which AGAS invests are accounted for as CIVs.
AssuredIM
Sources and Uses of Funds
AssuredIM’s sources of liquidity are: (1)were: (i) cash from operations, including management and performance fees (which are unpredictable as to amount and timing); and (2)(ii) capital contributions from AGUS ($1510 million and $15 million in ninesix months 20222023 and ninesix months 2021,2022, respectively, had been contributed to supplement cash from operations). As of SeptemberJune 30, 2023 and December 31, 2022, AssuredIM had $30$21 million and $41 million, respectively, in cash and short-term investments.
AssuredIM’s liquidity needs primarily include: (1)(i) paying operating expenses including compensation; (2)(ii) paying dividends or other distributions to AGUS; and (3)(iii) capital to support growth and expansion of the asset management business. In
third quarter 2022
See “ - Overview, Business.” for a discussion of Sound Point Transaction and 2021, AssuredIM distributed $8.8 million to AGUS to fund AGUS’s interest payment on its
intercompany debt to the insurance subsidiaries. That debt was incurred in October 2019 to fund the BlueMountain Acquisition.AHP Transaction.
Lease Obligations
The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco,
London, Paris, and other locations with various lease terms. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18,17, Leases, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, 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 CLO 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 other Assured Guaranty subsidiaries.
As of SeptemberJune 30, 2022,2023, these credit facilities had varying maturities ranging from 2023 to 20312024 with the aggregate principal amount not exceeding $1.5 billion.$820 million. The available commitment wascommitments were based on the amount of equity contributed to the warehousewarehouses which was $337$217 million. As of SeptemberJune 30, 2022, $2062023, $134 million was drawn under credit facilities with an interest rates ranging from 3-month Euriborrate of Euro InterBank Offered Rate (Euribor) plus 150 basis points (bps) to 3-month SOFR plus 150300 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of SeptemberJune 30, 2022.2023.
As of SeptemberJune 30, 2022,2023, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $110 million jointly and $71 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributedcapital committed to the funds. As of SeptemberJune 30, 2022, $622023, $54 million was drawn by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime floor of 3%). The fund was in compliance with all financial covenants as of SeptemberJune 30, 2022.2023.
Condensed Consolidated Cash Flows
The summarized condensed consolidated statements of cash flowflows in the table below presentspresent the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of consolidating FG VIEs and CIVs.
Condensed Consolidated Cash Flow Summary
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions) | | (in millions) |
| Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation | Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation | $ | 87 | | | $ | (66) | | | $ | (534) | | | $ | (20) | | Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation | $ | 27 | | | $ | 19 | | | $ | (7) | | | $ | (621) | |
| Effect of FG VIEs and CIVs consolidation (1) | (141) | | | (777) | | | (1,314) | | | (1,772) | | |
| Effect of FG VIEs and CIVs consolidation | | Effect of FG VIEs and CIVs consolidation | 97 | | | (921) | | | 443 | | | (1,173) | |
| Net cash flows provided by (used in) operating activities | Net cash flows provided by (used in) operating activities | (54) | | | (843) | | | (1,848) | | | (1,792) | | Net cash flows provided by (used in) operating activities | 124 | | | (902) | | | 436 | | | (1,794) | |
| | Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation | Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation | 25 | | | 400 | | | 1,006 | | | 57 | | Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation | 6 | | | 150 | | | 108 | | | 981 | |
| Effect of FG VIEs and CIVs consolidation (1) | 45 | | | 25 | | | 122 | | | 112 | | |
| Effect of FG VIEs and CIVs consolidation | | Effect of FG VIEs and CIVs consolidation | (40) | | | 58 | | | (236) | | | 77 | |
| Net cash flows provided by (used in) investing activities | Net cash flows provided by (used in) investing activities | 70 | | | 425 | | | 1,128 | | | 169 | | Net cash flows provided by (used in) investing activities | (34) | | | 208 | | | (128) | | | 1,058 | |
| | Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation | Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation | | Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation | |
| Dividends paid | Dividends paid | (16) | | | (16) | | | (49) | | | (51) | | Dividends paid | (17) | | | (16) | | | (35) | | | (33) | |
| Repurchases of common shares | Repurchases of common shares | (97) | | | (140) | | | (400) | | | (305) | | Repurchases of common shares | (24) | | | (151) | | | (26) | | | (303) | |
| Issuance of long-term debt, net of issuance costs | — | | | 394 | | | — | | | 889 | | |
| Redemptions and purchases of debt, including make-whole | — | | | (619) | | | — | | | (619) | | |
| Net cash flows provided by (used in) financing activities before effect of VIE consolidation | — | | | 2 | | | (6) | | | (12) | | |
| Effect of FG VIEs and CIVs consolidation (1) | 109 | | | 742 | | | 1,110 | | | 1,664 | | |
| Net cash flows provided by (used in) financing activities (2) | (4) | | | 363 | | | 655 | | | 1,566 | | |
| Other | | Other | — | | | 4 | | | (15) | | | (6) | |
| Effect of FG VIEs and CIVs consolidation | | Effect of FG VIEs and CIVs consolidation | 4 | | | 832 | | | (257) | | | 1,001 | |
| Net cash flows provided by (used in) financing activities (1) | | Net cash flows provided by (used in) financing activities (1) | (37) | | | 669 | | | (333) | | | 659 | |
| | Effect of exchange rate changes, before effect of FG VIEs and CIVs consolidation | | Effect of exchange rate changes, before effect of FG VIEs and CIVs consolidation | 1 | | | (1) | | | 2 | | | (2) | |
| Effect of FG VIEs and CIVs consolidation | | Effect of FG VIEs and CIVs consolidation | — | | | — | | | — | | | — | |
| Effect of exchange rate changes | Effect of exchange rate changes | (4) | | | (1) | | | (6) | | | (1) | | Effect of exchange rate changes | 1 | | | (1) | | | 2 | | | (2) | |
| Increase (decrease) in cash and cash equivalents and restricted cash | Increase (decrease) in cash and cash equivalents and restricted cash | 8 | | | (56) | | | (71) | | | (58) | | Increase (decrease) in cash and cash equivalents and restricted cash | 54 | | | (26) | | | (23) | | | (79) | |
| Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 263 | | | 296 | | | 342 | | | 298 | | Cash and cash equivalents and restricted cash at beginning of period | 130 | | | 289 | | | 207 | | | 342 | |
| Cash and cash equivalents and restricted cash at the end of the period | Cash and cash equivalents and restricted cash at the end of the period | $ | 271 | | | $ | 240 | | | $ | 271 | | | $ | 240 | | Cash and cash equivalents and restricted cash at the end of the period | $ | 184 | | | $ | 263 | | | $ | 184 | | | $ | 263 | |
____________________
(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 FG VIEs and CIVs, was an outflow of $534$7 million in ninesix months 20222023 and an outflow of $20$621 million in ninesix months 2021.2022. The increasedecrease in cash outflows during 2022six months 2023 was primarily due to a $579 million decrease in net claim payments, made net of cash recoveries received pursuantprimarily due to GO/PBA Plan and the terms of the HTA PSA2022 Puerto Rico Resolutions, as well as highera decrease of $95 million in tax payments. See Item 1. Financial Statements, Note 3, Outstanding Exposure, for additional information. Cash flows from operations attributable to the effect of FG VIE and CIV consolidation was negativewere inflows in 2022six months 2023 and 2021 due tooutflows in six months 2022. The consolidated statements of cash flows present the inclusion of investing activities of CIVs, which includedthe consolidated AssuredIM Funds and CLOs as cash outflows forflows from operations. The increase in inflows in six months 2023 compared with six months 2022 is mainly due to a decrease of $2,104 million in investment purchases, partially offset by a decrease of investments, offset in part byinvestment sales, maturities and paydowns of investments.$570 million.
Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments and paydowns on and sales of FG VIEs’ assets. The increasedecrease in investing cash inflows duringin six months 2023 compared with six months 2022 was mainly attributable to lower purchases and higher disposals of fixed-maturity securities andan increase in short-term investments in six months 2023 compared to net sales of trading securitiesshort term and fixed maturity investments in six months 2022. In six months 2022, investing inflows were used to fund share repurchases and claim
payments in connection withunder the March2022 Puerto Rico Resolutions.Resolutions and share repurchases. See Item 1. Financial Statements, Condensed Consolidated Statements of Cash Flows and Note 3, Outstanding Exposure, for additional information.
Financing activities primarily consist of share repurchases, dividends, and paydowns of FG VIEs’ liabilities, as well andas CLO issuances and CLO warehouse financing activities In nine months 2021, it also included the issuanceactivities. The CIVs’ financing cash flows mainly include issuances and repayments of 3.15% Senior NotesCLOs and 3.6% Senior Notes, and redemptions of a portion of AGMH and AGUSCLO warehouse financing debt. See Item 1. Financial Statements, Note 11, Long-Term Debt and Credit Facilities. The decrease in financing cash flow activity from VIEs was primarily due to the
$2,163 million in issuances, partially offset by a decrease in issuancesrepayments of $949 million by the consolidated CLOs and CLO warehouses. The proceeds from CLO issuances and CLO warehouse borrowings are used to fund the purchases of loans. FG VIEs’ cash flows relate to the paydowns of FG VIEs’ liabilities. See Item 1. Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
From OctoberJuly 1, 2023 through November 7, 2022,August 8, 2023, the Company repurchased an additional 0.8 million320,646 of common shares. As of November 7, 2022,August 8, 2023, the Company was authorized to purchase $261$158 million of its common shares. For more information about theabout the Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 14,13, Shareholders’ Equity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of SeptemberJune 30, 2022,2023, there were no material changes to the market risks to which the Company is exposed since December 31, 2021.2022.
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 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 SeptemberJune 30, 2022.2023. Based on their evaluation as of SeptemberJune 30, 20222023 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 thirdsecond quarter 20222023 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.
PART II.OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims, as described in Part I, Item 1, Financial Statements, Note 13,12, Commitments and Contingencies – Legal Proceedings and the “PREPA” and “Puerto Rico Litigation” sections of Note 3, Outstanding Exposureand the “Recovery Litigation and Dispute Resolution” section of Note 4, Expected Loss to be Paid (Recovered) contained in this Form 10-Q.10-Q and is incorporated by reference herein. For additional information see the “Legal Proceedings” and “Litigation” sections of Part II, Item 8, Financial Statements and Supplementary Data, Note 19,18, Commitments and Contingencies, the “Recovery Litigation” section of Note 4, Expected Loss to be Paid (Recovered), and the “Puerto Rico Litigation” section of Note 3, Outstanding Exposure, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
ITEM 1A.RISK FACTORS
See the risk factors set forth in Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There2022. Except as set forth below, there have been no material changes to the risk factors disclosed in such Annual Report on Form 10-K.10-K or Part II, “Item 1A. Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
From July 1, 2023, the Company’s interest in Sound Point is subject to the risks normally associated with a minority interest.
Since the Company holds a minority interest in Sound Point after the closing of the Sound Point Transaction, it is unable to control the business, management or policies of Sound Point. For example, the Company is not be able to control the timing or amount of distributions from Sound Point and is not involved on a day-to-day basis with Sound Point’s operations or its decision-making with respect to its investment, reporting, internal control, legal, compliance or risk functions. In most cases, the Company will be bound by the decisions made by the Managing Partner and Chief Investment Officer, other members of management and the Board of Managers of Sound Point. In the event that the Managing Partner and Chief Investment Officer, other members of management and the Board of Managers of Sound Point have interests, objectives and incentives that differ from those of the Company, there can be no assurance that the decisions they make will be aligned with the interests of the Company. Decisions made by the Managing Partner and Chief Investment Officer, other members of management and the Board of Managers of Sound Point not in the Company’s interest could have a material adverse effect on the Company’s interest in Sound Point and/or its investments in Sound Point funds, other vehicles and separately managed accounts.
An inability to obtain accurate and timely financial information from Sound Point or AHP may impair the Company’s ability to comply with reporting obligations under federal securities law.
The Company will be reliant on Sound Point and AHP to provide accurate and timely financial reporting that will allow the Company to timely prepare and file its own financial statements in accordance with GAAP and in compliance with SEC regulations and New York Stock Exchange listing rules.
As private companies, Sound Point and AHP are not subject to the reporting requirements of the Exchange Act and historically have not been required to prepare their financial statements in accordance with generally accepted accounting principles in the United States or in compliance with the SEC’s accounting regulations. The Company expects to report its investments in Sound Point, the Sound Point funds and AHP funds on a one-quarter lag. While each of Sound Point, AHP and their respective related parties have agreed to provide to the Company all financial information necessary to complete and file its periodic SEC reports on a timely basis, any failure by Sound Point, AHP or their respective related parties to provide the Company with accurate and timely financial information could result in a delay in the Company’s timely reporting of its results of operations for any period or it not filing one or more periodic reports with the SEC on time or inaccuracies in its financial statements.
The Company’s investments in Sound Point are subject to the risks of Sound Point’s business.
Sound Point’s business operates in highly competitive markets. Sound Point competes with many other firms in every aspect of the asset management industry, including raising funds, seeking investments, and hiring and retaining professionals. Sound Point’s ability to increase and retain AUM is directly related to the performance of the assets it manages as measured against market averages and the performance of its competitors. Some of Sound Point’s competitors may have a lower cost of
funds and access to funding and other resources that are not available to Sound Point. In addition, some of Sound Point’s competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than Sound Point does. Furthermore, Sound Point may lose investment opportunities if it does not match its competitors’ pricing, terms and structure. The loss of such investment opportunities may limit Sound Point’s ability to grow or cause it to have to shrink the size of its portfolio, which could decrease its earnings. If Sound Point matches its competitors’ pricing, terms and structure, it may experience decreased earnings and increased risk of investment losses.
Sound Point is dependent on certain key personnel, including Sound Point’s Managing Partner and Chief Investment Officer, and its future success depends on their continued service. The departure of any of Sound Point’s key personnel for any reason could have a material adverse effect on Sound Point’s business, financial condition or results of operations and, consequently, the Company’s interest in Sound Point and/or its investments in Sound Point funds, other vehicles and separately managed accounts.
Sound Point operates in a highly regulated industry and, as a registered investment adviser, is subject to the provisions of the Investment Advisers Act of 1940, as amended. Sound Point is, from time to time, subject to formal and informal examinations, investigations, inquiries, audits and reviews from numerous regulatory authorities both in response to issues and questions raised in such examinations or investigations and in connection with the changing priorities of the applicable regulatory authorities across the market in general. As a result, there can be no assurance that Sound Point will not become subject to possible enforcement actions. Sound Point and its principals and employees could also be named as defendants in, or otherwise become involved in, a regulatory action or litigation. Any such regulatory action or litigation could be disruptive, time-consuming, expensive and lead to negative financial and reputational consequences that have a material adverse effect on Sound Point’s business, financial condition or results of operations and, consequently, the Company’s interest in Sound Point and/or its investments in Sound Point funds, other vehicles and separately managed accounts.
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 thirdsecond quarter 2022.2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | 551,926 | | | $ | 55.63 | | | 551,926 | | | $ | 118,835,799 | |
| August 1 - August 31 | | 566,537 | | | $ | 54.67 | | | 566,537 | | | $ | 337,865,647 | |
| September 1 - September 30 | | 673,676 | | | $ | 51.48 | | | 671,932 | | | $ | 303,271,357 | |
| Total | | 1,792,139 | | | $ | 53.76 | | | 1,790,395 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total
Number of
Shares
Purchased | | Average
Price Paid
Per Share | | Total Number of
Shares Purchased as
Part of Publicly
Announced Program (1) | | Maximum Number
(or Approximate Dollar Value) of Shares that May Yet Be
Purchased
Under the Program (2) |
| April 1 - April 30 | | — | | | $ | — | | | — | | | $ | 201,040,120 | |
| May 1 - May 31 | | 177,741 | | | $ | 52.27 | | | 168,000 | | | $ | 192,263,706 | |
| June 1 - June 30 | | 285,942 | | | $ | 53.57 | | | 285,942 | | | $ | 176,946,450 | |
| Total | | 463,683 | | | $ | 53.07 | | | 453,942 | | | |
____________________
(1) After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through November 7, 2022,August 8, 2023, the Company has repurchased a total of 140142 million common shares for approximately $4.6$4.7 billion, excluding commissions, at an average price of $32.89$33.21 per share. On August 3, 2022, the Company announced that the Board of Directors had authorized an additional $250 million of share repurchases. As of November 7, 2022,August 8, 2023, the remaining authorization the Company was authorized to purchase was $261$158 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 5. OTHER MATTERS
10b5-1 Trading Plans
During second quarter 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act).
ITEM 6.EXHIBITS
The following exhibits are filed with this report:
| | | | | | | | |
Exhibit
Number | | Description of Document |
| 2.1 | | | |
| 22.0 | | | |
| 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 SeptemberJune 30, 20222023 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20222023 and December 31, 2021;2022; (ii) Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021;2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021;2022; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021;2022; (v) Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20222023 and 2021;2022; 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 SeptemberJune 30, 20222023 formatted, in Inline XBRL (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101). |
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 8, 2022August 9, 2023 | By: | /s/ ROBERT A. BAILENSON |
| | | |
| | | Robert A. Bailenson Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |
