0001273813us-gaap:FairValueInputsLevel2Memberago:FinancialGuarantyVariableInterestEntitiesMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | | | | | | |
ý☒ | | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20172023
Or
|
| | | | | | | |
o☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition Period from to
Commission File No. 001-32141
ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
Bermuda | | 98-0429991 |
(State or other jurisdiction of incorporation) | | (I.R.S. employer |
of incorporation) | | identification no.) |
30 Woodbourne Avenue
Hamilton HM 08,
Bermuda
(Address of principal executive offices)
(441) 279-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | |
Title of each class: | Trading Symbol(s) | Name of exchange on which registered |
Common Shares | $0.01 par value per share | AGO | New York Stock Exchange |
Assured Guaranty US Holdings Inc. 6.125% Senior Notes due 2028 (and the related guarantee of Registrant) | AGO/28 | New York Stock Exchange |
Assured Guaranty US Holdings Inc. 3.150% Senior Notes due 2031 (and the related guarantee of Registrant) | AGO/31 | New York Stock Exchange |
Assured Guaranty US Holdings Inc. 3.600% Senior Notes due 2051 (and the related guarantee of Registrant) | AGO/51 | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filerx | ☒ | Accelerated filero |
☐ | Non-accelerated filero | ☐ | Smaller reporting companyo |
(Do not check if a smaller reporting company) | ☐ | Emerging growth companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
Yes o No x
The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 1, 20176, 2023 was 117,453,84957,256,573 (includes 50,22538,464 unvested restricted shares).
ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
ITEM 1. FINANCIAL STATEMENTS
Assured Guaranty Ltd.
Condensed Consolidated Balance Sheets (unaudited)(Unaudited)
(dollars in millions except per share and share amounts)data)
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Investments: | | | |
Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $86 and $65 (amortized cost of $6,971 and $7,707) | $ | 6,267 | | | $ | 7,119 | |
Fixed-maturity securities, trading, at fair value | 350 | | | 303 | |
Short-term investments, at fair value | 1,426 | | | 810 | |
Other invested assets | 765 | | | 133 | |
Total investments | 8,808 | | | 8,365 | |
Cash | 108 | | | 107 | |
Premiums receivable, net of commissions payable | 1,376 | | | 1,298 | |
Deferred acquisition costs | 158 | | | 147 | |
Salvage and subrogation recoverable | 282 | | | 257 | |
Financial guaranty variable interest entities’ assets (includes $326 and $413, at fair value) | 327 | | | 416 | |
Assets of consolidated investment vehicles (includes $318 and $5,363, at fair value) | 330 | | | 5,493 | |
Goodwill and other intangible assets | 6 | | | 163 | |
Other assets (includes $112 and $148, at fair value) | 549 | | | 597 | |
Total assets | $ | 11,944 | | | $ | 16,843 | |
Liabilities | | | |
Unearned premium reserve | $ | 3,600 | | | $ | 3,620 | |
Loss and loss adjustment expense reserve | 361 | | | 296 | |
Long-term debt | 1,693 | | | 1,675 | |
Credit derivative liabilities, at fair value | 50 | | | 163 | |
Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $531 and $702, without recourse $11 and $13) | 542 | | | 715 | |
Liabilities of consolidated investment vehicles (includes $0 and $4,431, at fair value) | 4 | | | 4,625 | |
Other liabilities | 393 | | | 457 | |
Total liabilities | 6,643 | | | 11,551 | |
Commitments and contingencies (Note 13) | | | |
Shareholders’ equity | | | |
Common shares ($0.01 par value, 500,000,000 shares authorized; 57,819,732 and 59,013,040 shares issued and outstanding) | 1 | | | 1 | |
Retained earnings | 5,815 | | | 5,577 | |
Accumulated other comprehensive income (loss), net of tax of $(97) and $(84) | (565) | | | (515) | |
Deferred equity compensation | 1 | | | 1 | |
Total shareholders’ equity attributable to Assured Guaranty Ltd. | 5,252 | | | 5,064 | |
Nonredeemable noncontrolling interests (Note 8) | 49 | | | 228 | |
Total shareholders’ equity | 5,301 | | | 5,292 | |
Total liabilities and shareholders’ equity | $ | 11,944 | | | $ | 16,843 | |
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
Assets | |
| | |
|
Investment portfolio: | |
| | |
|
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,045 and $9,974) | $ | 10,546 |
| | $ | 10,233 |
|
Short-term investments, at fair value | 949 |
| | 590 |
|
Other invested assets | 96 |
| | 162 |
|
Total investment portfolio | 11,591 |
| | 10,985 |
|
Cash | 72 |
| | 118 |
|
Premiums receivable, net of commissions payable | 922 |
| | 576 |
|
Ceded unearned premium reserve | 108 |
| | 206 |
|
Deferred acquisition costs | 105 |
| | 106 |
|
Reinsurance recoverable on unpaid losses | 39 |
| | 80 |
|
Salvage and subrogation recoverable | 497 |
| | 365 |
|
Credit derivative assets | 3 |
| | 13 |
|
Deferred tax asset, net | 135 |
| | 497 |
|
Current income tax receivable | 72 |
| | 12 |
|
Financial guaranty variable interest entities’ assets, at fair value | 707 |
| | 876 |
|
Other assets | 398 |
| | 317 |
|
Total assets | $ | 14,649 |
| | $ | 14,151 |
|
Liabilities and shareholders’ equity | |
| | |
|
Unearned premium reserve | $ | 3,597 |
| | $ | 3,511 |
|
Loss and loss adjustment expense reserve | 1,326 |
| | 1,127 |
|
Reinsurance balances payable, net | 45 |
| | 64 |
|
Long-term debt | 1,292 |
| | 1,306 |
|
Credit derivative liabilities | 305 |
| | 402 |
|
Financial guaranty variable interest entities’ liabilities with recourse, at fair value | 657 |
| | 807 |
|
Financial guaranty variable interest entities’ liabilities without recourse, at fair value | 111 |
| | 151 |
|
Other liabilities | 438 |
| | 279 |
|
Total liabilities | 7,771 |
| | 7,647 |
|
Commitments and contingencies (See Note 14) |
| |
|
Common stock ($0.01 par value, 500,000,000 shares authorized; 117,937,242 and 127,988,230 shares issued and outstanding) | 1 |
| | 1 |
|
Additional paid-in capital | 637 |
| | 1,060 |
|
Retained earnings | 5,913 |
| | 5,289 |
|
Accumulated other comprehensive income, net of tax of $148 and $70 | 326 |
| | 149 |
|
Deferred equity compensation | 1 |
| | 5 |
|
Total shareholders’ equity | 6,878 |
| | 6,504 |
|
Total liabilities and shareholders’ equity | $ | 14,649 |
| | $ | 14,151 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Operations (unaudited)(Unaudited)
(dollars in millions except per share amounts)data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues | | | | | | | |
Net earned premiums | $ | 95 | | | $ | 89 | | | $ | 261 | | | $ | 385 | |
Net investment income | 100 | | | 67 | | | 270 | | | 191 | |
Asset management fees | — | | | 16 | | | 53 | | | 71 | |
Net realized investment gains (losses) | (9) | | | (14) | | | (20) | | | (39) | |
Fair value gains (losses) on credit derivatives | 9 | | | (48) | | | 115 | | | (42) | |
Fair value gains (losses) on committed capital securities | (20) | | | 1 | | | (35) | | | 12 | |
Fair value gains (losses) on financial guaranty variable interest entities | 6 | | | 11 | | | (2) | | | 27 | |
Fair value gains (losses) on consolidated investment vehicles | (4) | | | 8 | | | 60 | | | 25 | |
Foreign exchange gains (losses) on remeasurement | (39) | | | (80) | | | 9 | | | (181) | |
Fair value gains (losses) on trading securities | 4 | | | (8) | | | 42 | | | (30) | |
Gain on sale of asset management subsidiaries | 255 | | | — | | | 255 | | | — | |
Other income (loss) | 6 | | | (1) | | | 38 | | | 12 | |
Total revenues | 403 | | | 41 | | | 1,046 | | | 431 | |
Expenses | | | | | | | |
Loss and loss adjustment expenses (benefit) | 100 | | | (75) | | | 159 | | | (29) | |
Interest expense | 24 | | | 20 | | | 67 | | | 60 | |
Amortization of deferred acquisition costs | 4 | | | 4 | | | 10 | | | 11 | |
Employee compensation and benefit expenses | 47 | | | 57 | | | 199 | | | 189 | |
Other operating expenses | 44 | | | 37 | | | 170 | | | 120 | |
Total expenses | 219 | | | 43 | | | 605 | | | 351 | |
Income (loss) before income taxes and equity in earnings (losses) of investees | 184 | | | (2) | | | 441 | | | 80 | |
Equity in earnings (losses) of investees | 18 | | | (20) | | | 25 | | | (31) | |
Income (loss) before income taxes | 202 | | | (22) | | | 466 | | | 49 | |
Less: Provision (benefit) for income taxes | 43 | | | (27) | | | 84 | | | (6) | |
Net income (loss) | 159 | | | 5 | | | 382 | | | 55 | |
Less: Noncontrolling interests | 2 | | | (6) | | | 19 | | | 25 | |
Net income (loss) attributable to Assured Guaranty Ltd. | $ | 157 | | | $ | 11 | | | $ | 363 | | | $ | 30 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 2.65 | | | $ | 0.18 | | | $ | 6.11 | | | $ | 0.47 | |
Diluted | $ | 2.60 | | | $ | 0.18 | | | $ | 5.99 | | | $ | 0.46 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | | | | | | | |
Net earned premiums | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
Net investment income | 99 |
| | 94 |
| | 322 |
| | 291 |
|
Net realized investment gains (losses): | | | | | | | |
Other-than-temporary impairment losses | (20 | ) | | (4 | ) | | (23 | ) | | (32 | ) |
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income | (7 | ) | | 1 |
| | 6 |
| | (6 | ) |
Net impairment loss | (13 | ) | | (5 | ) | | (29 | ) | | (26 | ) |
Other net realized investment gains (losses) | 20 |
| | 3 |
| | 83 |
| | 21 |
|
Net realized investment gains (losses) | 7 |
| | (2 | ) | | 54 |
| | (5 | ) |
Net change in fair value of credit derivatives: | | | | | | | |
Realized gains (losses) and other settlements | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
Net change in fair value of credit derivatives | 58 |
| | 21 |
| | 106 |
| | 24 |
|
Fair value gains (losses) on committed capital securities | (4 | ) | | (23 | ) | | (4 | ) | | (50 | ) |
Fair value gains (losses) on financial guaranty variable interest entities | 3 |
| | (11 | ) | | 25 |
| | 11 |
|
Bargain purchase gain and settlement of pre-existing relationships | — |
| | 259 |
| | 58 |
| | 259 |
|
Other income (loss) | 274 |
| | (3 | ) | | 385 |
| | 49 |
|
Total revenues | 623 |
| | 566 |
| | 1,458 |
| | 1,207 |
|
Expenses | | | | | | | |
Loss and loss adjustment expenses | 223 |
| | (9 | ) | | 354 |
| | 183 |
|
Amortization of deferred acquisition costs | 5 |
| | 4 |
| | 13 |
| | 13 |
|
Interest expense | 24 |
| | 26 |
| | 73 |
| | 77 |
|
Other operating expenses | 58 |
| | 65 |
| | 183 |
| | 188 |
|
Total expenses | 310 |
| | 86 |
| | 623 |
| | 461 |
|
Income (loss) before income taxes | 313 |
| | 480 |
| | 835 |
| | 746 |
|
Provision (benefit) for income taxes | | | | | | | |
Current | (148 | ) | | 18 |
| | (102 | ) | | 80 |
|
Deferred | 253 |
| | (17 | ) | | 259 |
| | (18 | ) |
Total provision (benefit) for income taxes | 105 |
| | 1 |
| | 157 |
| | 62 |
|
Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 1.75 |
| | $ | 3.63 |
| | $ | 5.56 |
| | $ | 5.10 |
|
Diluted | $ | 1.72 |
| | $ | 3.60 |
| | $ | 5.48 |
| | $ | 5.06 |
|
Dividends per share | $ | 0.1425 |
| | $ | 0.13 |
| | $ | 0.4275 |
| | $ | 0.39 |
|
Assured Guaranty Ltd.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income (loss) | $ | 159 | | | $ | 5 | | | $ | 382 | | | $ | 55 | |
Change in net unrealized gains (losses) on: | | | | | | | |
Investments with no credit impairment, net of tax provision (benefit) of $(23), $(39), $(15) and $(139) | (113) | | | (277) | | | (54) | | | (857) | |
Investments with credit impairment, net of tax provision (benefit) of $(2), $1, $(4) and $(18) | (8) | | | 2 | | | (13) | | | (81) | |
Change in net unrealized gains (losses) on investments | (121) | | | (275) | | | (67) | | | (938) | |
Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax | 10 | | | (3) | | | 11 | | | (1) | |
Other, net of tax | 4 | | | (4) | | | 6 | | | (13) | |
Other comprehensive income (loss) | (107) | | | (282) | | | (50) | | | (952) | |
Comprehensive income (loss) | 52 | | | (277) | | | 332 | | | (897) | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 2 | | | (6) | | | 19 | | | 25 | |
Comprehensive income (loss) attributable to Assured Guaranty Ltd. | $ | 50 | | | $ | (271) | | | $ | 313 | | | $ | (922) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated Statements of Comprehensive Income (unaudited)Shareholders’ Equity (Unaudited)
(dollars in millions)millions, except share data)
For the Three Months Ended September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 June 30, 2023 | 58,850,144 | | | | $ | 1 | | | $ | 5,732 | | | $ | (458) | | | $ | 1 | | | $ | 5,276 | | | $ | 179 | | | $ | 5,455 | |
Net income | — | | | | — | | | 157 | | | — | | | — | | | 157 | | | 2 | | | 159 | |
Dividends ($0.28 per share) | — | | | | — | | | (16) | | | — | | | — | | | (16) | | | — | | | (16) | |
Common shares repurchases | (1,065,902) | | | | — | | | (64) | | | — | | | — | | | (64) | | | — | | | (64) | |
Share-based compensation | 35,490 | | | | — | | | 6 | | | — | | | — | | | 6 | | | — | | | 6 | |
Other comprehensive loss | — | | | | — | | | — | | | (107) | | | — | | | (107) | | | — | | | (107) | |
Deconsolidation of investment vehicles | — | | | | — | | | — | | | — | | | — | | | — | | | (132) | | | (132) | |
As of September 30, 2023 | 57,819,732 | | | | $ | 1 | | | $ | 5,815 | | | $ | (565) | | | $ | 1 | | | $ | 5,252 | | | $ | 49 | | | $ | 5,301 | |
For the Three Months Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 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) | |
Common shares repurchases | (1,790,395) | | | | — | | | (97) | | | — | | | — | | | (97) | | | — | | | (97) | |
Share-based compensation | 34,087 | | | | — | | | 9 | | | — | | | — | | | 9 | | | — | | | 9 | |
Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 23 | | | 23 | |
Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (36) | | | (36) | |
Other comprehensive loss | — | | | | — | | | — | | | (282) | | | — | | | (282) | | | — | | | (282) | |
As of September 30, 2022 | 60,719,431 | | | | $ | 1 | | | $ | 5,579 | | | $ | (652) | | | $ | 1 | | | $ | 4,929 | | | $ | 224 | | | $ | 5,153 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
Unrealized holding gains (losses) arising during the period on: | | | | | | | |
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $10, $(14), $63 and $48 | 27 |
| | (33 | ) | | 133 |
| | 146 |
|
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(7), $8, $44 and $(5) | (15 | ) | | 13 |
| | 81 |
| | (10 | ) |
Unrealized holding gains (losses) arising during the period, net of tax | 12 |
| | (20 | ) | | 214 |
| | 136 |
|
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $3, $(1), $29 and $(1) | 4 |
| | 0 |
| | 52 |
| | (1 | ) |
Change in net unrealized gains (losses) on investments | 8 |
| | (20 | ) | | 162 |
| | 137 |
|
Other, net of tax provision | 3 |
| | (5 | ) | | 15 |
| | (16 | ) |
Other comprehensive income (loss) | $ | 11 |
| | $ | (25 | ) | | $ | 177 |
| | $ | 121 |
|
Comprehensive income (loss) | $ | 219 |
| | $ | 454 |
| | $ | 855 |
| | $ | 805 |
|
Assured Guaranty Ltd.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(dollars in millions, except share data)
For the Nine Months Ended September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 December 31, 2022 | 59,013,040 | | | | $ | 1 | | | $ | 5,577 | | | $ | (515) | | | $ | 1 | | | $ | 5,064 | | | $ | 228 | | | $ | 5,292 | |
Net income | — | | | | — | | | 363 | | | — | | | — | | | 363 | | | 19 | | | 382 | |
Dividends ($0.84 per share) | — | | | | — | | | (51) | | | — | | | — | | | (51) | | | — | | | (51) | |
Common shares repurchases | (1,556,213) | | | | — | | | (90) | | | — | | | — | | | (90) | | | — | | | (90) | |
Share-based compensation | 362,905 | | | | — | | | 16 | | | — | | | — | | | 16 | | | — | | | 16 | |
Reclassification to liabilities | — | | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 20 | | | 20 | |
Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (70) | | | (70) | |
Other comprehensive loss | — | | | | — | | | — | | | (50) | | | — | | | (50) | | | — | | | (50) | |
Deconsolidation of investment vehicles | — | | | | — | | | — | | | — | | | — | | | — | | | (132) | | | (132) | |
As of September 30, 2023 | 57,819,732 | | | | $ | 1 | | | $ | 5,815 | | | $ | (565) | | | $ | 1 | | | $ | 5,252 | | | $ | 49 | | | $ | 5,301 | |
For the Nine Months Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 December 31, 2021 | 67,518,424 | | | | $ | 1 | | | $ | 5,990 | | | $ | 300 | | | $ | 1 | | | $ | 6,292 | | | $ | 186 | | | $ | 6,478 | |
Net income | — | | | | — | | | 30 | | | — | | | — | | | 30 | | | 26 | | | 56 | |
Dividends ($0.75 per share) | — | | | | — | | | (49) | | | — | | | — | | | (49) | | | — | | | (49) | |
Common shares repurchases | (7,134,565) | | | | — | | | (403) | | | — | | | — | | | (403) | | | — | | | (403) | |
Share-based compensation | 335,572 | | | | — | | | 11 | | | — | | | — | | | 11 | | | — | | | 11 | |
Contributions | — | | | | — | | | — | | | — | | | — | | | — | | | 63 | | | 63 | |
Distributions | — | | | | — | | | — | | | — | | | — | | | — | | | (51) | | | (51) | |
Other comprehensive loss | — | | | | — | | | — | | | (952) | | | — | | | (952) | | | — | | | (952) | |
As of September 30, 2022 | 60,719,431 | | | | $ | 1 | | | $ | 5,579 | | | $ | (652) | | | $ | 1 | | | $ | 4,929 | | | $ | 224 | | | $ | 5,153 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Condensed Consolidated StatementStatements of Shareholders’ Equity (unaudited)Cash Flows (Unaudited)
(in millions)
For the Nine Months Ended September 30, 2017 | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Net cash flows provided by (used in) operating activities | $ | 258 | | | $ | (1,848) | |
Cash flows from investing activities: | | | |
Fixed-maturity securities, available-for-sale: | | | |
Purchases | (458) | | | (279) | |
Sales | 767 | | | 560 | |
Maturities and paydowns | 528 | | | 585 | |
Short-term investments with original maturities of over three months: | | | |
Purchases | (16) | | | (42) | |
Sales | 4 | | | — | |
Maturities and paydowns | 35 | | | 23 | |
Net sales (purchases) of short-term investments with original maturities of less than three months | (638) | | | 64 | |
Sales of fixed-maturity securities, trading | — | | | 121 | |
Paydowns of financial guaranty variable interest entities’ assets | 88 | | | 74 | |
Purchases of other invested assets | (128) | | | (11) | |
Sales and return of capital of other invested assets | 16 | | | 35 | |
Sale of asset management subsidiaries, net of cash | (14) | | | — | |
Other | (1) | | | (2) | |
Net cash flows provided by (used in) investing activities | 183 | | | 1,128 | |
Cash flows from financing activities: | | | |
Dividends paid | (51) | | | (49) | |
Repurchases of common shares | (90) | | | (400) | |
Net paydowns of financial guaranty variable interest entities’ liabilities | (141) | | | (92) | |
Issuance of long-term debt, net of issuance costs | 345 | | | — | |
Redemption of debt | (330) | | | — | |
Other | (15) | | | (6) | |
Cash flows from consolidated investment vehicles: | | | |
Proceeds from issuance of collateralized loan obligations | — | | | 1,372 | |
Repayment of collateralized loan obligations | (1) | | | (373) | |
Proceeds from issuance of warehouse financing debt | — | | | 882 | |
Repayment of warehouse financing debt | (166) | | | (758) | |
Borrowing (payment) under credit facilities | (4) | | | 46 | |
Contributions from noncontrolling interests to consolidated investment vehicles | — | | | 52 | |
Distributions to noncontrolling interests from consolidated investment vehicles | (80) | | | (19) | |
Net cash flows provided by (used in) financing activities | (533) | | | 655 | |
Effect of foreign exchange rate changes | — | | | (6) | |
Increase (decrease) in cash and cash equivalents and restricted cash | (92) | | | (71) | |
Cash and cash equivalents and restricted cash at beginning of period | 207 | | | 342 | |
Cash and cash equivalents and restricted cash at end of period | $ | 115 | | | $ | 271 | |
(dollars in millions, except share data)continued on next page)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | | Common Stock Par Value | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Deferred Equity Compensation | | Total Shareholders’ Equity |
Balance at December 31, 2016 | 127,988,230 |
| | | $ | 1 |
| | $ | 1,060 |
| | $ | 5,289 |
| | $ | 149 |
| | $ | 5 |
| | $ | 6,504 |
|
Net income | — |
| | | — |
| | — |
| | 678 |
| | — |
| | — |
| | 678 |
|
Dividends ($0.4275 per share) | — |
| | | — |
| | — |
| | (53 | ) | | — |
| | — |
| | (53 | ) |
Common stock repurchases | (10,734,653 | ) | | | 0 |
| | (431 | ) | | — |
| | — |
| | — |
| | (431 | ) |
Share-based compensation and other | 683,665 |
| | | 0 |
| | 8 |
| | — |
| | — |
| | (4 | ) | | 4 |
|
Other comprehensive income | — |
| | | — |
| | — |
| | — |
| | 177 |
| | — |
| | 177 |
|
Other | — |
| | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Balance at September 30, 2017 | 117,937,242 |
| | | $ | 1 |
| | $ | 637 |
| | $ | 5,913 |
| | $ | 326 |
| | $ | 1 |
| | $ | 6,878 |
|
Assured Guaranty Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited) - (Continued)
(in millions)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Supplemental cash flow information | | | |
Income taxes paid (received) | $ | 3 | | | $ | 97 | |
Interest paid on long-term debt | 55 | | | 47 | |
| | | |
Supplemental disclosure of non-cash activities: | | | |
Puerto Rico Plan Consideration (see Note 3) | | | |
Fixed-maturity securities, available-for-sale, received as salvage | $ | 1 | | | $ | 610 | |
Fixed-maturity securities, available-for-sale, ceded to a reinsurer | — | | | 27 | |
Fixed-maturity securities, trading, received as salvage | — | | | 550 | |
Fixed-maturity securities, trading, ceded to a reinsurer | — | | | 6 | |
Debt securities of financial guaranty variable interest entities received as salvage | — | | | 54 | |
Contributions from noncontrolling interests | 20 | | | 32 | |
Distributions to noncontrolling interests | 27 | | | 53 | |
Sale of asset management subsidiaries (see Note 1) | | | |
Assets acquired | 444 | | | — | |
Assets transferred | 241 | | | — | |
Liabilities transferred | 66 | | | — | |
| | | |
| As of |
| September 30, 2023 | | September 30, 2022 |
Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | | | |
Cash | $ | 108 | | | $ | 131 | |
Restricted cash (included in other assets) | — | | | 1 | |
Cash and cash equivalents of consolidated investment vehicles (See Note 8) | 7 | | | 139 | |
Cash and cash equivalents and restricted cash at the end of period | $ | 115 | | | $ | 271 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Assured Guaranty Ltd.
Consolidated Statements of Cash Flows (unaudited)
(in millions)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Net cash flows provided by (used in) operating activities | $ | 354 |
| | $ | (189 | ) |
Investing activities | |
| | |
|
Fixed-maturity securities: | |
| | |
|
Purchases | (1,615 | ) | | (1,028 | ) |
Sales | 1,128 |
| | 877 |
|
Maturities | 689 |
| | 861 |
|
Net sales (purchases) of short-term investments | (240 | ) | | 80 |
|
Net proceeds from paydowns on financial guaranty variable interest entities’ assets | 117 |
| | 590 |
|
Acquisition of MBIA UK, net of cash acquired (see Note 2) | 95 |
| | — |
|
Acquisition of CIFG, net of cash acquired | — |
| | (435 | ) |
Other | 58 |
| | (12 | ) |
Net cash flows provided by (used in) investing activities | 232 |
| | 933 |
|
Financing activities | |
| | |
|
Dividends paid | (53 | ) |
| (52 | ) |
Repurchases of common stock | (431 | ) |
| (190 | ) |
Repurchases of common stock to pay withholding taxes | (13 | ) | | (2 | ) |
Net paydowns of financial guaranty variable interest entities’ liabilities | (124 | ) | | (567 | ) |
Repayment/ extinguishment of long-term debt | (29 | ) | | (2 | ) |
Proceeds from option exercises | 5 |
| | 6 |
|
Net cash flows provided by (used in) financing activities | (645 | ) | | (807 | ) |
Effect of foreign exchange rate changes | 4 |
| | (4 | ) |
Increase (decrease) in cash and restricted cash | (55 | ) | | (67 | ) |
Cash and restricted cash at beginning of period (see Note 10) | 127 |
| | 166 |
|
Cash and restricted cash at end of period (see Note 10) | $ | 72 |
| | $ | 99 |
|
Supplemental cash flow information | |
| | |
|
Cash paid (received) during the period for: | |
| | |
|
Income taxes | $ | 3 |
| | $ | 2 |
|
Interest | $ | 53 |
| | $ | 55 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)
September 30, 2017
1. Business and Basis of Presentation
| |
1. | Business and Basis of Presentation |
Business
Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-based holding company that provides, through its 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. TheAssured Guaranty also participates in the asset management 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 (debt(collectively, debt service), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Australia and Western Europe. The Company also provides other forms ofspecialty insurance that are in lineand reinsurance on transactions with its risk profile and benefit from its underwriting experience.
In the past, the Company sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (CDS). Contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments areprofiles similar to those forof its structured finance exposure`s written in financial guaranty insurance contracts. form.
Asset 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 participates 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 terms of a letter agreement (Letter Agreement), effective July 1, 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 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.
Upon closing of the Sound Point Transaction and the AHP Transaction the Company deconsolidated most of the corresponding AssuredIM entities (which had previously been classified as held-for-sale) and reported an investment in Sound Point that is accounted for under the equity method. In connection with the Sound Point Transaction and AHP Transaction, the Company reevaluated its consolidation conclusion for each consolidated investment vehicle (CIV) and deconsolidated all but three CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table presents the calculation of the gain associated with the Sound Point Transaction and AHP Transaction.
Gain on Sound Point Transaction and AHP Transaction
| | | | | |
| (in millions) |
Fair value of investment in Sound Point | $ | 419 | |
Fair value of other consideration | 25 | |
Total consideration | 444 | |
Less net asset carrying value of transferred AssuredIM subsidiaries (1) | 189 | |
Gain on sale of asset management subsidiaries (2) | $ | 255 | |
____________________
(1) Consists primarily of goodwill and intangible assets of $155 million.
(2) Consists of a $248 million gain on the Sound Point Transaction, and a $7 million gain on the AHP Transaction, which were both reported in the corporate division.
The Company’s credit derivative transactions are governed by International Swapsinterest in Sound Point is reported in other invested assets on the consolidated balance sheet. On the date of acquisition, the Company’s cost basis of its investment in Sound Point is the fair value of the Company’s ownership in Sound Point, and Derivative Association, Inc. (ISDA) documentation.certain other interests in related Sound Point entities (collectively, Sound Point entities). The acquisition date cost basis includes a basis difference, which is the excess of the fair value of the Company’s ownership interest in Sound Point entities of $419 million, over the Company’s proportionate share of the equity of the Sound Point entities. The basis difference must be allocated between identifiable assets and liabilities. The carrying value on the date of acquisition is periodically adjusted for the Company’s share in the comprehensive income or loss of Sound Point entities (on a one-quarter lag), distributions, contributions and the amortization of definite-lived intangible assets. As of the filing of this report, the Company has not entered into any new CDSfinalized the calculation of the basis difference or the allocation of such basis difference. The equity method investment in orderSound Point is subject to sell credit protectiona periodic other-than-temporary-impairment (OTTI) analysis.
The Company recognized expenses of $14 million and $46 million during the three-month period ended September 30, 2023 (third quarter 2023) and the nine-month period ended September 30, 2023 (nine months 2023), respectively, associated with the Sound Point Transaction and AHP Transaction.
Assets and Liabilities Held For Sale
The Company designated certain assets and liabilities supporting the Insurance segment as held for sale in the U.S. sincefirst quarter of 2023 and expects the beginningsale of 2009, when regulatory guidelines were issued that limitedsuch assets to be completed in 2024. A disposal group is measured at the terms under which such protection could be sold.lower of carrying amount or fair value less any costs associated with the transaction. The capitalCompany assessed the disposal group for impairment and margin requirements applicable underdetermined no impairment existed as of September 30, 2023. Upon classification of the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributed todisposal group as held for sale, the Company not entering into such new CDSceased depreciating held for sale fixed assets and amortizing held for sale intangibles. Assets held for sale were $28 million and liabilities held for sale were $2 million as of September 30, 2023 and were reported in the U.S. since 2009. The Company actively pursues opportunities to terminate existing CDS, which terminations have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.“other assets” and “other liabilities,” respectively.
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and, in the. In management’s opinion, of management, reflect all material adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, andincluding its consolidated variable interest entities (VIEs) for, are reflected in the periods presented.presented and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These unaudited interim condensed consolidated financial statements are as of September 30, 20172023 and cover third quarter 2023, the three-month period ended September 30, 2017 (Third Quarter 2017)2022 (third quarter 2022), the three-month period ended September 30, 2016 (Third Quarter 2016), the nine-month period ended September 30, 2017 (Nine Months 2017)nine months 2023 and the nine-month period ended September 30, 2016 (Nine Months 2016)2022 (nine months 2022). 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements, except Note 18, Subsidiary Information, which reflects transfers of businesses between entities within the consolidated group that occurred inbut does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current reporting period consistently for all prior periods presented.period’s presentation.
The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated VIEs.financial guaranty VIEs (FG VIEs) and CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. Certain prior year balances have been reclassified to conform to the current year's presentation.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in AGL’sthe Annual Report on Form 10-K for the year ended December 31, 2016,2022 filed with the U.S. Securities and Exchange Commission (the SEC)(SEC).
The Company'sCompany’s principal insurance company subsidiaries are:
•Assured Guaranty Municipal Corp. (AGM), domiciled in New York;
Municipal Assurance Corp. (MAC), domiciled in New York;
•Assured Guaranty Corp. (AGC), domiciled in Maryland;
•Assured Guaranty (Europe) plc (AGE)UK Limited (AGUK), organized in the U.K.; and
•Assured Guaranty (Europe) SA (AGE), organized in France;
•Assured Guaranty Re Ltd. (AG Re), domiciled in Bermuda; and
•Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda.
The Company’s organizational structure includes variousU.S. Insurance Subsidiaries jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by Sound Point, AHP, and, prior to July 1, 2023, AssuredIM (Sound Point and AHP funds, some of which were formerly known as AssuredIM funds).
AGL directly or indirectly owns several holding companies, two of which - Assured Guaranty US Holdings Inc. (AGUS) and AGMHAssured Guaranty Municipal Holdings Inc. (AGMH and, together with AGUS, the U.S. Holding Companies) - have public debt outstanding. Please referSee Note 11, Long-Term Debt.
Recent Accounting Standards Adopted
Targeted Improvements to Note 15, Long-Term Debt and Credit Facilities and Note 18, Subsidiary Information.the Accounting for Long-Duration Contracts
The Company is actively working to combine the operations of its European subsidiaries, AGE, Assured Guaranty (UK) plc (AGUK), Assured Guaranty (London) plc (AGLN) and CIFG Europe S.A. (CIFGE), through a multi-step transaction, which ultimately is expected to result in AGUK, AGLN and CIFGE transferring their insurance portfolios to and merging with and into AGE. As a preparatory step for the merger, AGE, AGUK and AGLN were re-registered as public limited companies on June 1, 2017. As a further preparatory step, AGUK, AGLN and CIFGE were sold by AGC to AGM and then contributed by AGM to AGE on June 26, 2017. While the Company and its European subsidiaries have received certain regulatory approvals, the combination is subject to further regulatory and court approvals. As a result, the Company cannot predict whether, or when, such combination will be completed.
Adopted Accounting Standards
Statement of Cash Flows
In November 2016,August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows2018-12, Financial Services - Insurance (Topic 230)944): Restricted Cash (a consensus of the Emerging Issues Task Force), which addresses the presentation of changes in restricted cash and restricted cash equivalents in the statement of cash flows with the objective of reducing the existing diversity in practice. Under the ASU, entities are required to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the ASU requires a reconciliation be presented either on the face of the statement of cash flows or in the notesTargeted Improvements to the financial statements showing the totals in the statementAccounting for Long-Duration Contracts. The Company’s adoption of cash flows to the related captions in the balance sheet. Thethis ASU was adopted on January 1, 2017 and was applied retrospectively. The required reconciliation is shown in Note 10, Investments and Cash.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU was adopted on January 1, 2017 and2023 did not have anany effect on the Company’s consolidated statementsfinancial statements.
2. Segment Information
The Company reports its results of cash flows foroperations in two segments: Insurance and Asset Management, separate from its Corporate division and the periods presented.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.
Share-Based Payments
In March 2016,The Insurance segment primarily consists of: (i) the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - ImprovementsCompany’s insurance subsidiaries; and (ii) AGAS. Prior to Employee Share-Based Payment,July 1, 2023, the Asset Management segment consisted of AssuredIM, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements,provided asset management services to third-party investors as well as classificationto the U.S. Insurance Subsidiaries and AGAS. Beginning in July 2023, the Company participates in the statement of cash flows. The new guidance requires all income tax effects of awards to be recognizedasset management business through its investment in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it previously could for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeituresSound Point as they occur. The ASU was adopted January 1, 2017 with no material effect on the consolidated financial statements.
Future Application of Accounting Standards
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which removes the current prohibition against immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. Under the ASU, the selling (transferring) entity is required to recognize a current income tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The ASU’s amendments are to be applied on a modified retrospective basis recognizing the effectsdescribed in retained earnings as of the beginning of the year of adoption. The Company does not expect this ASU to have a material effect on its consolidated financial statements.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU are intended to make targeted improvements to GAAP by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
Under the ASU, certain equity securities will need to be accounted for at fair value with changes in fair value recognized through net income instead of other comprehensive income (OCI). The Company does not expect that the amendment related to certain equity securities will have a material effect on its consolidated financial statements.
Another amendment pertains to liabilities that an entity has elected to measure at fair value in accordance with the fair value option for financial instruments. For these liabilities, the portion of fair value change related to instrument specific credit risk will be separately presented in OCI as opposed to the income statement. The Company elected the fair value option to account for its consolidated FG VIEs. The Company is evaluating the effect that the ASU will have on its consolidated FG VIEs.
The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year in which the guidance is adopted.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Topic 310-20) - Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This ASU has no effect on the accounting for purchased callable debt securities held at a discount. ASU 2017-08 is to be applied using a modified retrospective approach through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this ASU to have a material effect on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to present right-of-use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect that this ASU will have on its consolidated financial statements.
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will use forward-looking information to better inform their credit loss estimates as a result of the ASU. While many of the loss estimation techniques applied today will still be permitted, the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization’s portfolio.
In addition, the ASU amends the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration. The ASU also eliminates the concept of “other than temporary” from the impairment model for certain available-for-sale securities. Accordingly, the ASU states that an entity must use an allowance approach, must limit the allowance to an amount by which the security’s fair value is less than its amortized cost basis, may not consider the length of time fair value has been less than amortized cost, and may not consider recoveries in fair value after the balance sheet date when assessing whether a credit loss exists. For purchased financial assets with credit deterioration, the ASU requires an entity’s method for measuring credit losses to be consistent with its method for measuring expected losses for originated and purchased non-credit-deteriorated assets.
The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For debt securities classified as available-for-sale, entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted. The changes to the impairment model for available-for-sale securities and changes to purchased financial assets with credit deterioration are to be applied prospectively. The Company is evaluating the effect that this ASU will have on its consolidated financial statements.
MBIA UK Insurance Limited
On January 10, 2017 (the MBIA UK Acquisition Date), AGC completed its acquisition of MBIA UK Insurance Limited (MBIA UK), the U.K. operating subsidiary of MBIA Insurance Corporation (MBIA) (the MBIA UK Acquisition). As consideration for the outstanding shares of MBIA UK plus $23 million in cash, AGC exchanged all its holdings of notes issued in the Zohar II 2005-1 transaction (Zohar II Notes), which were insured by MBIA. AGC’s Zohar II Notes had total outstanding principal of approximately $347 million and fair value of $334 million as of the MBIA UK Acquisition Date. The MBIA UK Acquisition added approximately $12 billion of net par insured on January 10, 2017.
MBIA UK was renamed Assured Guaranty (London) Ltd. and on June 1, 2017, was re-registered as a public limited company (plc). Further, AGLN was sold by AGC to AGM and then contributed by AGM to AGE on June 26, 2017. Please refer to Note 1, Business and Basis of Presentation for additional informationPresentation. Beginning in third quarter 2023, the Asset Management segment primarily includes the results of the Company’s equity method investment in Sound Point entities, which are reported on a one-quarter lag.
The Corporate division primarily consists of interest expense on the Company's European subsidiaries combination.debt of the U.S. Holding Companies and any losses on extinguishment or repurchases of their debt, as well as any gains and losses and other operating expenses attributed to the corporate activities of AGL and the U.S. Holding Companies, including the gain associated with the Sound Point Transaction and the AHP Transaction.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 segment 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 Sound Point and AHP funds in “equity in earnings (losses) of investees.” Under GAAP, (i) FG VIEs are consolidated by the U.S. Insurance Subsidiaries and the premiums and losses/recoveries associated with the financial guaranty policies associated with the FG VIEs’ debt are eliminated (the reconciliation tables below present the FG VIEs and related eliminations in “other”) and (ii) CIVs are consolidated by either AGUS or AGAS (in the reconciliation tables below, the CIVs and related eliminations of the Insurance segment’s “equity in earnings (losses) of investees” associated with AGAS’ ownership interest in CIVs are presented in “other”). Until July 1, 2023, under GAAP, reimbursable fund expenses were shown as a component of asset management fees and included in total revenues, whereas in the Asset Management segment in the tables below these expenses were netted in “segment expenses.”
The MBIA UK Acquisition was accountedCompany analyzes the operating performance of each segment using “segment adjusted operating income (loss).” Results for undereach 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,” adjusted for the acquisition methodfollowing items, which primarily affect the Insurance segment and corporate division:
•Elimination of accountingrealized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading.
•Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which requires thatis the assets and liabilities acquired be recorded atamount of unrealized fair value. The Company exercised significant judgment to determinevalue gains (losses) in excess of the fairpresent value of the assets it acquiredexpected estimated economic credit losses, and liabilities it assumed in the MBIA UK Acquisition. The most significantnon-economic payments.
•Elimination of these determinations related to the valuation of MBIA UK's financial guaranty insurance contracts. On an aggregate basis, MBIA UK's contractual premiums for financial guaranty insurance contracts were less than the premiums a market participant of similar credit quality would demand to acquire those contractsfair value gains (losses) on the MBIA UK Acquisition Date, particularly for below-investment-grade (BIG) transactions, resultingCompany’s committed capital securities (CCS) that are recognized in a significant amountnet income.
•Elimination of the purchase price being allocated to these contracts. For informationforeign exchange gains (losses) on the methodology used to measure the fair valueremeasurement of assets acquired and liabilities assumed in the MBIA UK Acquisition, please refer to Note 7, Fair Value Measurement.
The fair value of the Company's stand-ready obligation on the MBIA UK Acquisition Date is recorded in unearnednet premium reserve. After the MBIA UK Acquisition Date, loss reservesreceivables and loss and loss adjustment expensesexpense (LAE) will be recorded when the expected losses for each contract exceeds the remaining unearned premium reserve,reserves that are recognized in accordance with thenet income.
Company's accounting policy described in the Annual Report on Form 10-K. The expected losses acquired by the Company as part•Elimination of the MBIA UK Acquisitiontax effects related to the above adjustments, which are includeddetermined by applying the statutory tax rate in Note 5, Expected Losses to be Paid.each of the jurisdictions that generate these adjustments.
The excess ofCompany does not report assets by reportable segment as the fair value of net assets acquired over the consideration transferred was recorded as a bargain purchase gain in "bargain purchase gainCODM does not assess performance and settlement of pre-existing relationships" in net income. In addition, the Company and MBIA UK had pre-existing reinsurance relationships, which were also effectively settled at fair valueallocate resources based on the MBIA UK Acquisition Date. The gain on settlement of these pre-existing reinsurance relationships represents the net difference between the historical assumed balances that were recorded by the Company and the fair value of ceded balances acquired from MBIA UK. The Company believes the bargain purchase gain resulted from MBIA's strategy to address its insurance obligations with regards to the Zohar II Notes, the issuers of which MBIA did not expect would have sufficient funds to repay such notes in full on the scheduled maturity date of such notes in January 2017.assets.
The following table showspresents information for the net effectCompany’s operating segments. Intersegment revenues include transactions between and among the segments, the corporate division and other.
Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter |
| | 2023 | | 2022 |
| | Insurance | | Asset Management | | Insurance | | Asset Management |
| | (in millions) |
Third-party revenues | | $ | 206 | | | $ | — | | | $ | 145 | | | $ | 13 | |
Intersegment revenues | | 2 | | | — | | | 2 | | | 8 | |
Segment revenues | | 208 | | | — | | | 147 | | | 21 | |
Segment expenses | | 165 | | | — | | | (16) | | | 24 | |
Segment equity in earnings (losses) of investees | | 25 | | | — | | | (11) | | | — | |
Less: Segment provision (benefit) for income taxes | | 9 | | | — | | | (7) | | | — | |
Segment adjusted operating income (loss) | | $ | 59 | | | $ | — | | | $ | 159 | | | $ | (3) | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months |
| | 2023 | | 2022 |
| | Insurance | | Asset Management | | Insurance | | Asset Management |
| | (in millions) |
Third-party revenues | | $ | 615 | | | $ | 44 | | | $ | 558 | | | $ | 59 | |
Intersegment revenues | | 7 | | | 27 | | | 6 | | | 29 | |
Segment revenues | | 622 | | | 71 | | | 564 | | | 88 | |
Segment expenses | | 354 | | | 75 | | | 147 | | | 91 | |
Segment equity in earnings (losses) of investees | | 60 | | | — | | | (46) | | | — | |
Less: Segment provision (benefit) for income taxes | | 46 | | | (1) | | | 24 | | | — | |
Segment adjusted operating income (loss) | | $ | 282 | | | $ | (3) | | | $ | 347 | | | $ | (3) | |
The tables below present a reconciliation of significant components of segment information to the MBIA UK Acquisition, including the effectscomparable consolidated amounts.
Reconciliation of the settlement of pre-existing relationships.Segment Information to Consolidated Information
|
| | | | | | | | | | | |
| Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships | | Net effect of Settlement of Pre-existing Relationships | | Net Effect of MBIA UK Acquisition |
| (in millions) |
Purchase price (1) | $ | 334 |
| | $ | — |
| | $ | 334 |
|
| | | | | |
Identifiable assets acquired: | | | | | |
Investments | 459 |
| | — |
| | 459 |
|
Cash | 72 |
| | — |
| | 72 |
|
Premiums receivable, net of commissions payable | 274 |
| | (4 | ) | | 270 |
|
Other assets | 16 |
| | (6 | ) | | 10 |
|
Total assets | 821 |
| | (10 | ) | | 811 |
|
| |
| | | | |
Liabilities assumed: | | | | | |
Unearned premium reserves | 389 |
| | (6 | ) | | 383 |
|
Current tax payable | 25 |
| | — |
| | 25 |
|
Other liabilities | 4 |
| | (5 | ) | | (1 | ) |
Total liabilities | 418 |
| | (11 | ) | | 407 |
|
Net assets of MBIA UK | 403 |
| | 1 |
| | 404 |
|
Cash acquired from MBIA Holdings | 23 |
| | — |
| | 23 |
|
Deferred tax liability | (36 | ) | | — |
| | (36 | ) |
Net asset effect of MBIA UK Acquisition | 390 |
| | 1 |
| | 391 |
|
Bargain purchase gain and settlement of pre-existing relationships resulting from MBIA UK Acquisition, after-tax | 56 |
| | 1 |
| | 57 |
|
Deferred tax | — |
| | 1 |
| | 1 |
|
Bargain purchase gain and settlement of pre-existing relationships resulting from MBIA UK Acquisition, pre-tax | $ | 56 |
| | $ | 2 |
| | $ | 58 |
|
_____________________ | |
(1) | The purchase price of $334 million was allocated as follows: (1) $329 million for the purchase of net assets of $385 million, and (2) the settlement of pre-existing relationships between MBIA UK and Assured Guaranty at a fair value of $5 million. |
Revenue and net income related to MBIA UK from the MBIA UK Acquisition Date throughThree Months Ended September 30, 2017 included in the consolidated statement2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | $ | 208 | | | $ | 165 | | | $ | 25 | | | $ | 9 | | | $ | — | | | $ | 59 | |
Asset Management | — | | | — | | | — | | | — | | | — | | | — | |
Total segments | 208 | | | 165 | | | 25 | | | 9 | | | — | | | 59 | |
Corporate division | 259 | | | 57 | | | — | | | 47 | | | — | | | 155 | |
Other | (4) | | | (3) | | | (7) | | | (2) | | | 2 | | | (8) | |
Subtotal | 463 | | | 219 | | | 18 | | | 54 | | | 2 | | | 206 | |
Reconciling items: | | | | | | | | | | | |
Realized gains (losses) on investments | (9) | | | — | | | — | | | — | | | — | | | (9) | |
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 6 | | | — | | | — | | | — | | | — | | | 6 | |
Fair value gains (losses) on CCS | (20) | | | — | | | — | | | — | | | — | | | (20) | |
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (37) | | | — | | | — | | | — | | | — | | | (37) | |
Tax effect | — | | | — | | | — | | | (11) | | | — | | | 11 | |
Total consolidated | $ | 403 | | | $ | 219 | | | $ | 18 | | | $ | 43 | | | $ | 2 | | | $ | 157 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of pre-existing relationships, quarterly activity and realized gain on the dispositionSegment Information to Consolidated Information
Three Months Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| (in millions) |
Segments: | | | | | | | | | | | |
Insurance | $ | 147 | | | $ | (16) | | | $ | (11) | | | $ | (7) | | | $ | — | | | $ | 159 | |
Asset Management | 21 | | | 24 | | | — | | | — | | | — | | | (3) | |
Total segments | 168 | | | 8 | | | (11) | | | (7) | | | — | | | 156 | |
Corporate division | 1 | | | 34 | | | — | | | (3) | | | — | | | (30) | |
Other | 13 | | | 2 | | | (9) | | | 1 | | | (6) | | | 7 | |
Subtotal | 182 | | | 44 | | | (20) | | | (9) | | | (6) | | | 133 | |
Reconciling items: | | | | | | | | | | | |
Realized gains (losses) on investments | (14) | | | — | | | — | | | — | | | — | | | (14) | |
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (50) | | | (1) | | | — | | | — | | | — | | | (49) | |
Fair value gains (losses) on CCS | 1 | | | — | | | — | | | — | | | — | | | 1 | |
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (78) | | | — | | | — | | | — | | | — | | | (78) | |
Tax effect | — | | | — | | | — | | | (18) | | | — | | | 18 | |
Total consolidated | $ | 41 | | | $ | 43 | | | $ | (20) | | | $ | (27) | | | $ | (6) | | | $ | 11 | |
Reconciliation of AGC's Zohar II Notes. For Segment Information to Consolidated Information
Nine Months 2017, the Company recognized transaction expenses related to the MBIA UK AcquisitionEnded September 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 | $ | 622 | | | $ | 354 | | | $ | 60 | | | $ | 46 | | | $ | — | | | $ | 282 | |
Asset Management | 71 | | | 75 | | | — | | | (1) | | | — | | | (3) | |
Total segments | 693 | | | 429 | | | 60 | | | 45 | | | — | | | 279 | |
Corporate division | 263 | | | 165 | | | — | | | 37 | | | — | | | 61 | |
Other | 28 | | | 12 | | | (35) | | | (8) | | | 19 | | | (30) | |
Subtotal | 984 | | | 606 | | | 25 | | | 74 | | | 19 | | | 310 | |
Reconciling items: | | | | | | | | | | | |
Realized gains (losses) on investments | (20) | | | — | | | — | | | — | | | — | | | (20) | |
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 108 | | | (1) | | | — | | | — | | | — | | | 109 | |
Fair value gains (losses) on CCS | (35) | | | — | | | — | | | — | | | — | | | (35) | |
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 9 | | | — | | | — | | | — | | | — | | | 9 | |
Tax effect | — | | | — | | | — | | | 10 | | | — | | | (10) | |
Total consolidated | $ | 1,046 | | | $ | 605 | | | $ | 25 | | | $ | 84 | | | $ | 19 | | | $ | 363 | |
Unaudited Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and MBIA UK as if the acquisition had been completed on January 1, 2016, as required under GAAP. The pro forma accounts include the estimated historical resultsLtd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of the Company and MBIA UK and pro forma adjustments primarily comprising the earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships, the realized gain on the disposition of the Zohar II Notes and MBIA UK acquisition related expenses, all net of tax at the applicable statutory rate.Segment Information to Consolidated Information
The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2016, nor is it indicative of the results of operations in future periods. The Company did not include any pro forma combined financial information for 2017 as substantially all of MBIA UK's results of operations for 2017 are included in Nine Months 2017 consolidated statements of operations.Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Equity in Earnings (Losses) of Investees | | Less: | | Net Income (Loss) Attributable to AGL |
| Revenues | | Expenses | | | Provision (Benefit) for Income Taxes | | Noncontrolling Interests | |
| (in millions) |
Segments: | | | | | | | | | | | |
Insurance | $ | 564 | | | $ | 147 | | | $ | (46) | | | $ | 24 | | | $ | — | | | $ | 347 | |
Asset Management | 88 | | | 91 | | | — | | | — | | | — | | | (3) | |
Total segments | 652 | | | 238 | | | (46) | | | 24 | | | — | | | 344 | |
Corporate division | 3 | | | 104 | | | — | | | (3) | | | — | | | (98) | |
Other | 34 | | | 14 | | | 15 | | | 3 | | | 25 | | | 7 | |
Subtotal | 689 | | | 356 | | | (31) | | | 24 | | | 25 | | | 253 | |
Reconciling items: | | | | | | | | | | | |
Realized gains (losses) on investments | (39) | | | — | | | — | | | — | | | — | | | (39) | |
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | (51) | | | (5) | | | — | | | — | | | — | | | (46) | |
Fair value gains (losses) on CCS | 12 | | | — | | | — | | | — | | | — | | | 12 | |
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (180) | | | — | | | — | | | — | | | — | | | (180) | |
Tax effect | — | | | — | | | — | | | (30) | | | — | | | 30 | |
Total consolidated | $ | 431 | | | $ | 351 | | | $ | (31) | | | $ | (6) | | | $ | 25 | | | $ | 30 | |
Unaudited Pro Forma Results of Operations
|
| | | | |
| | Nine Months 2016 |
| | (in millions, except per share amounts) |
Pro forma revenues | | $ | 1,358 |
|
Pro forma net income | | 796 |
|
Pro forma earnings per share (EPS): | | |
Basic | | 5.93 |
|
Diluted | | 5.89 |
|
CIFG Holding Inc.
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFG Holding Inc. (together with its subsidiaries, CIFGH), the parent of financial guaranty insurer CIFG Assurance North America, Inc. (CIFGNA) (the CIFG Acquisition), for $450.6 million in cash. AGUS previously owned 1.6% of the outstanding shares of CIFGH, for which it received $7.1 million in consideration from AGC, resulting in a net consolidated purchase price of $443 million. AGC merged CIFGNA with and into AGC, with AGC as the surviving company, on July 5, 2016. The CIFG Acquisition added $4.2 billion of net par insured on July 1, 2016.
Please refer to Note 2, Acquisitions, in Part II, Item 8. “Financial Statements and Supplementary Data” of AGL’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on the acquisition of CIFG Holding Inc., including the purchase price and the allocation of the purchase price to net assets acquired and the resulting bargain purchase gain and the loss on settlement of pre-existing relationships.
3. RatingsOutstanding Exposure
The Company sells credit protection primarily in financial strength ratings (or similar ratings)guaranty insurance form. The Company may also sell credit protection by issuing policies that guarantee 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 insurance companies, along with the date of the most recent rating action (or confirmation) by the rating agency,obligation to make loss payments are shown in the table below. Ratings are subjectsimilar 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 ofthose for 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.
|
| | | | | | | |
| S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC | | Kroll Bond Rating
Agency
| | Moody’s Investors Service, Inc. | | A.M. Best Company,
Inc.
|
AGM | AA (stable) (6/26/17) | | AA+ (stable) (12/14/16) | | A2 (stable) (8/8/16) | | — |
AGC | AA (stable) (6/26/17) | | AA (stable) (9/20/16) | | (1) | | — |
MAC | AA (stable) (6/26/17) | | AA+ (stable) (7/14/17) | | — | | — |
AG Re | AA (stable) (6/26/17) | | — | | — | | — |
AGRO | AA (stable) (6/26/17) | | — | | — | | A+ (stable) (6/15/17) |
AGE | AA (stable) (6/26/17) | | — | | A2 (stable) (8/8/16) | | — |
AGUK | AA (stable) (6/26/17) | | — | | (1) | | — |
AGLN | BB (positive) (1/12/17) | | — | | (2) | | — |
CIFGE | — | | — | | — | | — |
____________________
| |
(1) | AGC requested that Moody’s Investors Service, Inc. (Moody's) withdraw its financial strength ratings of AGC and AGUK in January 2017, but Moody's denied that request. Moody’s continues to rate AGC A3 (stable) and AGUK A3; Moody's put AGUK on review for upgrade on June 27, 2017, following its transfer to AGM. |
| |
(2) | Assured Guaranty did not request that Moody's rate AGLN. Moody's continues to rate AGLN, and upgraded its rating to Baa2 (stable) on January 13, 2017, following its acquisition by AGC, and then to Baa1 on review for further upgrade on June 27, 2017, following its transfer to AGM. |
There can be no assurance that any of the rating agencies will not take negative action on their financial strength ratings of AGL's insurance subsidiaries in the future.
For a discussion of the effects of rating actions on the Company, please refer to Note 6, Contracts Accounted for as Insurance, and Note 13, Reinsurance and Other Monoline Exposures.
The Company’s financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts.
The Company seeks to limit its exposure to losses by underwriting obligations that it views asto be investment grade at inception, although on occasion it may underwrite new issuances that it views to be below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled credits,exposures. The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies or providing reinsurance on a portfolio of insurance; in such instances, it evaluates the risk characteristics of the target portfolio, which may underwrite new issuances that it viewsinclude some BIG exposures, as BIG.a whole in the context of the proposed transaction. The Company diversifies its insured portfolio across asset classessector and geography and, in the structured finance portfolio, generally requires rigorous subordination or collateralization requirements.collateral to protect it from loss. Reinsurance may be used in order to reduce net exposure to certain insured transactions.
Public finance obligations insured by the Company primarily consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health carehealthcare 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. Some of these VIEs are consolidated as described in Note 9, Consolidated8, Financial Guaranty Variable Interest Entities.Entities and
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 business that is consistent with its risk profile and benefits from its underwriting experience and other types of financial 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 forof each exposure. BIG exposures include all exposures with internal credit ratings below BBB-.
The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective ofreflect an approach similar to that employed by the rating agencies, except that the Company'sCompany’s internal credit ratings focus on future performance rather than lifetime performance.
The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as being the higher of AA or their current internal rating. Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect its internal ratings.
The Company monitors its insured portfolio and refreshes its internal credit ratings on individual creditsexposures in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’sexposure’s credit quality, loss potential, volatility and sector. Ratings on creditsexposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’squarter, although the Company may also review a rating in response to developments impacting a credit when a ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such informationreview is not available, in which case,scheduled. For assumed exposures, the Company may use the ceding company’s credit ratings of the transactions are used.where it is impractical for it to assign its own rating.
CreditsExposures identified as BIG are subjected to further review to determine the probability of a loss. Please refer toSee Note 5,4, Expected Loss to be Paid for additional information.(Recovered). Surveillance personnel then assign each BIG transaction to one of the appropriatethree BIG surveillance categorycategories described below based upon whether a future loss is expected and whether a claim has been paid. The Company uses the pre-tax book yield of the relevant subsidiary’s investment portfolio to calculate the present value of projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG surveillance category to a transaction. For surveillancefinancial statement measurement purposes, the Company calculates present value using a discount rate of 4% or 5% depending on the insurance subsidiary. (Risk-freeuses risk-free rates, which are used for calculatingdetermined each quarter, to calculate the expected loss for financial statement measurement purposes.)loss.
More extensive monitoring and intervention isare employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. TheFor purposes of determining the appropriate surveillance category, the Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will in the future pay more claims on that transaction in the future than itthat will havenot be fully reimbursed. The three BIG surveillance categories are:
•BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
•BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims, which are claims that the Company expects to be reimbursed within one year) have yet been paid.
•BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.
Components of OutstandingFinancial Guaranty Exposure
Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The Company classifies those portionsmeasures its financial guaranty exposure in terms of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.(i) gross and net par outstanding and (ii) gross and net debt service.
The Company purchasestypically guarantees the payment of debt service when due. Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure. Gross par outstanding generally represents the principal amount of the insured obligation at a point in time. Net par outstanding equals gross par outstanding net of any reinsurance. The Company includes in its par outstanding calculation the impact of any
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date. Non-U.S. dollar 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 hashad expected losses to be paid, in order to
mitigate the economic effect of insured losses (loss mitigation securities)(Loss Mitigation Securities). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated)Loss Mitigation Securities from par and debt service outstanding which amounts are includedand instead reports Loss Mitigation Securities in the investment portfolio, because itportfolio. The Company manages such securities as investments and not insurance exposure. As of September 30, 20172023 and December 31, 2016,2022, the Company excluded $2.0net par outstanding of $1.2 billion and $2.1$1.3 billion, respectively, primarily attributable to Loss Mitigation Securities.
Gross debt service outstanding represents the sum of all estimated future debt service payments on the insured obligations, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net par relatedof 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 loss mitigationcontractual maturity; and
•for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (which(RMBS)), as the total estimated expected future debt service due on insured obligations through their respective expected terms, which includes the Company’s expectations as to whether the obligations may be called and, in the case of obligations where principal payments are mostly BIG),due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity.
The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates and assumptions for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other loss mitigation strategies. The following table presentsassumptions based on the grosscharacteristics of each insured obligation. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and netother remedies available to it under its financial guaranty contract.
Actual debt service for financial guaranty contracts.may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio
Debt Service and Par Outstanding
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| Gross | | Net | | Gross | | Net |
| (in millions) |
Debt Service | | | | | | | |
Public finance | $ | 372,908 | | | $ | 372,711 | | | $ | 359,899 | | | $ | 359,703 | |
Structured finance | 11,290 | | | 11,265 | | | 10,273 | | | 10,248 | |
Total financial guaranty | $ | 384,198 | | | $ | 383,976 | | | $ | 370,172 | | | $ | 369,951 | |
| | | | | | | |
Par Outstanding | | | | | | | |
Public finance | $ | 231,871 | | | $ | 231,721 | | | $ | 224,254 | | | $ | 224,099 | |
Structured finance | 10,138 | | | 10,112 | | | 9,184 | | | 9,159 | |
Total financial guaranty | $ | 242,009 | | | $ | 241,833 | | | $ | 233,438 | | | $ | 233,258 | |
|
| | | | | | | | | | | | | | | |
| Gross Debt Service Outstanding | | Net Debt Service Outstanding |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
| (in millions) |
Public finance | $ | 407,539 |
| | $ | 425,849 |
| | $ | 399,347 |
| | $ | 409,447 |
|
Structured finance | 17,464 |
| | 29,151 |
| | 17,377 |
| | 28,088 |
|
Total financial guaranty | $ | 425,003 |
| | $ | 455,000 |
| | $ | 416,724 |
| | $ | 437,535 |
|
In addition to amounts shown in the tablestable above, the Company had outstanding commitments to provide guaranties of $43 million$1.5 billion of public finance direct gross par and $1.3 billion of structured finance direct gross par as of the date of this filing. TheSeptember 30, 2023. These commitments are contingent on the satisfaction of all conditions set forth in themthe guaranties and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.
Financial Guaranty Portfolio by Internal Rating
As of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 212 | | | 0.1 | % | | $ | 2,004 | | | 4.4 | % | | $ | 860 | | | 9.6 | % | | $ | 457 | | | 40.2 | % | | $ | 3,533 | | | 1.5 | % |
AA | | 16,994 | | | 9.1 | | | 3,298 | | | 7.2 | | | 4,545 | | | 50.7 | | | 12 | | | 1.0 | | | 24,849 | | | 10.3 | |
A | | 101,243 | | | 54.5 | | | 10,545 | | | 23.1 | | | 1,932 | | | 21.5 | | | 568 | | | 50.0 | | | 114,288 | | | 47.2 | |
BBB | | 64,220 | | | 34.5 | | | 29,083 | | | 63.5 | | | 586 | | | 6.5 | | | 100 | | | 8.8 | | | 93,989 | | | 38.9 | |
BIG | | 3,304 | | | 1.8 | | | 818 | | | 1.8 | | | 1,052 | | | 11.7 | | | — | | | — | | | 5,174 | | | 2.1 | |
Total net par outstanding | | $ | 185,973 | | | 100.0 | % | | $ | 45,748 | | | 100.0 | % | | $ | 8,975 | | | 100.0 | % | | $ | 1,137 | | | 100.0 | % | | $ | 241,833 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Public Finance U.S. | | Public Finance Non-U.S. | | Structured Finance U.S | | Structured Finance Non-U.S | | Total |
Rating Category | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % |
| | (dollars in millions) |
AAA | | $ | 915 |
| | 0.4 | % | | $ | 2,523 |
| | 5.9 | % | | $ | 2,333 |
| | 17.8 | % | | $ | 419 |
| | 25.0 | % | | $ | 6,190 |
| | 2.2 | % |
AA | | 33,614 |
| | 15.4 |
| | 301 |
| | 0.7 |
| | 4,853 |
| | 36.9 |
| | 76 |
| | 4.5 |
| | 38,844 |
| | 14.1 |
|
A | | 124,332 |
| | 57.0 |
| | 13,657 |
| | 32.0 |
| | 1,778 |
| | 13.5 |
| | 268 |
| | 15.9 |
| | 140,035 |
| | 50.8 |
|
BBB | | 52,021 |
| | 23.8 |
| | 23,965 |
| | 56.1 |
| | 724 |
| | 5.5 |
| | 762 |
| | 45.3 |
| | 77,472 |
| | 28.1 |
|
BIG | | 7,334 |
| | 3.4 |
| | 2,281 |
| | 5.3 |
| | 3,454 |
| | 26.3 |
| | 157 |
| | 9.3 |
| | 13,226 |
| | 4.8 |
|
Total net par outstanding (1) | | $ | 218,216 |
| | 100.0 | % |
| $ | 42,727 |
|
| 100.0 | % |
| $ | 13,142 |
|
| 100.0 | % |
| $ | 1,682 |
|
| 100.0 | % |
| $ | 275,767 |
|
| 100.0 | % |
_____________________
| |
(1) | The September 30, 2017 amounts include $13.0 billion of net par from the MBIA UK Acquisition. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for the effect of commutations on net par outstanding. |
Financial Guaranty Portfolio by Internal Rating
As of December 31, 20162022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Public Finance U.S. | | Public Finance Non-U.S. | | Structured Finance U.S | | Structured Finance Non-U.S | | Total |
Rating Category | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % |
| | (dollars in millions) |
AAA | | $ | 2,066 |
| | 0.8 | % | | $ | 2,221 |
| | 8.4 | % | | $ | 9,757 |
| | 44.2 | % | | $ | 1,447 |
| | 47.0 | % | | $ | 15,491 |
| | 5.2 | % |
AA | | 46,420 |
| | 19.0 |
| | 170 |
| | 0.6 |
| | 5,773 |
| | 26.2 |
| | 127 |
| | 4.1 |
| | 52,490 |
| | 17.7 |
|
A | | 133,829 |
| | 54.7 |
| | 6,270 |
| | 23.8 |
| | 1,589 |
| | 7.2 |
| | 456 |
| | 14.8 |
| | 142,144 |
| | 48.0 |
|
BBB | | 55,103 |
| | 22.5 |
| | 16,378 |
| | 62.1 |
| | 879 |
| | 4.0 |
| | 759 |
| | 24.6 |
| | 73,119 |
| | 24.7 |
|
BIG | | 7,380 |
| | 3.0 |
| | 1,342 |
| | 5.1 |
| | 4,059 |
| | 18.4 |
| | 293 |
| | 9.5 |
| | 13,074 |
| | 4.4 |
|
Total net par outstanding | | $ | 244,798 |
| | 100.0 | % | | $ | 26,381 |
| | 100.0 | % | | $ | 22,057 |
| | 100.0 | % | | $ | 3,082 |
| | 100.0 | % | | $ | 296,318 |
| | 100.0 | % |
Components of BIGFinancial Guaranty Portfolio
Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BIG Net Par Outstanding | | Net Par |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | (in millions) | | | | |
Public finance: | | | | | | | | | |
U.S. public finance | $ | 1,290 | | | $ | 926 | | | $ | 1,088 | | | $ | 3,304 | | | $ | 185,973 | |
Non-U.S. public finance | 818 | | | — | | | — | | | 818 | | | 45,748 | |
Public finance | 2,108 | | | 926 | | | 1,088 | | | 4,122 | | | 231,721 | |
Structured finance: | | | | | | | | | |
U.S. RMBS | 23 | | | 36 | | | 897 | | | 956 | | | 1,817 | |
Other structured finance | — | | | 28 | | | 68 | | | 96 | | | 8,295 | |
Structured finance | 23 | | | 64 | | | 965 | | | 1,052 | | | 10,112 | |
Total | $ | 2,131 | | | $ | 990 | | | $ | 2,053 | | | $ | 5,174 | | | $ | 241,833 | |
|
| | | | | | | | | | | | | | | | | | | |
| BIG Net Par Outstanding | | Net Par |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | (in millions) | | | | |
Public finance: | | | | | | | | | |
U.S. public finance | $ | 2,563 |
| | $ | 662 |
| | $ | 4,109 |
| | $ | 7,334 |
| | $ | 218,216 |
|
Non-U.S. public finance | 2,007 |
| | 274 |
| | — |
| | 2,281 |
| | 42,727 |
|
Public finance | 4,570 |
| | 936 |
| | 4,109 |
| | 9,615 |
| | 260,943 |
|
Structured finance: | | | | | | | | | |
U.S. Residential mortgage-backed securities (RMBS) | 177 |
| | 354 |
| | 2,338 |
| | 2,869 |
| | 5,064 |
|
Triple-X life insurance transactions | — |
| | — |
| | 85 |
| | 85 |
| | 2,058 |
|
Trust preferred securities (TruPS) | 239 |
| | — |
| | — |
| | 239 |
| | 1,455 |
|
Other structured finance | 186 |
| | 157 |
| | 75 |
| | 418 |
| | 6,247 |
|
Structured finance | 602 |
| | 511 |
| | 2,498 |
| | 3,611 |
| | 14,824 |
|
Total | $ | 5,172 |
| | $ | 1,447 |
| | $ | 6,607 |
| | $ | 13,226 |
| | $ | 275,767 |
|
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 20162022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
|
| | | | | | | | | | | | | | | | | | | |
| BIG Net Par Outstanding | | Net Par |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | | Outstanding |
| | | | | (in millions) | | | | |
Public finance: | | | | | | | | | |
U.S. public finance | $ | 2,402 |
| | $ | 3,123 |
| | $ | 1,855 |
| | $ | 7,380 |
| | $ | 244,798 |
|
Non-U.S. public finance | 1,288 |
| | 54 |
| | — |
| | 1,342 |
| | 26,381 |
|
Public finance | 3,690 |
| | 3,177 |
| | 1,855 |
| | 8,722 |
| | 271,179 |
|
Structured finance: | | | | | | | | | |
U.S. RMBS | 197 |
| | 493 |
| | 2,461 |
| | 3,151 |
| | 5,637 |
|
Triple-X life insurance transactions | — |
| | — |
| | 126 |
| | 126 |
| | 2,057 |
|
TruPS | 304 |
| | 126 |
| | — |
| | 430 |
| | 1,892 |
|
Other structured finance | 304 |
| | 263 |
| | 78 |
| | 645 |
| | 15,553 |
|
Structured finance | 805 |
| | 882 |
| | 2,665 |
| | 4,352 |
| | 25,139 |
|
Total | $ | 4,495 |
| | $ | 4,059 |
| | $ | 4,520 |
| | $ | 13,074 |
| | $ | 296,318 |
|
Financial Guaranty Portfolio
BIG Net Par Outstanding
and Number of Risks
As of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 2,115 | | | $ | 16 | | | $ | 2,131 | | | 102 | | | 2 | | | 104 | |
BIG 2 | | 980 | | | 10 | | | 990 | | | 13 | | | 2 | | | 15 | |
BIG 3 | | 2,024 | | | 29 | | | 2,053 | | | 109 | | | 7 | | | 116 | |
Total BIG | | $ | 5,119 | | | $ | 55 | | | $ | 5,174 | | | 224 | | | 11 | | | 235 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | |
| | Net Par Outstanding | | Number of Risks(2) |
Description | | Financial Guaranty Insurance(1) | | Credit Derivative | | Total | | Financial Guaranty Insurance(1) | | Credit Derivative | | Total |
| | (dollars in millions) |
BIG: | | |
| | |
| | |
| | |
| | |
| | |
|
Category 1 | | $ | 4,628 |
| | $ | 544 |
| | $ | 5,172 |
| | 150 |
| | 9 |
| | 159 |
|
Category 2 | | 1,382 |
| | 65 |
| | 1,447 |
| | 48 |
| | 4 |
| | 52 |
|
Category 3 | | 6,520 |
| | 87 |
| | 6,607 |
| | 151 |
| | 8 |
| | 159 |
|
Total BIG | | $ | 12,530 |
| | $ | 696 |
| | $ | 13,226 |
| | 349 |
| | 21 |
| | 370 |
|
Financial Guaranty Portfolio
BIG Net Par Outstanding
and Number of Risks
As of December 31, 20162022
|
| | | | | | | | | | | | | | | | | | | | | |
| | Net Par Outstanding | | Number of Risks(2) |
Description | | Financial Guaranty Insurance(1) | | Credit Derivative | | Total | | Financial Guaranty Insurance(1) | | Credit Derivative | | Total |
| | (dollars in millions) |
BIG: | | |
| | |
| | |
| | |
| | |
| | |
|
Category 1 | | $ | 3,861 |
| | $ | 634 |
| | $ | 4,495 |
| | 165 |
| | 10 |
| | 175 |
|
Category 2 | | 3,857 |
| | 202 |
| | 4,059 |
| | 79 |
| | 6 |
| | 85 |
|
Category 3 | | 4,383 |
| | 137 |
| | 4,520 |
| | 148 |
| | 9 |
| | 157 |
|
Total BIG | | $ | 12,101 |
| | $ | 973 |
| | $ | 13,074 |
| | 392 |
| | 25 |
| | 417 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 net par outstandingFG VIEs.
(2) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for VIEs.purposes of making debt service payments.
| |
(2) | A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. |
Exposure to Puerto Rico
The Company hashad insured exposure to general obligation 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 $1.1 billion and various obligations of its related authorities and public corporations aggregating $5.0$1.4 billion net par outstanding as of September 30, 2017,2023 and December 31, 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 which are rated BIG. This amount includes $389 million related to the 2017 commutations of previously ceded business. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. In recent years,its outstanding Puerto Rico has experienced significant general fund budget deficitsexposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and a challenging economic environment. Beginning on January 1, 2016, a numberSewer Authority (PRASA), and the University of Puerto Rico credits have defaulted on bond payments, and the Company(U of PR), each of which has now paid claims on most of its Puerto Rico credits as shown in the table "Puerto Rico Net Par Outstanding" below.continued to make timely debt service payments.
On November 30, 2015 and December 8, 2015, Governor García Padilla of Puerto Rico (the Former Governor) issued executive orders (Clawback Orders) directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company to "claw back" certain taxes pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation Authority (PRHTA), Puerto Rico Infrastructure Financing Authority (PRIFA), and Puerto Rico Convention Center District Authority (PRCCDA). The Puerto Rico credits insured by the Company subject to clawback are shown in the table “Puerto Rico Net Par Outstanding” below.
On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law by the President of the United States.law. PROMESA establishesestablished a seven-member federal financial oversight board (Oversight Board)Financial Oversight and Management Board (the FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. PROMESA provides a legal framework under which the debt of the Commonwealth and its related authorities and public corporations may be voluntarily restructured, and grants the Oversight Board the sole authority to file restructuring petitions in a federal court to restructure the debt of the Commonwealth and its related authorities and public corporations if voluntary negotiations fail, provided that any such restructuring must be in accordance with an Oversight Board approved fiscal plan that respects the liens and priorities provided under Puerto Rico law.
On January 2, 2017, Ricardo Antonio Rosselló Nevares (the Governor) took office, replacing the Former Governor. On January 29, 2017, the Governor signed the Puerto Rico Emergency and Fiscal Responsibility Act (Emergency Act) that, among other things, defined an emergency period that has since been extended to December 31, 2017, continued diversion of collateral away from bonds the Company insures, and defined the powers and duties of the Fiscal Agency and Financial Advisory Authority (FAFAA).
In mid-March 2017, the Oversight Board certified Puerto Rico’s fiscal plan, dated March 13, 2017 (Fiscal Plan). The Fiscal Plan provides only approximately $7.9 billion for Commonwealth debt service over the next ten years, an amount less than scheduled debt service for such period. The Fiscal Plan itself acknowledges that there are a number of legal and contractual issues not addressed by the Fiscal Plan. On April 28, 2017, the Oversight Board approved fiscal plans for Puerto Rico Electric Power Authority (PREPA) and PRHTA, and directed Puerto Rico Aqueduct and Sewer Authority (PRASA) to amend its proposed plan in several ways. The Oversight Board approved the amended PRASA plan on June 30, 2017. The PRHTA plan assumes that PRHTA will not pay any debt service at least through 2026. The PRASA plan assumes it will pay only approximately 65% of its debt service through 2026. The Company does not believe the fiscal plans of PRHTA or PRASA in their current forms comply with certain mandatory requirements of PROMESA.
On May 3, 2017, the Oversight Board filed a petition with the Federal District Court of Puerto Rico for the Commonwealth under Title III of PROMESA. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under chapterChapter 9 of the United States Bankruptcy Code (Bankruptcy Code). On May 5, 2017, the Oversight Board certifiedCode.
After over five years of negotiations, a filing under Title III of PROMESA for the Puerto Rico Sales Tax Financing Corporation (COFINA). On May 21, 2017, the Board filed a petition under Title III of PROMESA for PRHTA. On July 2, 2017, after the rejection by the Oversight Board and termination by PREPAsubstantial portion of the Restructuring Support Agreement (RSA) described below, the Oversight Board commenced proceedings for PREPA under Title III of PROMESA.
The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters. Please see “Puerto Rico Recovery Litigation” below.
Judge Laura Taylor Swain of the Southern District of New York was selected by Chief Justice John Roberts of the United States Supreme Court to preside over any proceedings under PROMESA. Judge Swain has selected a team of five federal judges to act as mediators for certain issues and disputes.
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and widespread devastation in the Commonwealth. Damage to the Commonwealth’s infrastructure, including the power grid, water system and transportation system, was extensive, with the entire island being without power in the aftermath of the storm. Officials continue to assess the extent of the damage, but rebuilding and economic recovery are expected to take years. While the federal government is expected to provide very substantial resources for relief and rebuilding -- which is expected to help economic activity and address the Commonwealth’s infrastructure needs in the intermediate and longer term -- economic activity in general and tourism in particular, as well as tax collections, are all expected to decline in the short term. Out migration to the mainland is also expected to increase, at least initially.
Litigation and mediation related to the Commonwealth’s debt have been delayed by Hurricane Maria. The final form and timing of responses to Puerto Rico’s financial distress and the devastation of Hurricane Maria eventually taken by the federal government or implemented under the auspices of PROMESA and the Oversight Board or otherwise, and the final impact, after resolution of legal challenges, of any such responses on obligations insured by the Company, are uncertain.
The Company groups itsCompany’s Puerto Rico exposure into three categories:
Constitutionally Guaranteed. The Company includeswas resolved in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes2022 in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year. The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to claw back revenues supporting debt insuredaccordance with four orders entered by the Company. Prior to the enactment of PROMESA, the Company sued various Puerto Rico governmental officials in the United States District Court District of Puerto Rico asserting that Puerto Rico's attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief. Please see "Puerto Rico Recovery Litigation" below.
Other Public Corporations. The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.
Constitutionally Guaranteed
General Obligation. As of September 30, 2017, the Company had $1,419 million insured net par outstanding of the general obligations of Puerto Rico, which are supported by the good faith, credit and taxing power of the Commonwealth. On July 1, 2016, despite the requirements of Article VI of its Constitution, the Commonwealth defaulted on most of the debt service payment due that day, and the Company made its first claim payments on these bonds, and has continued to make claim payments on these bonds. As noted above, the Oversight Board filed a petition under Title III of PROMESA with respect to the Commonwealth.
Puerto Rico Public Buildings Authority (PBA). As of September 30, 2017, the Company had $141 million insured net par outstanding of PBA bonds, which are supported by a pledge of the rents due under leases of government facilities to departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power. On July 1, 2016, despite the requirements of Article VI of its Constitution, the PBA defaulted on most of the debt service payment due that day, and the Company made its first claim payments on these bonds, and has continued to make claim payments on these bonds.
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA. As of September 30, 2017, the Company had $882 million insured net par outstanding of PRHTA (transportation revenue) bonds and $495 million insured net par of PRHTA (highways revenue) bonds. The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on up to $120 million annually of taxes on crude oil, unfinished oil and derivative products. The highways revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls. The non-toll revenues consisting of excise taxes and fees collected by the Commonwealth on behalf of PRHTA and its bondholders that are statutorily allocated to PRHTA and its bondholders are potentially subject to clawback. Despite the presence of funds in relevant debt service accounts that the Company believes should have been employed to fund debt service, PRHTA defaulted on the full July 1, 2017 insured debt service payment, and the Company made its first claim payments on these bonds. As noted above, on April 28, 2017, the Oversight Board approved a fiscal plan for PRHTA that PRHTA will not pay any debt service at least through 2026. The Company does not believe the PRHTA fiscal plan in its current form complies with certain mandatory requirements of PROMESA.
PRCCDA. As of September 30, 2017, the Company had $152 million insured net par outstanding of PRCCDA bonds, which are secured by certain hotel tax revenues. These revenues are sensitive to the level of economic activity in the area and are potentially subject to clawback. There were sufficient funds in the PRCCDA bond accounts to make only partial payments on the July 1, 2017 PRCCDA bond payments guaranteed by the Company, and the Company made its first claim payments on these bonds.
PRIFA. As of September 30, 2017, the Company had $18 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to Puerto Rico of federal excise taxes paid on rum. These revenues are potentially subject to the clawback. The Company made its first claim payment on PRIFA bonds in January 2016, and has continued to make claim payments on PRIFA bonds.
Other Public Corporations
PREPA. As of September 30, 2017, the Company had $853 million insured net par outstanding of PREPA obligations, which are secured by a lien on the revenues of the electric system.
On December 24, 2015, AGM and AGC entered into an RSA with PREPA, an ad hoc group of uninsured bondholders and a group of fuel-line lenders that would, subject to certain conditions, result in, among other things, modernization of the utility and a restructuring of current debt. Upon finalization of the contemplated restructuring transaction, insured PREPA revenue bonds (with no reduction to par or stated interest rate) would be supported by securitization bonds issued by a special purpose corporation and secured by a transition charge assessed on ratepayers.
In March 2017, the Governor indicated a desire to modify certain aspects of the RSA. On April 6, 2017, the Governor announced that an agreement in principle had been reached to supplement the RSA. As supplemented, the RSA called for AGM and AGC to provide surety insurance policies aggregating approximately $113 million ($14 million for AGC and $99 million for AGM) to support the securitization bonds contemplated by the RSA, to extend the maturity of all of the relending financing provided in 2016, and to provide $120 million of principal payment deferrals in 2018 through 2023. In addition, the RSA as supplemented provided for a consensual restructuring under Title VI of PROMESA.
The Oversight Board did not certify the RSA under Title VI of PROMESA as the Company believes is required by PROMESA, but rather, on July 2, 2017, commenced proceedings for PREPA under Title III of PROMESA. PREPA defaulted on its July 1, 2017 debt service payments, and the Company made its first claim payments on these bonds to bondholders as a result of these defaults. The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to the PREPA obligations it insures and the RSA are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters. Please see “Puerto Rico Recovery Litigation” below.
PRASA. As of September 30, 2017, the Company had $373 million of insured net par outstanding to PRASA bonds, which are secured by a lien on the gross revenues of the water and sewer system. On September 15, 2015, PRASA entered into a settlement with the U.S. Department of Justice and the U.S. Environmental Protection Agency that requires it to spend $1.6 billion to upgrade and improve its sewer system island-wide. The PRASA bond accounts contained sufficient funds to make the PRASA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full. As noted above, on April 28, 2017, the Oversight Board considered a fiscal plan for PRASA that assumes PRASA will pay only approximately 65% of its debt service through 2026, and approved the amended plan on June 30, 2017. Because PRASA has several categories of debt outstanding and the Company insures only PRASA debt with a senior lien on gross revenues of PRASA, it is unclear whether (or to what extent, if any) the payment of only 65% of debt service through 2026 would result in a reduction in PRASA payments of Company-insured debt. The Company does not believe the PRASA fiscal plan in its current form complies with certain mandatory requirements of PROMESA.
Municipal Finance Agency (MFA). As of September 30, 2017, the Company had $360 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues. The MFA bond accounts contained sufficient funds to make the MFA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.
COFINA. As of September 30, 2017, the Company had $272 million insured net par outstanding of junior COFINA bonds, which are secured primarily by a second lien on certain sales and use taxes. As noted above, the Oversight Board filed a petition on behalf of the Commonwealth under Title III of PROMESA. COFINA defaulted on its August 1, 2017 insured debt service payment, and the Company made its first claim payments on these bonds.
University of Puerto Rico (U of PR). As of September 30, 2017, the Company had $1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the University, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds. As of the date of this filing, all debt service payments on U of PR bonds insured by the Company have been made.
Puerto Rico Recovery Litigation
The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.
On January 7, 2016, AGM, AGC and Ambac Assurance Corporation (Ambac) commenced an action for declaratory judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico (Federal District Court inof Puerto Rico) related to invalidate the executive orders issued by the Former Governor on November 30, 2015 and December 8, 2015 directing that the SecretaryCompany’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 Treasury2022 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. As described below, on August 31, 2023, the Company extinguished its remaining exposure to GO and PBA bonds by satisfying its obligations to insured bondholders holding custody receipts representing interests in legacy insured GO and PBA bonds.
Under 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 TourismPublic Buildings Authority (GO/PBA Plan), the Company claw back certain taxesreceived cash, new general obligation bonds (New GO Bonds) and contingent value instruments (CVIs). In connection with the Modified Fifth Amended Title III Plan of Adjustment for PRHTA (HTA Plan) and related arrangements, the Company received cash and new bonds backed by toll revenues pledged(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 secure the payment2022 Puerto Rico Resolutions are collectively referred to as Plan Consideration.
Plan Consideration is reported in either cash, investments or FG VIEs’ assets as described below.
•Investments and cash. Plan Consideration received in respect of bondholders whose principal of bonds issuedinsured by the PRHTA, the PRCCDA and the PRIFA. The Commonwealth defendants filed a motion to dismiss the action for lack of subject matter jurisdiction, which the Court denied on October 4, 2016. On October 14, 2016, the Commonwealth defendants filed a notice of PROMESA automatic stay. While the PROMESA automatic stay expired on May 1, 2017, on May 17, 2017, the Court stayed the action under Title III of PROMESA.
On May 3, 2017, AGM and AGC filed in the Federal District Court in Puerto Rico an adversary complaint seeking a judgment that the Commonwealth's Fiscal Plan violates various sections of PROMESA and the Contracts, Takings and Due Process Clauses of the U.S. Constitution, an injunction enjoiningCompany were accelerated against the Commonwealth and Oversight Board from presentingbecame due and payable under the 2022 Puerto Rico
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Resolutions are reported in Cash and Investments. See Note 7, Investments, for the fair value of the New Recovery Bonds and CVIs remaining as of September 30, 2023.
•FG VIEs’ assets. Plan Consideration received in respect of insured bondholders who elected to receive custody receipts that represent an interest in custodial trusts that hold the legacy insurance policy plus Plan Consideration that constitute distributions under the HTA Plan or proceeding with confirmation of any plan of adjustment basedthe GO/PBA Plan are reported in FG VIEs’ assets. The Company’s insurance policy continues to guarantee principal and interest coming due on the Fiscal Plan, and a stay on the confirmation of any plan of adjustment based on the Fiscal Plan pending development of a fiscal plan that complies with PROMESA and the U.S. Constitution. On October 6, 2017, AGC and AGM voluntarily withdrew without prejudice the complaint, based on their expectation that the Fiscal Plan would be modified as a result of Hurricane Maria.
On May 16, 2017, The Bank of New York Mellon, as trustee for thelegacy insured bonds issued by COFINA, filed an adversary complaint for interpleader and declaratory relief with the Federal District Court in Puerto Rico to resolve competing and conflicting demands made by various groups of COFINA bondholders, insurers of certain COFINA Bonds and COFINA, regarding funds held by the trustee for certain COFINA bond debt service payments scheduled to occur on and after June 1, 2017. On May 19, 2017, an order to show cause was entered permitting AGC and AGM to intervene in this matter. While AGM has insured COFINA Bonds, AGC has not.
On June 3, 2017, AGC and AGM filed an adversary complaint in Federal District Court in Puerto Rico seeking (i) a judgment declaring that the application of pledged special revenues to the payment of the PRHTA Bonds is not subject to the PROMESA Title III automatic stay and that the Commonwealth has violated the special revenue protections provided to the PRHTA Bonds under the Bankruptcy Code; (ii) an injunction enjoining the Commonwealth from taking or causing to be taken any action that would further violate the special revenue protections provided to the PRHTA Bonds under the Bankruptcy Code; and (iii) an injunction ordering the Commonwealth to remit the pledged special revenues securing the PRHTA Bonds in accordance with the terms of such insurance policy on the special revenue provisions set forthoriginally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts. On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Bankruptcy Code.
On June 26, 2017, AGM and AGC filed a complaint in Federal District Court in Puerto Rico seeking (i) a declaratory judgment that the PREPA RSA is a “Preexisting Voluntary Agreement”Company satisfied its obligations under Section 104such legacy insured bonds with respect to $108 million net par outstanding as of PROMESAAugust 31, 2023, and the Oversight Board’s failurecustodial trusts released to certify the PREPA RSA is an unlawful application of Section 601 of PROMESA; (ii) an injunction enjoining the Oversight Board from unlawfully applying Section 601 of PROMESA and ordering it to certify the PREPA RSA; and (iii) a writ of mandamus requiring the Oversight Board to comply with its duties under PROMESA and certify the PREPA RSA. On July 21, 2017, in light of its PREPA Title III petition on July 2, 2017, the Oversight Board filed a notice of stay under PROMESA.
On July 18, 2017, AGM and AGC filed a motion for relief from the automatic stay in the PREPA Title III bankruptcy proceeding and a form of complaint seeking the appointment of a receiver for PREPA. That motion was denied on September 14, 2017. AGM and AGC filed a notice of appeal on September 28, 2017.
On August 7, 2017, AGC and AGM filed an adversary complaintNew Recovery Bonds and CVIs with a fair value totaling $73 million as of August 31, 2023. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for the fair value of New Recovery Bonds remaining as of September 30, 2023.
The Company has sold a portion of New Recovery Bonds and CVIs it received and may sell in Federal District Courtthe future any New Recovery Bonds or CVIs it continues to hold. The fair value of any New Recovery Bonds and CVIs that the Company retains will fluctuate from their date of acquisition. Any gains or losses on sales of New Recovery Bonds and CVIs in the investment portfolio are reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.
The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico seeking, among other things, judgment5.5% Sales and Use Tax (SUT) receipts against defendants (i) declaring thatMay 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the application of pledged special revenues to the paymentsum of the PREPA Bonds is notmaximum distributions the holder could receive under the CVI, subject to the PROMESA Title III automatic staycumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time. As of September 30, 2023, all of the CVIs are reported in investments.
The Company is 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 Commonwealth has violatedcost of petroleum products, may impact any resolution of the special revenue protections providedCompany’s PREPA insured exposure and the value of any remaining consideration received in connection with the 2022 Puerto Rico Resolutions or any future resolutions of the Company’s PREPA insured exposures. The impact of developments relating to Puerto Rico during any quarter or year could be material to the PREPA Bonds under the Bankruptcy Code; (ii) declaring that capital expendituresCompany’s results of operations and all other expenses that do not constitute current, reasonableshareholders’ equity.
Puerto Rico Par and necessary operating expenses may not be paid from pledged special revenues prior to the payment of debt service on the PREPA Bonds, and (iii) enjoining defendants from taking or causing to be taken any action that would further violate the special revenue protections provided to the PREPA Bonds underDebt Service Schedules
the Bankruptcy Code; and (iv) ordering defendants to remit the pledged special revenues securing the PREPA Bonds in accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code. On October 13, 2017, AGC and AGM voluntarily withdrew without prejudice the complaint, in order to allow PREPA to focus on emergency efforts to restore electricity to the island's residents and businesses in the wake of Hurricane Maria.
All Puerto Rico exposures are internally rated BIG. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.
Puerto Rico
Gross Par and Gross Debt Service Outstanding
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Par Outstanding | | Gross Debt Service Outstanding |
| As of | | As of |
| September 30, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
| (in millions) |
Exposure to Puerto Rico | $ | 1,121 | | | $ | 1,378 | | | $ | 1,529 | | | $ | 1,899 | |
|
| | | | | | | | | | | | | | | |
| Gross Par Outstanding | | Gross Debt Service Outstanding |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
| (in millions) |
Exposure to Puerto Rico | $ | 5,186 |
| | $ | 5,435 |
| | $ | 8,516 |
| | $ | 9,038 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico
Net Par Outstanding (1)
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Defaulted Puerto Rico Exposures | | | |
PREPA | $ | 624 | | | $ | 720 | |
Total Defaulted | 624 | | | 720 | |
Resolved Puerto Rico Exposures | | | |
PRHTA (Transportation revenue) (1) | 244 | | | 298 | |
PRHTA (Highway revenue) (1) | 128 | | | 182 | |
Commonwealth of Puerto Rico - GO (1) | — | | | 25 | |
PBA (1) | — | | | 4 | |
Total Resolved | 372 | | | 509 | |
Other Puerto Rico Exposures | | | |
MFA (2) | 108 | | | 131 | |
PRASA and U of PR (2) | 1 | | | 1 | |
Total Other | 109 | | | 132 | |
Total net exposure to Puerto Rico | $ | 1,105 | | | $ | 1,361 | |
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Commonwealth Constitutionally Guaranteed | | | |
Commonwealth of Puerto Rico - General Obligation Bonds (2) (3) | $ | 1,419 |
| | $ | 1,476 |
|
PBA (2) | 141 |
| | 169 |
|
Public Corporations - Certain Revenues Potentially Subject to Clawback | | | |
PRHTA (Transportation revenue) (2) (3) | 882 |
| | 918 |
|
PRHTA (Highways revenue) (2) (3) | 495 |
| | 350 |
|
PRCCDA (2) | 152 |
| | 152 |
|
PRIFA (2) | 18 |
| | 18 |
|
Other Public Corporations | | | |
PREPA (2) (3) | 853 |
| | 724 |
|
PRASA | 373 |
| | 373 |
|
MFA | 360 |
| | 334 |
|
COFINA (2) (3) | 272 |
| | 271 |
|
U of PR | 1 |
| | 1 |
|
Total net exposure to Puerto Rico | $ | 4,966 |
| | $ | 4,786 |
|
________________________________________ | |
(1) | The September 30, 2017 amounts include $389 million (which comprises $36 million of General Obligation Bonds, $134 million of PREPA, $144 million of PRHTA (Highways revenue), and $75 million of MFA) related to 2017 commutations of previously ceded business. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. |
(1) Resolved pursuant to the 2022 Puerto Rico Resolutions.
(2) As of the date of this filing, the Company has paid claimsAll debt service on these credits.insured exposures have been paid to date without any insurance claim being made on the Company.
(3) As of the date of this filing, the Oversight Board has certified a filing under Title III of PROMESA for these credits.
The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees paymentspayment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis.basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the principal and interestdebt service due in any given period and the amount paid by the obligors.
Amortization Schedule of Puerto Rico
Net Par Outstanding
and Net Debt Service Outstanding
As of September 30, 20172023
| | | | | | | | | | | |
| Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| (in millions) |
2023 (October 1 - December 31) | $ | — | | | $ | 3 | |
| | | |
2024 (January 1 - March 31) | — | | | 24 | |
2024 (April 1 - June 30) | — | | | 3 | |
2024 (July 1 - September 30) | 110 | | | 134 | |
2024 (October 1 - December 31) | — | | | 3 | |
Subtotal 2024 | 110 | | | 164 | |
2025 | 84 | | | 132 | |
2026 | 140 | | | 185 | |
2027 | 120 | | | 158 | |
2028-2032 | 293 | | | 427 | |
2033-2037 | 235 | | | 302 | |
2038-2041 | 123 | | | 140 | |
Total | $ | 1,105 | | | $ | 1,511 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | |
| Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| (in millions) |
2017 (October 1 - December 31) | $ | 0 |
| | $ | 3 |
|
2018 (January 1 - March 31) | 0 |
| | 123 |
|
2018 (April 1 - June 30) | 0 |
| | 3 |
|
2018 (July 1 - September 30) | 200 |
| | 322 |
|
2018 (October 1 - December 31) | 0 |
| | 3 |
|
Subtotal 2018 | 200 |
| | 451 |
|
2019 | 223 |
| | 464 |
|
2020 | 285 |
| | 516 |
|
2021 | 147 |
| | 364 |
|
2022-2026 | 1,045 |
| | 1,995 |
|
2027-2031 | 981 |
| | 1,655 |
|
2032-2036 | 1,250 |
| | 1,669 |
|
2037-2041 | 417 |
| | 588 |
|
2042-2047 | 418 |
| | 492 |
|
Total | $ | 4,966 |
| | $ | 8,197 |
|
PREPA
Exposure toAs of September 30, 2023, the U.S. Virgin Islands
The Company has $498had $624 million insured net par outstanding toof PREPA obligations. The Company believes that the U.S. Virgin Islands and its related authorities (USVI), of which it rates $224 million BIG. The $274 million USVI net par the Company rates investment grade is comprised primarily ofPREPA bonds are secured by a lien on matching fundthe revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum. The $224 million BIG USVI net par comprises (a) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.
Hurricane Irma caused significant damageOn 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 29, 2023 extending the term to March 29, 2024. The FOMB filed an initial 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).
On March 22, 2023, the Federal District Court of Puerto Rico held that the PREPA bondholders had perfected liens only in St. Johnrevenues that had been deposited in the sinking fund established under the PREPA trust agreement and St. Thomas, while Hurricane Maria made landfallrelated 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 Federal 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 St. CroixJune 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 Category 4 hurricanedetermination 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 collection risk. 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 estimation ruling, upon final adjudication by the Federal District Court of Puerto Rico of all claims and counterclaims in the PREPA lien challenge adversary proceeding.
On October 27, 2023, the FOMB filed with the Federal District Court of Puerto Rico the third modified third amended plan of adjustment for PREPA and supporting supplemental disclosure statement (FOMB PREPA Plan) based on the Saffir-Simpson scale, causing losslast revised PREPA fiscal plan certified by the FOMB on June 23, 2023 (2023 PREPA Fiscal Plan). The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation regarding whether creditor repayment is limited to existing accounts, and another group that would continue litigating whether bondholders are secured by PREPA’s current and future revenue collections. The FOMB PREPA Plan also would further split settling bondholders into two sub-groups: one consisting of lifecertain original settling bondholders that would receive an enhanced recovery (compared to non-settling bondholders) plus other supporting creditor payments, while the second settling sub-group would receive only the enhanced recovery. The 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 substantial damage(ii) general unsecured creditors (GUCs). The most recent revised FOMB PREPA Plan provides for reduced payments to St. Croix’s businesses and infrastructure, includingbondholders since lower projected PREPA revenues are included in the power grid.2023 PREPA Fiscal Plan than had been previously anticipated. The USVIFOMB PREPA Plan estimates that non-settling bondholders will receive a recovery of 12.5% of their allowed unsecured net revenue claim. The Company is benefiting fromopposed to the federal response to this year’s hurricanesFOMB PREPA Plan and has made its debt service paymentsjoined with a group of non-settling bondholders that continue to date.litigate whether creditor repayments will include future revenue collections.
ExposureThe supplemental disclosure statement hearing for the FOMB PREPA Plan is scheduled for November 14, 2023. The confirmation hearing for the FOMB PREPA Plan is currently scheduled to the Selected European Countriesoccur in March 2024.
The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal, Spain and Turkey (collectively, the Selected European Countries). The Company’s direct economic exposure to the Selected European Countries, based on par, is shown in the following table, net of ceded reinsurance.PRHTA
Net Direct Economic Exposure to Selected European Countries(1)
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Hungary | | Italy | | Portugal | | Spain | | Turkey | | Total |
| (in millions) |
Sub-sovereign exposure(2) | $ | 214 |
| | $ | 1,034 |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 1,779 |
|
Non-sovereign exposure(3) | 125 |
| | 449 |
| | — |
| | — |
| | 200 |
| | 774 |
|
Total | $ | 339 |
| | $ | 1,483 |
| | $ | 75 |
| | $ | 456 |
| | $ | 200 |
| | $ | 2,553 |
|
Total BIG (See Note 5) | $ | 262 |
| | $ | — |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 793 |
|
____________________
| |
(1) | While exposures are shown in U.S. dollars, the obligations are in various currencies, primarily euros.
|
| |
(2) | Sub-sovereign exposure in Selected European Countries includes transactions backed by receivables from, or supported by, sub-sovereigns, which are governmental or government-backed entities other than the ultimate governing body of the country.
|
| |
(3) | Non-sovereign exposure in Selected European Countries includes debt of regulated utilities, RMBS and diversified payment rights (DPR) securitizations.
|
When2023, the Company directly insureshad $372 million of insured net par outstanding of PRHTA bonds: $244 million insured net par outstanding of PRHTA (transportation revenue) bonds and $128 million insured net par outstanding of PRHTA (highway revenue) bonds. PRHTA net par outstanding primarily represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an obligation, it assignsinterest in the obligationlegacy insurance policy plus Toll Bonds that constitute distributions under the HTA Plan.
Assured Guaranty Ltd.
Notes to a geographic location or locations basedCondensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico GO and PBA
The Company’s exposure to GO bonds and PBA bonds was extinguished on its viewAugust 31, 2023, and, therefore, as of the geographic location of the risk. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies, in which caseSeptember 30, 2023, the Company depends upon geographic information provided by the primary insurer.had no remaining insured net par outstanding of GO bonds and PBA bonds.
The Company's $200 million net insured par exposure in Turkey is to DPR securitizations sponsored by a major Turkish bank. These DPR securitizations were established outside of Turkey and involve payment orders in U.S. dollars, pounds sterling and euros from persons outside of Turkey to beneficiaries in Turkey who are customers of the sponsoring bank. The sponsoring bank's correspondent banks have agreed to remit all such payments to a trustee-controlled account outside Turkey, whereOther Puerto Rico Exposures
All debt service payments for the DPR securitizationCompany’s remaining Puerto Rico exposures of $109 million insured net par outstanding have been made in full by the obligors as of the date of this filing. These exposures consist primarily of $108 million net par outstanding of MFA bonds, which are given priority over paymentssecured by a lien on local tax revenues.
Puerto Rico Litigation
Currently, there are numerous legal actions relating to the sponsoring bank. 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.
A number of legal actions involving the Company and relating 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 is 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 challenging the validity, enforceability, and extent of prepetition security interests securing those bonds and seeking other relief. On September 30, 2022, the FOMB filed an amended complaint against the trustee (i) objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing PREPA’s bonds and (ii) arguing that PREPA bondholders’ recourse was limited to certain deposit accounts held by the trustee. On October 7, 2022, the court approved a stipulation permitting AGM and AGC to intervene as defendants. 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 Puerto Rico granted in part and denied in part each party’s cross-motions for summary judgment. The Federal District Court of Puerto Rico found 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. 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following Puerto Rico proceedings in which the Company is involved remain stayed:
•On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court of Puerto Rico to compel the FOMB to certify the PREPA RSA for implementation under Title VI of PROMESA. On July 21, 2017, considering its PREPA Title III petition on July 2, 2017, the FOMB filed a notice of stay under PROMESA.
•On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the
automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14,
2017, but on August 8, 2018, the United States Court of Appeals for the First Circuit vacated and remanded the court’s decision. On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver. 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
The Company has excluded from the exposure tables abovealso guarantees specialty business with risk profiles similar to those of its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $46 million to Selected European Countries in transactions with $0.7 billion of net par outstanding.
Non-Financial Guaranty Insurance
The Company provided capital relief triple-X excess of loss life reinsurance on approximately $540 million of exposure as of September 30, 2017 and $390 million as of December 31, 2016. The triple-X excess of loss life reinsurance exposure is expected to increase to approximately $1.2 billion prior to September 30, 2036.
In addition, the Company started providing reinsurance on aircraft residual value insurance (RVI) policies in the first quarter of 2017 and had net exposure of $116 million to such reinsurance as of September 30, 2017.
The capital relief triple-X excess of loss life reinsurance and aircraft residual value reinsurance are all rated investment grade internally. This non-financial guaranty exposure has a similar risk profile to the Company's other structured finance investment grade exposureexposures written in financial guaranty form.
Specialty Business
| |
5. | Expected Loss to be Paid |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2023 | | As of December 31, 2022 |
| | Gross Exposure | | Net Exposure | | Gross Exposure | | Net Exposure |
| | (in millions) |
Life insurance transactions (1) | | $ | 1,325 | | | $ | 1,003 | | | $ | 1,314 | | | $ | 986 | |
Aircraft residual value insurance policies | | 355 | | | 200 | | | 355 | | | 200 | |
Other guaranties | | 2,090 | | | 2,090 | | | 228 | | | 228 | |
____________________
(1) The life insurance transactions net exposure is projected to reach $1.1 billion in 2024.
As of both September 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.
Specialty business includes an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties with an internal rating of AA that matures in 2042. The Company’s maximum potential exposure under this guaranty, which is accounted for in accordance with Accounting Standards Codification (ASC) 460, Guarantees, was $1.6 billion as of September 30, 2023.
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 scenarios.
Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s surveillance and risk management 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.
In circumstances where the Company purchased its own insured obligations that had expected losses, and in cases
where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and
the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the Company are referred to as Loss Estimation ProcessMitigation 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 exposure reported in Note 3, Outstanding Exposure includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
models are: (1) insurance, as described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of these accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio, regardless of the accounting model.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, and sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions, and scenarios and the probabilities they assign to those scenarios based on actual developments during the quarterperiod and their view of future performance.
The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such financial guaranties. As a result, the Company'sCompany’s estimate of ultimate lossesloss on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the long life of most contracts.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities.
Changes over a resultreporting period in the Company’s loss estimates for public finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may change materiallyalso be affected by the Company’s loss mitigation efforts and other variables.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over that same period.a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables.
The Company does not use traditional actuarial approaches Net economic loss development (benefit) over a reporting period may be attributable to determine its estimatesa number of expected losses.interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates and dispute resolution. Actual losses will ultimately depend on future events, or transaction performance and may be influenced by many interrelatedor other factors that are difficult to predict. As a result, the Company'sCompany’s current projections of losses may be subject to considerable volatility and may not reflect the Company'sCompany’s ultimate claims paid. For information on
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
In some instances, the Company's loss estimation process, please referterms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to Note 5,pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which results in an acceleration of cash outflows but reduces overall losses paid.
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 | | Third Quarter | | Nine Months |
Accounting Model | | September 30, 2023 | | December 31, 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
Insurance (see Note 5) | | $ | 252 | | | $ | 205 | | | $ | 92 | | | $ | (67) | | | $ | 160 | | | $ | (137) | |
FG VIEs (see Note 8) (1) | | 235 | | | 314 | | | (6) | | | (6) | | | (15) | | | (16) | |
Credit derivatives (see Note 6) | | 3 | | | 3 | | | 1 | | | 1 | | | 2 | | | 5 | |
Total | | $ | 490 | | | $ | 522 | | | $ | 87 | | | $ | (72) | | | $ | 147 | | | $ | (148) | |
____________________
(1) The net expected loss to be paid for FG VIEs primarily relates to trusts established as part of Part II, Item 8, Financial Statements and Supplementary Data in AGL's Annual Report on Form 10-K for the year ended December 31, 2016.2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated.
The following tables present a roll forward of the present value of net expected loss to be paid (recovered) for all contracts, whetherwhich are accounted for asunder one of the following accounting models: insurance, credit derivatives or financial guaranty (FG) VIEs, by sector, after the expected recoveries/ (payables) for breaches of representationsderivative and warranties (R&W) and other expected recoveries.FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.0%4.51% to 2.94%5.45% with a weighted average of 2.27%4.80% as of September 30, 20172023 and 0.0%3.82% to 3.23%4.69% with a weighted average of 2.73%4.08% as of December 31, 2016.2022. Net expected losses to be paid for U.S. dollar denominated transactions represented approximately 98.2% and 98.5% of the total as of September 30, 2023 and December 31, 2022, respectively.
Net Expected Loss to be Paid (Recovered)
Roll Forward
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Net expected loss to be paid, beginning of period | $ | 1,297 |
| | $ | 1,326 |
| | $ | 1,198 |
| | $ | 1,391 |
|
Net expected loss to be paid on the MBIA UK portfolio as of January 10, 2017 | — |
| | — |
| | 21 |
| | — |
|
Net expected loss to be paid on the CIFG portfolio as of July 1, 2016 | — |
| | 22 |
| | — |
| | 22 |
|
Economic loss development (benefit) due to: | | | | | | | |
Accretion of discount | 8 |
| | 5 |
| | 24 |
| | 20 |
|
Changes in discount rates | (6 | ) | | (29 | ) | | 28 |
| | 79 |
|
Changes in timing and assumptions | 202 |
| | (20 | ) | | 246 |
| | (62 | ) |
Total economic loss development (benefit) | 204 |
| | (44 | ) | | 298 |
| | 37 |
|
Net (paid) recovered losses | (209 | ) | | (214 | ) | | (225 | ) | | (360 | ) |
Net expected loss to be paid, end of period | $ | 1,292 |
| | $ | 1,090 |
| | $ | 1,292 |
| | $ | 1,090 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Third Quarter 2017
|
| | | | | | | | | | | | | | | |
| Net Expected Loss to be Paid (Recovered) as of June 30, 2017 | | Economic Loss Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2017 (2) |
| (in millions) |
Public finance: | | | | | | | |
U.S. public finance | $ | 1,044 |
| | $ | 229 |
| | $ | (227 | ) | | $ | 1,046 |
|
Non-U.S. public finance | 42 |
| | 0 |
| | 5 |
| | 47 |
|
Public finance | 1,086 |
| | 229 |
| | (222 | ) | | 1,093 |
|
Structured finance: | | | | | | | |
U.S. RMBS | 182 |
| | (19 | ) | | 13 |
| | 176 |
|
Triple-X life insurance transactions | (4 | ) | | (1 | ) | | (2 | ) | | (7 | ) |
Other structured finance | 33 |
| | (5 | ) | | 2 |
| | 30 |
|
Structured finance | 211 |
| | (25 | ) | | 13 |
| | 199 |
|
Total | $ | 1,297 |
| | $ | 204 |
| | $ | (209 | ) | | $ | 1,292 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Third Quarter 2016
|
| | | | | | | | | | | | | | | | | | | |
| Net Expected Loss to be Paid (Recovered) as of June 30, 2016 | | Net Expected Loss to be Paid (Recovered) on CIFG as of July 1, 2016 | | Economic Loss Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2016 |
| (in millions) |
Public finance: | | | | | | | | | |
U.S. public finance | $ | 963 |
| | $ | 40 |
| | $ | 9 |
| | $ | (196 | ) | | $ | 816 |
|
Non-U.S. public finance | 37 |
| | 2 |
| | (1 | ) | | — |
| | 38 |
|
Public finance | 1,000 |
| | 42 |
| | 8 |
| | (196 | ) | | 854 |
|
Structured finance: | |
| | | | |
| | |
| | |
|
U.S. RMBS | 192 |
| | (22 | ) | | (27 | ) | | 5 |
| | 148 |
|
Triple-X life insurance transactions | 100 |
| | — |
| | (23 | ) | | (23 | ) | | 54 |
|
Other structured finance | 34 |
| | 2 |
| | (2 | ) | | 0 |
| | 34 |
|
Structured finance | 326 |
| | (20 | ) | | (52 | ) | | (18 | ) | | 236 |
|
Total | $ | 1,326 |
| | $ | 22 |
| | $ | (44 | ) | | $ | (214 | ) | | $ | 1,090 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Nine Months 2017
|
| | | | | | | | | | | | | | | | | | | |
| Net Expected Loss to be Paid (Recovered) as of December 31, 2016 (2) | | Net Expected Loss to be Paid on MBIA UK as of January 10, 2017 | | Economic Loss Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2017 (2) |
| (in millions) |
Public finance: | | | | | | | | | |
U.S. public finance | $ | 871 |
| | $ | — |
| | $ | 431 |
| | $ | (256 | ) | | $ | 1,046 |
|
Non-U.S. public finance | 33 |
| | 13 |
| | (4 | ) | | 5 |
| | 47 |
|
Public finance | 904 |
| | 13 |
| | 427 |
| | (251 | ) | | 1,093 |
|
Structured finance: | | | | | | | | | |
U.S. RMBS | 206 |
| | — |
| | (70 | ) | | 40 |
| | 176 |
|
Triple-X life insurance transactions | 54 |
| | — |
| | (56 | ) | | (5 | ) | | (7 | ) |
Other structured finance | 34 |
| | 8 |
| | (3 | ) | | (9 | ) | | 30 |
|
Structured finance | 294 |
| | 8 |
| | (129 | ) | | 26 |
| | 199 |
|
Total | $ | 1,198 |
| | $ | 21 |
| | $ | 298 |
| | $ | (225 | ) | | $ | 1,292 |
|
Net Expected Loss to be Paid
Roll Forward by Sector
Nine Months 2016
|
| | | | | | | | | | | | | | | | | | | |
| Net Expected Loss to be Paid (Recovered) as of December 31, 2015 | | Net Expected Loss to be Paid (Recovered) on CIFG as of July 1, 2016 | | Economic Loss Development / (Benefit) | | (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2016 |
| (in millions) |
Public finance: | | | | | | | | | |
U.S. public finance | $ | 771 |
| | $ | 40 |
| | $ | 218 |
| | $ | (213 | ) | | $ | 816 |
|
Non-U.S. public finance | 38 |
| | 2 |
| | (2 | ) | | — |
| | 38 |
|
Public finance | 809 |
| | 42 |
| | 216 |
| | (213 | ) | | 854 |
|
Structured finance: | |
| | | | |
| | |
| | |
|
U.S. RMBS | 409 |
| | (22 | ) | | (139 | ) | | (100 | ) | | 148 |
|
Triple-X life insurance transactions | 99 |
| | — |
| | (21 | ) | | (24 | ) | | 54 |
|
Other structured finance | 74 |
| | 2 |
| | (19 | ) | | (23 | ) | | 34 |
|
Structured finance | 582 |
| | (20 | ) | | (179 | ) | | (147 | ) | | 236 |
|
Total | $ | 1,391 |
| | $ | 22 |
| | $ | 37 |
| | $ | (360 | ) | | $ | 1,090 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Net expected loss to be paid (recovered), beginning of period | $ | 560 | | | $ | 442 | | | $ | 522 | | | $ | 411 | |
Economic loss development (benefit) due to: | | | | | | | |
Accretion of discount | 6 | | | 3 | | | 15 | | | 8 | |
Changes in discount rates | (12) | | | (25) | | | (8) | | | (114) | |
Changes in timing and assumptions | 93 | | | (50) | | | 140 | | | (42) | |
Total economic loss development (benefit) | 87 | | | (72) | | | 147 | | | (148) | |
Net (paid) recovered losses (1) | (157) | | | 357 | | | (179) | | | 464 | |
Net expected loss to be paid (recovered), end of period | $ | 490 | | | $ | 727 | | | $ | 490 | | | $ | 727 | |
____________________
| |
(1) | Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets. The Company paid $7 million and $3 million inLAE for Third Quarter 2017 and 2016, respectively and $16 million and $12 million in LAE for Nine Months 2017 and 2016, respectively.
|
| |
(2) | Includes expected LAE(1) Net (paid) recovered losses in 2023 include recoveries related to various Puerto Rico securities transferred to be paid of $23 million as of September 30, 2017 and $12 million as of December 31, 2016. |
The following table presents the present valueCompany's investment portfolio upon the maturity and extinguishment of net expected loss to be paidcertain GO, PBA and HTA insured exposure. Net (paid) recovered losses in 2022 include the net economic loss development for all contracts by accounting model.amounts received pursuant to the 2022 Puerto Rico Resolutions, as described in Note 3, Outstanding Exposure.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Expected Loss to be Paid (Recovered) and
Net Economic Loss Development (Benefit)Roll Forward by Sector
By Accounting Model
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2023 |
Sector | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 | | Net Economic Loss Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2023 |
| | (in millions) |
Public finance: | | | | | | | | |
U.S. public finance | | $ | 433 | | | $ | 135 | | | $ | (169) | | | $ | 399 | |
Non-U.S. public finance | | 10 | | | (1) | | | — | | | 9 | |
Public finance | | 443 | | | 134 | | | (169) | | | 408 | |
Structured finance: | | | | | | | | |
U.S. RMBS | | 73 | | | (48) | | | 13 | | | 38 | |
Other structured finance | | 44 | | | 1 | | | (1) | | | 44 | |
Structured finance | | 117 | | | (47) | | | 12 | | | 82 | |
Total | | $ | 560 | | | $ | 87 | | | $ | (157) | | | $ | 490 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2022 |
Sector | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 | | Net 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months 2023 |
Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | | Net Economic Loss Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2023 |
| | (in millions) |
Public finance: | | | | | | | | |
U.S. public finance | | $ | 403 | | | $ | 193 | | | $ | (197) | | | $ | 399 | |
Non-U.S. public finance | | 9 | | | — | | | — | | | 9 | |
Public finance | | 412 | | | 193 | | | (197) | | | 408 | |
Structured finance: | | | | | | | | |
U.S. RMBS | | 66 | | | (52) | | | 24 | | | 38 | |
Other structured finance | | 44 | | | 6 | | | (6) | | | 44 | |
Structured finance | | 110 | | | (46) | | | 18 | | | 82 | |
Total | | $ | 522 | | | $ | 147 | | | $ | (179) | | | $ | 490 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| As of September 30, 2017 | | As of December 31, 2016 | | Third Quarter 2017 | | Third Quarter 2016 | | Nine Months 2017 | | Nine Months 2016 |
| (in millions) |
Financial guaranty insurance | $ | 1,205 |
| | $ | 1,083 |
| | $ | 207 |
| | $ | (35 | ) | | $ | 328 |
| | $ | 66 |
|
FG VIEs (1) and other | 93 |
| | 105 |
| | (2 | ) | | (3 | ) | | (6 | ) | | (6 | ) |
Credit derivatives (2) | (6 | ) | | 10 |
| | (1 | ) | | (6 | ) | | (24 | ) | | (23 | ) |
Total | $ | 1,292 |
| | $ | 1,198 |
| | $ | 204 |
| | $ | (44 | ) | | $ | 298 |
| | $ | 37 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months 2022 |
Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | | Net 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 | | $ | 197 | | | $ | (16) | | | $ | 445 | | | $ | 626 | |
Non-U.S. public finance | | 12 | | | (6) | | | — | | | 6 | |
Public finance | | 209 | | | (22) | | | 445 | | | 632 | |
Structured finance: | | | | | | | | |
U.S. RMBS | | 150 | | | (127) | | | 29 | | | 52 | |
Other structured finance | | 52 | | | 1 | | | (10) | | | 43 | |
Structured finance | | 202 | | | (126) | | | 19 | | | 95 | |
Total | | $ | 411 | | | $ | (148) | | | $ | 464 | | | $ | 727 | |
_______________________________________
(1) Refer to Note 9, Consolidated Variable Interest Entities.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.”
(2) Refer to Note 8, Contracts Accounted for as Credit Derivatives.
Selected U.S. Public Finance Transactions
The Company insures general obligation bondstables above include (i) net LAE paid of the Commonwealth of Puerto Rico$9 million, $5 million, $17 million and various obligations of its related authorities$25 million for third quarter 2023, third quarter 2022, nine months 2023 and public corporations aggregating $5.0 billion net par as of September 30, 2017, all of which are BIG. For additional information regarding the Company's exposure to general obligations of Commonwealth of Puerto Riconine months 2022, respectively, and various obligations of its related authorities and public corporations, please refer to "Exposure to Puerto Rico" in Note 4, Outstanding Exposure.
As of September 30, 2017, the Company has insured $346 million net par outstanding of general obligation bonds issued by the City of Hartford, Connecticut, which has recently experienced financial distress. The Company rates $345 million net par of that BIG, with the remainder being a second-to-pay policy rated investment grade. The mayor of Hartford announced that the city would be unable to meet its financial obligations by early November 2017 if the State of Connecticut failed to enact a budget, and hired bankruptcy consultants. On October 31, 2017, the State adopted a budget providing for substantial payments to the City, placing the City under State oversight and providing an avenue for the City to issue debt backed by the State.
The Company has approximately $19 million of net par exposure as of September 30, 2017 to bonds issued by Parkway East Public Improvement District (District), which is located in Madison County, Mississippi (the County). The bonds, which are rated BIG, are payable from special assessments on properties within the District, as well as amounts paid under a contribution agreement with the County in which the County covenants that it will provide funds in the event special assessments are not sufficient to make a debt service payment. The special assessments have not been sufficient to pay debt service in full. In earlier years, the County provided funding to cover the balance of the debt service requirement, but subsequently claimed the District’s failure to reimburse it within the two years stipulated in the contribution agreement means that the County is not required to provide funding until it is reimbursed. On May 31, 2017, the United States Court of Appeals for the Fifth Circuit reversed a district court ruling favorable to the Company in its declaratory judgment action disputing the County’s interpretation. See “Recovery Litigation” below.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the U.S. Bankruptcy Code became effective. As of September 30, 2017, the Company’s net par subject to the plan consists of $113 million of pension obligation bonds. As part of the plan of adjustment, the City will repay any claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth.
The Company projects that its total(ii) net expected loss across its troubled U.S. public finance credits as of September 30, 2017 including those mentioned above, which incorporated the likelihood of the various outcomes, will be $1.0 billion, compared with a net expected loss of $871 million as of December 31, 2016. Economic loss development in Third Quarter 2017 was $229 million and economic loss development for Nine Months 2017 was $431 million, which was primarily attributable to Puerto Rico exposures.
Selected Non - U.S. Public Finance Transactions
The Company insures and reinsures credits with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the sub-sovereigns also to default. The Company's exposure net of reinsurance to these Spanish and Portuguese credits is $456 million and $75 million, respectively. The Company rates all of these exposures BIG due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities. The Company's exposure, net of reinsurance, to these Hungarian credits is $214 million, all of which is rated BIG.
As part of the MBIA UK Acquisition, the Company now also insures an obligation backed by the availability and toll revenues of a major arterial road into a city in the U.K. with $218 million of net par outstanding as of September 30, 2017. This transaction has been underperforming due to lower traffic volume and higher costs compared with expectations at underwriting.
These transactions, together with other non-U.S. public finance insured obligations, had expected lossLAE to be paid of $47$29 million and $11 million as of September 30, 2017, compared with $33 million as of2023 and December 31, 2016. 2022, respectively.
Public Finance
The MBIA UK Acquisition added $13 millionlargest component of public finance net expected loss as of January 2017. There was littlelosses to be paid (recovered) and net economic loss development during Third Quarter 2017. The economic benefit of approximately $4 million during Nine Months 2017 was due mainly to the improved internal outlook of certain European sovereigns and sub-sovereign entities.(benefit) are U.S. exposures, including Puerto Rico exposures, which are discussed in Note 3, Outstanding Exposure.
Approach to Projecting Losses in U.S. RMBS Loss Projections
The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e.(e.g., payment priorities and tranching) of the RMBS and any expected R&W recoveriesrepresentation and warranty (R&W) recoveries/payables to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates.
Third Quarter 2017 U.S.Each period the Company reviews the assumptions it uses to make RMBS Loss Projections
Basedloss projections with consideration of updates on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, liquidation rateslate-stage delinquencies and loss severities)severity) as well as the residential property market and economy in general,general. To the Company choseextent it observes changes, it makes a judgment as to makewhether those changes are normal fluctuations or part of a more prolonged trend. The assumptions that the changes to the assumptions itCompany uses to project RMBS losses are shown in the tables of assumptions in the sections below.
Net Economic Loss Development (Benefit)
U.S. RMBS
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
First lien U.S. RMBS | $ | (12) | | | $ | (38) | | | $ | (12) | | | $ | (34) | |
Second lien U.S. RMBS | (36) | | | (57) | | | (40) | | | (93) | |
First Lien U.S. RMBS Loss Projections: Alt-A, First Lien,Prime, Option ARM Subprime and PrimeSubprime
The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have recently been 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 developmentprojections 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 partythird-party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews the most recent twelve months of this data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories.
First Lien U.S. RMBS Liquidation Rates
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
Current but recently delinquent | | | |
Alt-A and Prime | 20% | | 20% |
Option ARM | 20% | | 20% |
Subprime | 20% | | 20% |
30 – 59 Days Delinquent | | | |
Alt-A and Prime | 35% | | 35% |
Option ARM | 35% | | 35% |
Subprime | 30% | | 30% |
60 – 89 Days Delinquent | | | |
Alt-A and Prime | 40% | | 40% |
Option ARM | 45% | | 45% |
Subprime | 40% | | 40% |
90+ Days Delinquent | | | |
Alt-A and Prime | 55% | | 55% |
Option ARM | 60% | | 60% |
Subprime | 45% | | 45% |
Bankruptcy | | | |
Alt-A and Prime | 45% | | 45% |
Option ARM | 50% | | 50% |
Subprime | 40% | | 40% |
Foreclosure | | | |
Alt-A and Prime | 60% | | 60% |
Option ARM | 65% | | 65% |
Subprime | 55% | | 55% |
Real Estate Owned | | | |
All | 100% | | 100% |
|
| | | | | |
| September 30, 2017 | | June 30, 2017 | | December 31, 2016 |
Delinquent/Modified in the Previous 12 Months | | | | | |
Alt A and Prime | 20% | | 20% | | 25% |
Option ARM | 20 | | 20 | | 25 |
Subprime | 20 | | 20 | | 25 |
30 – 59 Days Delinquent | | | | | |
Alt A and Prime | 30 | | 30 | | 35 |
Option ARM | 35 | | 35 | | 35 |
Subprime | 40 | | 40 | | 40 |
60 – 89 Days Delinquent | | | | | |
Alt A and Prime | 40 | | 40 | | 45 |
Option ARM | 45 | | 45 | | 50 |
Subprime | 50 | | 45 | | 50 |
90+ Days Delinquent | | | | | |
Alt A and Prime | 50 | | 50 | | 55 |
Option ARM | 55 | | 55 | | 55 |
Subprime | 55 | | 55 | | 55 |
Bankruptcy | | | | | |
Alt A and Prime | 45 | | 45 | | 45 |
Option ARM | 50 | | 50 | | 50 |
Subprime | 40 | | 40 | | 40 |
Foreclosure | | | | | |
Alt A and Prime | 65 | | 60 | | 65 |
Option ARM | 65 | | 65 | | 65 |
Subprime | 65 | | 65 | | 65 |
Real Estate Owned | | | | | |
All | 100 | | 100 | | 100 |
While the Company uses the liquidation rates as described above to project defaults of non-performing loans (including current loans that were recently modified or delinquent within the last 12 months)delinquent), it projects defaults on presently current loans by applying a conditional default rate (CDR) trend.curve. The start of that CDR trendcurve is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e.(i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce 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 case)scenario), after the initial 36-month36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau.plateau CDR. In the base case,scenario, the Company assumes the final CDR will be reached 5.75 yearsone year after the initial 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
trend after the first 36 month36-month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.re-perform.
Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. LossThe Company assumes in the base scenario that recent (still historically elevated) loss severities experienced in first lien transactions have reached historically high levels,will improve after loans with accumulated delinquencies and theforeclosure cost are liquidated. The Company is assuming in the base casescenario that these highthe recent levels
generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 month18-month period, declining to 40% in the base casescenario over 2.5 years.
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for direct vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base CaseScenario Expected Loss Estimates
First Lien RMBS(1)U.S. RMBS
|
| | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of June 30, 2017 | | As of December 31, 2016 |
| Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average |
Alt A and Prime | | | | | | | | | | | | | | | | | |
Plateau CDR | 1.0 | % | - | 11.0% | | 5.1% | | 1.1 | % | - | 10.3% | | 5.1 | % | | 1.0 | % | – | 13.5% | | 5.7% |
Final CDR | 0.0 | % | - | 0.5% | | 0.3% | | 0.1 | % | - | 0.5% | | 0.3 | % | | 0.0 | % | – | 0.7% | | 0.3% |
Initial loss severity: | | | | | | | | | | | | | |
2005 and prior | 60% | | | | 60% | | | | 60% | | |
2006 | 80% | | | | 80% | | | | 80% | | |
2007+ | 70% | | | | 70% | | | | 70% | | |
Option ARM | | | | | | | | | | | | | | | | | |
Plateau CDR | 2.4 | % | - | 6.6% | | 5.3% | | 3.7 | % | - | 6.7% | | 5.4 | % | | 3.2 | % | – | 7.0% | | 5.6% |
Final CDR | 0.1 | % | - | 0.3% | | 0.3% | | 0.2 | % | - | 0.3% | | 0.3 | % | | 0.2 | % | – | 0.3% | | 0.3% |
Initial loss severity: | | | | | | | | | | | | | |
2005 and prior | 60% | | | | 60% | | | | 60% | | |
2006 | 70% | | | | 70% | | | | 70% | | |
2007+ | 75% | | | | 75% | | | | 75% | | |
Subprime | | | | | | | | | | | | | | | | | |
Plateau CDR | 3.6 | % | - | 13.1% | | 7.9% | | 3.8 | % | - | 13.1% | | 7.8 | % | | 2.8 | % | – | 14.1% | | 8.1% |
Final CDR | 0.2 | % | - | 0.7% | | 0.4% | | 0.2 | % | - | 0.7% | | 0.4 | % | | 0.1 | % | – | 0.7% | | 0.4% |
Initial loss severity: | | | | | | | | | | | | | |
2005 and prior | 80% | | | | 80% | | | | 80% | | |
2006 | 90% | | | | 90% | | | | 90% | | |
2007+ | 95% | | | | 95% | | | | 90% | | |
____________________
(1)Represents variables for the base case.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| Range | | Weighted Average | | Range | | Weighted Average |
Alt-A and Prime: | | | | | | | | | | | |
Plateau CDR | 0.3 | % | - | 9.7% | | 3.8% | | 1.6 | % | - | 11.5% | | 5.1% |
Final CDR | 0.0 | % | - | 0.5% | | 0.2% | | 0.1 | % | - | 0.6% | | 0.3% |
Initial loss severity: | | | |
2005 and prior | 50% | | | | 50% | | |
2006 | 50% | | | | 50% | | |
2007+ | 50% | | | | 50% | | |
Option ARM: | | | |
Plateau CDR | 0.0 | % | - | 9.2% | | 3.6% | | 2.0 | % | - | 7.7% | | 4.3% |
Final CDR | 0.0 | % | - | 0.5% | | 0.2% | | 0.1 | % | - | 0.4% | | 0.2% |
Initial loss severity: | | | |
2005 and prior | 50% | | | | 50% | | |
2006 | 50% | | | | 50% | | |
2007+ | 50% | | | | 50% | | |
Subprime: | | | |
Plateau CDR | 0.2 | % | - | 9.6% | | 4.7% | | 2.7 | % | - | 9.7% | | 5.6% |
Final CDR | 0.0 | % | - | 0.5% | | 0.2% | | 0.1 | % | - | 0.5% | | 0.3% |
Initial loss severity: | | | |
2005 and prior | 50% | | | | 50% | | |
2006 | 50% | | | | 50% | | |
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 pattern to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case.scenario. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for June 30, 2017 and December 31, 2016.2022.
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 30% 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 volatility in interest rates, the mortgage market and home prices, the Company began incorporating a 10% recovery of deferred principal balances in the most stressful scenario and a 50% recovery in the least stressful scenario. Additionally, in third quarter 2023, due to home prices reaching all time highs and high equity levels, the Company increased its scenario based recovery assumptions such that the weighted average recovery percentage increased from 20% to approximately 30%. The effect of these updated assumptions on expected losses was a benefit of $7 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 initialplateau 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 September 30, 2017. 2023 and December 31, 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 Secured Overnight Finance Rate (SOFR). An increase in projected SOFR decreases excess spread, while lower SOFR results in higher excess spread.
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of September 30, 20172023 as it used as of June 30, 2017 and December 31, 2016,2022, increasing and decreasing the periods of stress from those used in the base case.
scenario, except as described above with regards to the increase in deferred principal recoveries. In the Company'sCompany’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 1516 months, expected loss to be paid would increase from current projections by approximately $24$28 million for Alt-Aall first liens, $9 million for Option ARM, $41 million for subprime and $1 million for primelien U.S. RMBS transactions.
In the Company'sCompany’s least stressful scenario where 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 nineeight months), expected loss to be paid would decrease from current projections by approximately $11$20 million for Alt-Aall first liens, $21 million for Option ARM, $22 million for subprime and $0.1 million for primelien U.S. RMBS transactions.
U.S. Second Lien U.S. RMBS Loss Projections
Second lien U.S. RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions.transactions (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the voluntary prepayment rate (typically also referred to as CPRspeeds of the collateral),collateral, the interest rate environment and assumptions about loss severity.
In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six monthsseveral years by first calculating current representativeexpected liquidation rates. Arates for delinquent loans, and applying liquidation rate is the percent ofrates to currently delinquent loans in a given cohort (in this instance, delinquency category) that ultimately default. order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults).
Similar to first liens,lien U.S. RMBS transactions, the Company then calculates a CDR for six months, which isthat will cause the period over which the currently delinquent collateral is expectedtargeted amount of liquidations to be liquidated. That CDR is then used as the basis foroccur during the plateau CDR period that follows the embedded plateau losses.period.
For the base case scenario, the CDR (the plateau CDR) wasis held constant for six36 months. Once the plateau period has ended,ends, the CDR is 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 is calculated as the constant CDR that would have yielded the amount(5% of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprising six months of delinquent data and 28 months of decrease to the steady state CDR, the same as of June 30, 2017 and December 31, 2016.original plateau).
HELOC loans generally permitpermitted the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. In the prior periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization period, the Company incorporated an assumption that a percentageA substantial number of loans reaching their principal amortization periods would default aroundin the time of the payment increase.
Most of the HELOC loans underlying the Company'sCompany’s insured HELOC transactions are now past their interest only reset date, although a significant number of HELOC loans werehad been modified to extend the interest onlyinterest-only period for another fiveto 15 years. As a result, in Third Quarter 2017,The majority of the modified loans had reset to fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Recently, the Company eliminatedhas observed the CDR increaseperformance of the modified loans that was applied when such loans reached their principalhave finally reset to full amortization period. In addition, based on(which represent the averagemajority of extended loans), and noted low levels of delinquency, even with substantial increases in monthly payments. This observed performance history, starting in Third Quarter 2017,lowers the Company applied a CDR floorlevel of 2.5% foruncertainty regarding this modified cohort as the future steady state CDR on all its HELOC transactions and reduced the liquidation rate assumption for selected vintages.remainder continue to reset.
When a second lien loan defaults, there is generally a very low recovery. The Company assumed, as of September 30, 20172023 and December 31, 2022, that it will generally recover only 2% of future defaulting collateral at the collateral defaulting in the future and decliningtime of charge-off, with additional amounts of post-default receiptspost charge-off recoveries projected to come in over time. A second lien on previously defaulted collateral. Thisthe borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the sameloss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual 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 usedfor charged-off loans is 40% (up from 30% in the prior quarters), as shown in the table below, based on observed trends and reasonable expectations of June 30, 2017future recoveries. Such recoveries are assumed to be received evenly over the next five years. In the first quarter of 2023, in light of volatility in interest rates, the mortgage market and December 31, 2016.home prices, as with the first lien deferred principal balances detailed earlier, the Company also expanded the range of potential recoveries as a percentage of charged off loan balances. In third quarter 2023, this range was further expanded to represent a potential for greater future recoveries due to home prices reaching new record highs. The assumptions for the current quarter ranged from a 10% recovery of charged-off loan balances in the most stressful scenario and an 80% recovery in the least stressful scenario. The effect of these updated assumptions on expected loss to be paid (recovered) was a benefit of $31 million.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case,scenario, an average CPR (based on experience of the past year) is assumed to continue
until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien U.S. RMBS transactions (in the base case)scenario), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is generally consistent with how the Company modeled the CPR as of June 30, 2017 and December 31, 2016.2022. 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.
The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices. These variables have been relatively stable and have less impact on the projection results than the variables discussed above. However, in a number of HELOC transactions the servicers have been modifying poorly performing loans from floating to fixed rates, and, as a result, rising interest rates would negatively impact the excess spread available from these modified loans to support the transactions. The Company incorporated these modifications in its assumptions.
In estimating expected losses, the Company modeled and probability weighted five possiblescenarios, each with a different CDR curvescurve applicable to the period preceding the return to the long-term steady state CDR. The Company used five scenarios at September 30, 2017 and December 31, 2016. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate and the amount of additional defaults because of the expiry of the interest only period are the primary drivers behindof the likely amount of losses the collateral will likely suffer.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.
Key Assumptions in Base Scenario Expected Loss Estimates
HELOCs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| Range | | Weighted Average | | Range | | Weighted Average |
Plateau CDR | 0.4 | % | - | 8.7% | | 2.7% | | 0.4 | % | - | 8.4% | | 3.5% |
Final CDR trended down to | 0.0 | % | - | 0.4% | | 0.1% | | 0.0 | % | - | 0.4% | | 0.2% |
Liquidation rates: | | | | | | | | | | | |
Current but recently delinquent | 20% | | | | 20% | | |
30 – 59 Days Delinquent | 30 | | | | 30 | | |
60 – 89 Days Delinquent | 40 | | | | 40 | | |
90+ Days Delinquent | 60 | | | | 60 | | |
Bankruptcy | 55 | | | | 55 | | |
Foreclosure | 55 | | | | 55 | | |
Real Estate Owned | 100 | | | | 100 | | |
Loss severity on future defaults | 98% | | | | 98% | | |
Projected future recoveries on previously charged-off loans | 40% | | | | 30% | | |
The Company continues to evaluate the assumptions affecting its modeling results.
The Company believes the most important driver of its projected second lien RMBS losses is the performance of its HELOC transactions. The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 HELOCs.
Key Assumptions in Base Case Expected Loss Estimates
HELOCs (1)
|
| | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of June 30, 2017 | | As of December 31, 2016 |
| Range | | Weighted Average | | Range | | Weighted Average | | Range | | Weighted Average |
Plateau CDR | 5.2 | % | - | 22.0% | | 11.3% | | 3.2 | % | - | 22.6% | | 13.3 | % | | 3.5 | % | - | 24.8% | | 13.6% |
Final CDR trended down to | 2.5 | % | - | 3.2% | | 2.5% | | 0.5 | % | - | 3.2% | | 1.3 | % | | 0.5 | % | - | 3.2% | | 1.3% |
Liquidation rates: | | | | | | | | | | | | | | | | | |
Delinquent/Modified in the Previous 12 Months | 20% | | | | 20% | | | | 25% | | |
30 – 59 Days Delinquent | 45 | | | | 45 | | | | 50 | | |
60 – 89 Days Delinquent | 60 | | | | 65 | | | | 65 | | |
90+ Days Delinquent | 75 | | | | 80 | | | | 80 | | |
Bankruptcy | 55 | | | | 55 | | | | 55 | | |
Foreclosure | 70 | | | | 75 | | | | 75 | | |
Real Estate Owned | 100 | | | | 100 | | | | 100 | | |
Loss severity | 98% | | | | 98% | | | | 98% | | |
____________________
| |
(1) | Represents variables for the base case. |
The Company’s base case assumed a six month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenarioscenarios with a longer period of elevated defaults and anotherothers with a shorter period of elevated defaults. IncreasingIn the Company’s most stressful scenario, assuming 10% recoveries on charged-off loans, increasing the CDR plateau to eight42 months and increasing the ramp-down by threefour months to 3116 months (for a total stress period of 3958 months) would increasedecrease the expected lossrecovery by approximately $13$89 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, assuming 80% recoveries on charged-off loans, reducing the CDR plateau to four30 months and decreasing the length of the CDR ramp-down to 25eight months (for a total stress period of 2938 months), and lowering the ultimate prepayment rate to 10% would decreaseincrease the expected lossrecovery by approximately $14$120 million for HELOC transactions.
Breaches of Representations and Warranties
As of September 30, 2017, the Company had a net R&W payable of $3 million to R&W counterparties, compared to an R&W payable of $6 million as of December 31, 2016.
Triple-X Life Insurance Transactions
The Company had $2.1 billion of net par exposure to financial guaranty triple-X life insurance transactions as of September 30, 2017, of which two transactions with $85 million in net par are rated BIG. The triple-X life insurance transactions are based on discrete blocks of individual life insurance business. In older vintage triple-X life insurance transactions, which include the two BIG-rated transactions, the amounts raised by the sale of the notes insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The amounts have been invested since inception in accounts managed by third-party investment managers. In the case of the two BIG-rated transactions, material amounts of their assets were invested in U.S. RMBS. Based on its analysis of the information available, including estimates of future investment performance, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at September 30, 2017, the Company projected net expected recoveries of $7 million. The economic benefit during Third Quarter 2017 was approximately $1 million, which was due primarily to improved performance in some of the underlying assets in which the transactions have invested. The economic benefit during Nine Months 2017 was approximately $56 million, which was due primarily to a settlement with the former investment manager of the two BIG transactions.
Student Loan Transactions
The Company has insured or reinsured $1.4 billion net par of student loan securitizations issued by private issuers that are classified as structured finance. Of this amount, $116 million is rated BIG. The Company is projecting approximately $34 million of net expected loss to be paid on these transactions. In general, the losses are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The economic development during Third Quarter 2017 was approximately $1 million, which was driven primarily by a lower probability of certain deals being commuted. The economic loss development during Nine Months 2017 was approximately $2 million, which was driven primarily by changes in the discount rates and a lower probability of certain deals being commuted.
Recovery Litigation and Dispute Resolution
In the ordinary course of their respective businesses, certain of the Company'sAGL’s subsidiaries assert claimsare involved in legal proceedings againstlitigation 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.
Public Finance Transactions
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. Please refer toSee Note 4,3, Outstanding Exposure, for a discussion of the Company'sCompany’s exposure to Puerto Rico and related recovery litigation being pursued by the Company.
On November 1, 2013, Radian Asset Assurance Inc. (Radian Asset) commenced a declaratory judgment action in the U.S. District Court
5. Contracts Accounted for the Southern District of Mississippi against Madison County, Mississippi and the Parkway East Public Improvement District to establish its rights under a contribution agreement from the County supporting certain special assessment bonds issued by the District and insured by Radian Asset (now AGC). As of September 30, 2017, $19 million of such bonds were outstanding. The County maintained that its payment obligation is limited to two years of annual debt service, while AGC contended the County’s obligations under the contribution agreement continue so long as the bonds remain outstanding. On April 27, 2016, the Court granted AGC's motion for summary judgment, agreeing with AGC's interpretation of the County's obligations. The County appealed the District Court’s summary judgment ruling to the United States Court of Appeals for the Fifth Circuit, and on May 31, 2017, the appellate court reversed the District Court’s ruling and remanded the matter to the District Court.Insurance
Triple-X Life Insurance Transactions
In December 2008 AGUK filed an action in the Supreme Court of the State of New York against J.P. Morgan Investment Management Inc. (JPMIM), the investment manager for a triple-X life insurance transaction, Orkney Re II plc (Orkney), involving securities guaranteed by AGUK. The action alleged that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the Orkney investments. The trial commenced on March 13, 2017. During a court-ordered mediation session on March 25, 2017, the parties agreed to settle the litigation and subsequently filed a stipulation of discontinuance of the court proceedings with prejudice. The parties have agreed to keep the terms of the settlement confidential.
RMBS Transactions
On February 5, 2009, U.S. Bank National Association, as indenture trustee (U.S. Bank), CIFG Assurance North America Inc. (CIFGNA), as insurer of the Class Ac Notes, and Syncora Guarantee Inc. (Syncora), as insurer of the Class Ax Notes, filed a complaint in the Supreme Court of the State of New York against GreenPoint Mortgage Funding, Inc. (GreenPoint) alleging GreenPoint breached its R&W with respect to the underlying mortgage loans in the GreenPoint Mortgage Funding Trust 2006-HE1 transaction. On March 3, 2010, the court dismissed CIFGNA's and Syncora’s causes of action on standing grounds. On December 16, 2013, GreenPoint moved to dismiss the remaining claims of U.S. Bank on the grounds that it too lacked standing. U.S. Bank cross-moved for partial summary judgment striking GreenPoint’s defense that U.S. Bank lacked standing to directly pursue claims against GreenPoint. On January 28, 2016, the court denied GreenPoint’s motion for summary judgment and granted U.S. Bank’s cross-motion for partial summary judgment, finding that as a matter of law U.S. Bank has standing to directly assert claims against GreenPoint. Oral argument on GreenPoint's appeal was heard by the New York Appellate Division, First Department, on May 2, 2017. CIFGNA originally had $500 million insured net par exposure to this transaction; $19 million insured net par remains outstanding at September 30, 2017.
On November 26, 2012, CIFGNA filed a complaint in the Supreme Court of the State of New York against JP Morgan Securities LLC (JP Morgan) for material misrepresentation in the inducement of insurance and common law fraud, alleging that JP Morgan fraudulently induced CIFGNA to insure $400 million of securities issued by ACA ABS CDO 2006-2 Ltd. and $325 million of securities issued by Libertas Preferred Funding II, Ltd. On June 26, 2015, the Court dismissed with prejudice CIFGNA’s material misrepresentation in the inducement of insurance claim and dismissed without prejudice CIFGNA’s common law fraud claim. On September 24, 2015, the Court denied CIFGNA’s motion to amend but allowed CIFGNA to re-plead a cause of action for common law fraud. On November 20, 2015, CIFGNA filed a motion for leave to amend its complaint to re-plead common law fraud. On April 29, 2016, CIFGNA filed an appeal to reverse the Court’s decision dismissing CIFGNA’s material misrepresentation in the inducement of insurance claim. On November 29, 2016, the Appellate Division of the Supreme Court of the State of New York ruled that the Court’s decision dismissing with prejudice CIFGNA’s material misrepresentation in the inducement of insurance claim should be modified to grant CIFGNA leave to re-plead such claim. On February 27, 2017, AGC (as successor to CIFGNA) filed an amended complaint which includes a claim for material misrepresentation in the inducement of insurance.
| |
6. | Contracts Accounted for as Insurance |
Premiums
The portfolio of outstanding exposures discussed in Note 4,3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that meet the definition of insurance contracts, contracts that meet the definition of a derivative, and contracts that are accounted for as insurance contracts, derivatives and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, contracts. Please refer tounless otherwise specified. See Note 8,6, Contracts Accounted for as Credit Derivatives, for amounts that relaterelated to CDS and Note 9, Consolidated8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that relate toare accounted for as consolidated FG VIEs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Premiums
Net Earned Premiums
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Financial guaranty insurance: | | | | | | | |
Scheduled net earned premiums | $ | 73 | | | $ | 70 | | | $ | 212 | | | $ | 219 | |
Accelerations from refundings and terminations (1) | 14 | | | 12 | | | 26 | | | 145 | |
Accretion of discount on net premiums receivable | 7 | | | 6 | | | 20 | | | 18 | |
Financial guaranty insurance net earned premiums | 94 | | | 88 | | | 258 | | | 382 | |
Specialty net earned premiums | 1 | | | 1 | | | 3 | | | 3 | |
Net earned premiums | $ | 95 | | | $ | 89 | | | $ | 261 | | | $ | 385 | |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Scheduled net earned premiums | $ | 96 |
| | $ | 101 |
| | $ | 296 |
| | $ | 285 |
|
Accelerations: | | | | | | | |
Refundings | 84 |
| | 105 |
| | 189 |
| | 267 |
|
Terminations | 3 |
| | 21 |
| | 15 |
| | 65 |
|
Total Accelerations | 87 |
| | 126 |
| | 204 |
| | 332 |
|
Accretion of discount on net premiums receivable | 3 |
| | 4 |
| | 11 |
| | 11 |
|
Financial guaranty insurance net earned premiums | 186 |
| | 231 |
| | 511 |
| | 628 |
|
Other | 0 |
| | — |
| | 1 |
| | 0 |
|
Net earned premiums (1) | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
(1) Nine months 2022 accelerations included $104 million related to PRCCDA, PRIFA and GO/PBA exposures. See Note 3, Outstanding Exposure. ___________________
| |
(1) | Excludes $3 million and $4 million for Third Quarter 2017 and 2016, respectively, and $11 million and $12 million for Nine Months 2017 and 2016, respectively, related to consolidated FG VIEs. |
Components of Unearned Premium Reserve
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Gross | | Ceded | | Net(1) | | Gross | | Ceded | | Net(1) |
| (in millions) |
Deferred premium revenue(2) | $ | 3,647 |
| | $ | 107 |
| | $ | 3,540 |
| | $ | 3,548 |
| | $ | 206 |
| | $ | 3,342 |
|
Contra-paid (3) | (50 | ) | | 1 |
| | (51 | ) | | (37 | ) | | 0 |
| | (37 | ) |
Unearned premium reserve | $ | 3,597 |
| | $ | 108 |
| | $ | 3,489 |
| | $ | 3,511 |
| | $ | 206 |
| | $ | 3,305 |
|
____________________
| |
(1) | Excludes $79 million and $90 million of deferred premium revenue, and $18 million and $25 million of contra-paid related to FG VIEs as of September 30, 2017 and December 31, 2016, respectively. |
| |
(2) | Includes $7 million of non- financial guaranty as of September 30, 2017. As of December 31, 2016, non-financial guaranty deferred premium revenue was de minimis. |
| |
(3) | See "Financial Guaranty Insurance Losses– Insurance Contracts' Loss Information" below for an explanation of "contra-paid". |
Gross Premium Receivable,
Net of Commissions Payable on Assumed Business
Roll Forward
| | | | | | | | | | | |
| Nine Months |
| 2023 | | 2022 |
| (in millions) |
Beginning of year | $ | 1,298 | | | $ | 1,372 | |
Less: Specialty insurance premium receivable | 1 | | | 1 | |
Financial guaranty insurance premiums receivable | 1,297 | | | 1,371 | |
Gross written premiums on new business, net of commissions | 215 | | | 232 | |
Gross premiums received, net of commissions | (170) | | | (258) | |
Adjustments: | | | |
Changes in the expected term and debt service assumptions | 4 | | | (5) | |
Accretion of discount, net of commissions on assumed business | 20 | | | 18 | |
Foreign exchange gain (loss) on remeasurement | 9 | | | (181) | |
Financial guaranty insurance premium receivable | 1,375 | | | 1,177 | |
Specialty insurance premium receivable | 1 | | | 1 | |
September 30, | $ | 1,376 | | | $ | 1,178 | |
|
| | | | | | | |
| Nine Months |
| 2017 | | 2016 |
| (in millions) |
December 31, | $ | 576 |
| | $ | 693 |
|
FG activity | | | |
Premiums receivable from acquisitions (see Note 2) | 270 |
| | 18 |
|
Gross written premiums on new business, net of commissions on assumed business | 225 |
| | 111 |
|
Gross premiums received, net of commissions on assumed business | (216 | ) | | (155 | ) |
Adjustments: | | | |
Changes in the expected term | 0 |
| | (39 | ) |
Accretion of discount, net of commissions on assumed business | 13 |
| | 5 |
|
Foreign exchange translation | 54 |
| | (25 | ) |
Subtotal (1) | 922 |
| | 608 |
|
Other | 0 |
| | 0 |
|
September 30, | $ | 922 |
|
| $ | 608 |
|
____________________
| |
(1) | Excludes $10 million and $11 million as of September 30, 2017 and September 30, 2016, respectively, related to consolidated FG VIEs. |
Foreign exchange translation relates to installmentApproximately 70% and 74% of gross premiums receivable, denominated in currencies other than the U.S. dollar . Approximately 71%, 50% and 52%net of installment premiumscommissions payable, at September 30, 2017,2023 and December 31, 2016 and September 30, 2016,2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the europound sterling and pound sterling.euro.
The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the tablestable below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, andrestructurings, changes in the consumer price indices, changes in expected lives.lives and new business.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance Gross Premiums Receivable,
Expected Future Premium Collections and Earnings
| | | | | | | | | | | |
| As of September 30, 2023 |
| Future Gross Premiums to be Collected (1) | | Future Net Premiums to be Earned (2) |
| (in millions) |
2023 (October 1 - December 31) | $ | 45 | | | $ | 72 | |
2024 | 134 | | | 277 | |
2025 | 104 | | | 259 | |
2026 | 100 | | | 243 | |
2027 | 97 | | | 230 | |
2028-2032 | 402 | | | 958 | |
2033-2037 | 264 | | | 635 | |
2038-2042 | 182 | | | 390 | |
After 2042 | 360 | | | 537 | |
Total | $ | 1,688 | | | 3,601 | |
Future accretion | | | 313 | |
Total future net earned premiums | | | $ | 3,914 | |
____________________
(1) Net of Commissions on Assumed Businessassumed commissions payable.
(Undiscounted)(2) Net of reinsurance.
|
| | | |
| As of September 30, 2017 |
| (in millions) |
2017 (October 1 – December 31) | $ | 32 |
|
2018 | 95 |
|
2019 | 82 |
|
2020 | 80 |
|
2021 | 78 |
|
2022-2026 | 306 |
|
2027-2031 | 212 |
|
2032-2036 | 120 |
|
After 2036 | 120 |
|
Total(1) | $ | 1,125 |
|
____________________
| |
(1) | Excludes expected cash collections on FG VIEs of $13 million. |
Scheduled Financial Guaranty Insurance Net Earned Premiums
|
| | | |
| As of September 30, 2017 |
| (in millions) |
2017 (October 1 – December 31) | $ | 92 |
|
2018 | 348 |
|
2019 | 300 |
|
2020 | 271 |
|
2021 | 249 |
|
2022-2026 | 963 |
|
2027-2031 | 620 |
|
2032-2036 | 373 |
|
After 2036 | 317 |
|
Net deferred premium revenue(1) | 3,533 |
|
Future accretion | 197 |
|
Total future net earned premiums | $ | 3,730 |
|
____________________
| |
(1) | Excludes scheduled net earned premiums on consolidated FG VIEs of $79 million. |
Selected Information for Financial Guaranty Insurance
Policies with Premiums Paid in Installments
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (dollars in millions) |
Premiums receivable, net of commissions payable | $ | 1,375 | | $ | 1,297 |
Deferred premium revenue | 1,702 | | 1,663 |
Weighted-average risk-free rate used to discount premiums | 1.9% | | 1.8% |
Weighted-average period of premiums receivable (in years) | 12.2 | | 12.9 |
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (dollars in millions) |
Premiums receivable, net of commission payable | $ | 922 |
| | $ | 576 |
|
Gross deferred premium revenue | 1,241 |
| | 1,041 |
|
Weighted-average risk-free rate used to discount premiums | 2.4 | % | | 3.0 | % |
Weighted-average period of premiums receivable (in years) | 9.3 |
| | 9.1 |
|
Losses and Recoveries
Financial Guaranty Insurance Losses
Insurance Contracts' Loss Information
The following table provides information on loss and LAE reserves and salvage and subrogation recoverable, net of reinsurance. The Company usedare discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0%4.51% to 2.94%5.45% with a weighted average of 2.27%4.86% as of September 30, 20172023 and 0.0%3.82% to 3.23%4.69% with a weighted average of 2.74%4.15% as of December 31, 2016.2022.
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 Reservereserves and Salvagesalvage and Subrogation Recoverablesubrogation recoverable, both net of reinsurance.
Net of ReinsuranceReserve (Salvage) by Sector
Insurance Contracts | | | | | | | | | | | | | | |
| | As of |
Sector | | September 30, 2023 | | December 31, 2022 |
| | (in millions) |
Public finance: | | | | |
U.S. public finance | | $ | 123 | | | $ | 71 | |
Non-U.S. public finance | | 1 | | | 1 | |
Public finance | | 124 | | | 72 | |
Structured finance: | | | | |
U.S. RMBS | | (89) | | | (77) | |
Other structured finance | | 42 | | | 42 | |
Structured finance | | (47) | | | (35) | |
Total | | $ | 77 | | | $ | 37 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Loss and LAE Reserve, net | | Salvage and Subrogation Recoverable, net | | Net Reserve (Recoverable) | | Loss and LAE Reserve, net | | Salvage and Subrogation Recoverable, net | | Net Reserve (Recoverable) |
| (in millions) |
Public finance: | | | | | | | | | | | |
U.S. public finance | $ | 984 |
| | $ | 196 |
| | $ | 788 |
| | $ | 711 |
| | $ | 86 |
| | $ | 625 |
|
Non-U.S. public finance | 21 |
| | — |
| | 21 |
| | 21 |
| | — |
| | 21 |
|
Public finance | 1,005 |
| | 196 |
| | 809 |
| | 732 |
| | 86 |
| | 646 |
|
Structured finance: | | | | | | | | | | | |
U.S. RMBS | 269 |
| | 252 |
| | 17 |
| | 283 |
| | 262 |
| | 21 |
|
Triple-X life insurance transactions | 15 |
| | 28 |
| | (13 | ) | | 36 |
| | — |
| | 36 |
|
Other structured finance | 52 |
| | — |
| | 52 |
| | 60 |
| | — |
| | 60 |
|
Structured finance | 336 |
| | 280 |
| | 56 |
| | 379 |
| | 262 |
| | 117 |
|
Subtotal | 1,341 |
| | 476 |
| | 865 |
| | 1,111 |
| | 348 |
| | 763 |
|
Other recoverable (payable) | — |
| | 3 |
| | (3 | ) | | — |
| | (1 | ) | | 1 |
|
Subtotal | 1,341 |
| | 479 |
| | 862 |
| | 1,111 |
| | 347 |
| | 764 |
|
Elimination of losses attributable to FG VIEs | (54 | ) | | — |
| | (54 | ) | | (64 | ) | | — |
| | (64 | ) |
Total (1) | $ | 1,287 |
| | $ | 479 |
| | $ | 808 |
| | $ | 1,047 |
| | $ | 347 |
| | $ | 700 |
|
____________________
| |
(1) | See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components. |
Components of Net Reserves (Salvage)
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Loss and LAE reserve | $ | 1,326 |
| | $ | 1,127 |
|
Reinsurance recoverable on unpaid losses | (39 | ) | | (80 | ) |
Loss and LAE reserve, net | 1,287 |
| | 1,047 |
|
Salvage and subrogation recoverable | (497 | ) | | (365 | ) |
Salvage and subrogation payable(1) | 21 |
| | 17 |
|
Other payable (recoverable) | (3 | ) | | 1 |
|
Salvage and subrogation recoverable, net, and other recoverable | (479 | ) | | (347 | ) |
Net reserves (salvage) | $ | 808 |
| | $ | 700 |
|
____________________
| |
(1) | Recorded as a component of reinsurance balances payable. |
The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid, which representrepresents the claim payments made and recoveries received that have not yet been recognized in the statementstatements of operations,operations; (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (having the effect of reducing net expected loss to be paid by the amount of the previously paid claim and the expected recovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offset(and therefore recognized in income in future periods),but not yet received); and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).
Reconciliation of Net Expected Loss to be Paid and(Recovered)
to Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
|
| | | |
| As of September 30, 2017 |
| (in millions) |
Net expected loss to be paid - financial guaranty insurance (1) | $ | 1,205 |
|
Contra-paid, net | 51 |
|
Salvage and subrogation recoverable, net of reinsurance | 476 |
|
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance | (1,286 | ) |
Other recoverable (payable) | 3 |
|
Net expected loss to be expensed (present value) (2) | $ | 449 |
|
____________________
| | | | | |
(1) | See "Net Expected LossAs of September 30, 2023 |
| (in millions) |
Net expected loss to be Paid (Recovered) by Accounting Model" table in Note 5, Expected Loss to be Paid.paid (recovered) - financial guaranty insurance |
$ | 249 | |
(2)Contra-paid, net | Excludes $55 million as21 | |
Salvage and subrogation recoverable, net | 281 | |
Loss and LAE reserve - financial guaranty insurance contracts, net of September 30, 2017, relatedreinsurance | (355) | |
Net expected loss to consolidated FG VIEs.be expensed (present value) | $ | 196 | |
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.
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
| | | | | |
| As of September 30, 2023 |
| (in millions) |
2023 (October 1 - December 31) | $ | 2 | |
2024 | 13 | |
2025 | 12 | |
2026 | 15 | |
2027 | 16 | |
2028-2032 | 63 | |
2033-2037 | 49 | |
2038-2042 | 13 | |
After 2042 | 13 | |
Net expected loss to be expensed | 196 | |
Future accretion | 39 | |
Total expected future loss and LAE | $ | 235 | |
|
| | | |
| As of September 30, 2017 |
| (in millions) |
2017 (October 1 – December 31) | $ | 9 |
|
Subtotal 2017 | 9 |
|
2018 | 40 |
|
2019 | 37 |
|
2020 | 38 |
|
2021 | 34 |
|
2022-2026 | 143 |
|
2027-2031 | 86 |
|
2032-2036 | 46 |
|
After 2036 | 16 |
|
Net expected loss to be expensed | 449 |
|
Future accretion | 205 |
|
Total expected future loss and LAE | $ | 654 |
|
The following table presents the loss and LAE recorded(benefit) reported in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.
Loss and LAE
Reported on the
Consolidated Statements of Operations (Benefit) by Sector
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
Sector | 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Public finance: | | | | | | | |
U.S. public finance | $ | 134 | | | $ | 1 | | | $ | 186 | | | $ | 67 | |
Non-U.S. public finance | — | | | — | | | — | | | — | |
Public finance | 134 | | | 1 | | | 186 | | | 67 | |
Structured finance: | | | | | | | |
U.S. RMBS | (35) | | | (78) | | | $ | (31) | | | $ | (97) | |
Other structured finance | 1 | | | 2 | | | 4 | | | 1 | |
Structured finance | (34) | | | (76) | | | (27) | | | (96) | |
Loss and LAE (benefit) | $ | 100 | | | $ | (75) | | | $ | 159 | | | $ | (29) | |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Public finance: | | | | | | | |
U.S. public finance | $ | 233 |
| | $ | 20 |
| | $ | 424 |
| | $ | 233 |
|
Non-U.S. public finance | 0 |
| | — |
| | (3 | ) | | (1 | ) |
Public finance | 233 |
| | 20 |
| | 421 |
| | 232 |
|
Structured finance: | | | | | | | |
U.S. RMBS | (4 | ) | | (2 | ) | | (14 | ) | | (3 | ) |
Triple-X life insurance transactions | (2 | ) | | (24 | ) | | (48 | ) | | (22 | ) |
Other structured finance | (3 | ) | | (3 | ) | | 0 |
| | (20 | ) |
Structured finance | (9 | ) | | (29 | ) | | (62 | ) | | (45 | ) |
Loss and LAE on insurance contracts before FG VIE consolidation | 224 |
| | (9 | ) | | 359 |
| | 187 |
|
Gain (loss) related to FG VIE consolidation | (1 | ) | | 0 |
| | (5 | ) | | (4 | ) |
Loss and LAE | $ | 223 |
| | $ | (9 | ) | | $ | 354 |
| | $ | 183 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table providestables provide information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross | | Net Total BIG |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
Number of risks (1) | 102 | | | 13 | | | 109 | | | 224 | | | 224 | |
Remaining weighted-average period (in years) | 9.8 | | 16.1 | | 7.7 | | 10.2 | | 10.2 |
| | | | | | | | | |
Outstanding exposure: | | | | | | | | | |
Par | $ | 2,121 | | | $ | 980 | | | $ | 2,033 | | | $ | 5,134 | | | $ | 5,119 | |
Interest | 1,125 | | | 922 | | | 824 | | | 2,871 | | | 2,867 | |
Total (2) | $ | 3,246 | | | $ | 1,902 | | | $ | 2,857 | | | $ | 8,005 | | | $ | 7,986 | |
| | | | | | | | | |
Expected cash outflows (inflows) | $ | 113 | | | $ | 180 | | | $ | 1,621 | | | $ | 1,914 | | | $ | 1,903 | |
Potential recoveries (3) | (324) | | | (78) | | | (1,223) | | | (1,625) | | | (1,615) | |
Subtotal | (211) | | | 102 | | | 398 | | | 289 | | | 288 | |
Discount | 60 | | | (25) | | | (74) | | | (39) | | | (39) | |
Expected losses to be paid (recovered) | $ | (151) | | | $ | 77 | | | $ | 324 | | | $ | 250 | | | $ | 249 | |
| | | | | | | | | |
Deferred premium revenue | $ | 96 | | | $ | 64 | | | $ | 146 | | | $ | 306 | | | $ | 306 | |
Reserves (salvage) | $ | (178) | | | $ | 37 | | | $ | 215 | | | $ | 74 | | | $ | 74 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BIG Categories |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG, Net | | Effect of Consolidating FG VIEs | | Total |
| Gross | | Ceded | | Gross | | Ceded | | Gross | | Ceded | | | |
| (dollars in millions) |
Number of risks(1) | 150 |
| | (22 | ) | | 48 |
| | (3 | ) | | 151 |
| | (44 | ) | | 349 |
| | — |
| | 349 |
|
Remaining weighted-average contract period (in years) | 8.7 |
| | 7.1 |
| | 14.1 |
| | 2.9 |
| | 9.6 |
| | 9.3 |
| | 9.8 |
| | — |
| | 9.8 |
|
Outstanding exposure: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Principal | $ | 4,727 |
| | $ | (99 | ) | | $ | 1,390 |
| | $ | (8 | ) | | $ | 6,715 |
| | $ | (195 | ) | | $ | 12,530 |
| | $ | — |
| | $ | 12,530 |
|
Interest | 2,239 |
| | (42 | ) | | 1,051 |
| | (1 | ) | | 3,218 |
| | (89 | ) | | 6,376 |
| | — |
| | 6,376 |
|
Total(2) | $ | 6,966 |
| | $ | (141 | ) | | $ | 2,441 |
| | $ | (9 | ) | | $ | 9,933 |
| | $ | (284 | ) | | $ | 18,906 |
| | $ | — |
| | $ | 18,906 |
|
Expected cash outflows (inflows) | $ | 192 |
| | $ | (5 | ) | | $ | 418 |
| | $ | (1 | ) | | $ | 3,174 |
| | $ | (83 | ) | | $ | 3,695 |
| | $ | (309 | ) | | $ | 3,386 |
|
Potential recoveries(3) | (494 | ) | | 20 |
| | (80 | ) | | 0 |
| | (1,662 | ) | | 46 |
| | (2,170 | ) | | 194 |
| | (1,976 | ) |
Subtotal | (302 | ) | | 15 |
| | 338 |
| | (1 | ) | | 1,512 |
| | (37 | ) | | 1,525 |
| | (115 | ) | | 1,410 |
|
Discount | 62 |
| | (4 | ) | | (96 | ) | | 0 |
| | (192 | ) | | 2 |
| | (228 | ) | | 23 |
| | (205 | ) |
Present value of expected cash flows | $ | (240 | ) | | $ | 11 |
| | $ | 242 |
| | $ | (1 | ) | | $ | 1,320 |
| | $ | (35 | ) | | $ | 1,297 |
| | $ | (92 | ) | | $ | 1,205 |
|
Deferred premium revenue | $ | 116 |
| | $ | (5 | ) | | $ | 135 |
| | $ | 0 |
| | $ | 573 |
| | $ | (6 | ) | | $ | 813 |
| | $ | (77 | ) | | $ | 736 |
|
Reserves (salvage) | $ | (284 | ) | | $ | 12 |
| | $ | 188 |
| | $ | 0 |
| | $ | 975 |
| | $ | (30 | ) | | $ | 861 |
| | $ | (54 | ) | | $ | 807 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 20162022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross | | Net Total BIG |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
Number of risks (1) | 122 | | | 14 | | | 111 | | | 247 | | | 247 | |
Remaining weighted-average period (in years) | 11.3 | | 8.7 | | 7.6 | | 9.8 | | 9.8 |
| | | | | | | | | |
Outstanding exposure: | | | | | | | | | |
Par | $ | 3,363 | | | $ | 171 | | | $ | 2,318 | | | $ | 5,852 | | | $ | 5,835 | |
Interest | 2,177 | | | 77 | | | 894 | | | 3,148 | | | 3,144 | |
Total (2) | $ | 5,540 | | | $ | 248 | | | $ | 3,212 | | | $ | 9,000 | | | $ | 8,979 | |
| | | | | | | | | |
Expected cash outflows (inflows) | $ | 128 | | | $ | 121 | | | $ | 1,771 | | | $ | 2,020 | | | $ | 2,008 | |
Potential recoveries (3) | (294) | | | (79) | | | (1,364) | | | (1,737) | | | (1,725) | |
Subtotal | (166) | | | 42 | | | 407 | | | 283 | | | 283 | |
Discount | 35 | | | (13) | | | (104) | | | (82) | | | (82) | |
Expected losses to be paid (recovered) | $ | (131) | | | $ | 29 | | | $ | 303 | | | $ | 201 | | | $ | 201 | |
| | | | | | | | | |
Deferred premium revenue | $ | 170 | | | $ | 15 | | | $ | 160 | | | $ | 345 | | | $ | 345 | |
Reserves (salvage) | $ | (174) | | | $ | 21 | | | $ | 186 | | | $ | 33 | | | $ | 33 | |
____________________
(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.
6. Contracts Accounted for as Credit Derivatives
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BIG Categories |
| BIG 1 | | BIG 2 | | BIG 3 | | Total BIG, Net | | Effect of Consolidating FG VIEs | | Total |
| Gross | | Ceded | | Gross | | Ceded | | Gross | | Ceded | |
| (dollars in millions) |
Number of risks(1) | 165 |
| | (35 | ) | | 79 |
| | (11 | ) | | 148 |
| | (49 | ) | | 392 |
| | — |
| | 392 |
|
Remaining weighted-average contract period (in years) | 8.6 |
| | 7.0 |
| | 13.2 |
| | 10.5 |
| | 8.1 |
| | 6.0 |
| | 10.1 |
| | — |
| | 10.1 |
|
Outstanding exposure: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Principal | $ | 4,187 |
| | $ | (326 | ) | | $ | 4,273 |
| | $ | (416 | ) | | $ | 4,703 |
| | $ | (320 | ) | | $ | 12,101 |
| | $ | — |
| | $ | 12,101 |
|
Interest | 1,932 |
| | (140 | ) | | 2,926 |
| | (219 | ) | | 1,867 |
| | (87 | ) | | 6,279 |
| | — |
| | 6,279 |
|
Total(2) | $ | 6,119 |
| | $ | (466 | ) | | $ | 7,199 |
| | $ | (635 | ) | | $ | 6,570 |
| | $ | (407 | ) | | $ | 18,380 |
| | $ | — |
| | $ | 18,380 |
|
Expected cash outflows (inflows) | $ | 172 |
| | $ | (19 | ) | | $ | 1,404 |
| | $ | (86 | ) | | $ | 1,435 |
| | $ | (65 | ) | | $ | 2,841 |
| | $ | (326 | ) | | $ | 2,515 |
|
Potential recoveries(3) | (440 | ) | | 23 |
| | (146 | ) | | 4 |
| | (743 | ) | | 45 |
| | (1,257 | ) | | 198 |
| | (1,059 | ) |
Subtotal | (268 | ) | | 4 |
| | 1,258 |
| | (82 | ) | | 692 |
| | (20 | ) | | 1,584 |
| | (128 | ) | | 1,456 |
|
Discount | 61 |
| | (4 | ) | | (355 | ) | | 19 |
| | (114 | ) | | (4 | ) | | (397 | ) | | 24 |
| | (373 | ) |
Present value of expected cash flows | $ | (207 | ) | | $ | 0 |
| | $ | 903 |
| | $ | (63 | ) | | $ | 578 |
| | $ | (24 | ) | | $ | 1,187 |
| | $ | (104 | ) | | $ | 1,083 |
|
Deferred premium revenue | $ | 131 |
| | $ | (5 | ) | | $ | 246 |
| | $ | (6 | ) | | $ | 476 |
| | $ | (30 | ) | | $ | 812 |
| | $ | (86 | ) | | $ | 726 |
|
Reserves (salvage) | $ | (255 | ) | | $ | 5 |
| | $ | 738 |
| | $ | (58 | ) | | $ | 343 |
| | $ | (10 | ) | | $ | 763 |
| | $ | (64 | ) | | $ | 699 |
|
____________________
| |
(1) | A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure. |
| |
(2) | Includes BIG amounts related to FG VIEs. |
| |
(3) | Includes excess spread and R&W receivables and payables. |
Ratings Impact on Financial Guaranty BusinessAmounts presented in this note relate only to contracts accounted for as derivatives. The Company’s credit derivatives (contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps.
A downgradeThe Company’s credit derivatives are generally 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 oneprincipal 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 AGL’sthe 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 11.4 years and 12.8 years as of September 30, 2023 and December 31, 2022, respectively.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Credit Derivatives (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 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 | | $ | 1,074 | | | $ | (15) | | | $ | 1,175 | | | $ | (79) | |
Non-U.S. public finance | | 1,478 | | | (19) | | | 1,565 | | | (58) | |
U.S. structured finance | | 327 | | | (13) | | | 342 | | | (22) | |
Non-U.S. structured finance | | 610 | | | (2) | | | 121 | | | (3) | |
Total | | $ | 3,489 | | | $ | (49) | | | $ | 3,203 | | | $ | (162) | |
____________________
(1) Expected loss to be paid was $3 million as of both September 30, 2023 and December 31, 2022.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2023 | | As of December 31, 2022 |
Rating Category | | Net Par Outstanding | | % of Total | | Net Par Outstanding | | % of Total |
| | (dollars in millions) |
AAA | | $ | 1,255 | | | 36.0 | % | | $ | 1,260 | | | 39.3 | % |
AA | | 1,020 | | | 29.2 | | | 1,064 | | | 33.2 | |
A | | 689 | | | 19.7 | | | 232 | | | 7.2 | |
BBB | | 470 | | | 13.5 | | | 590 | | | 18.5 | |
BIG | | 55 | | | 1.6 | | | 57 | | | 1.8 | |
Credit derivative net par outstanding | | $ | 3,489 | | | 100.0 | % | | $ | 3,203 | | | 100.0 | % |
Fair Value Gains (Losses) on Credit Derivatives
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Realized gains (losses) and other settlements | $ | — | | | $ | (1) | | | $ | 1 | | | $ | (2) | |
Net unrealized gains (losses) | 9 | | | (47) | | | 114 | | | (40) | |
Fair value gains (losses) on credit derivatives | $ | 9 | | | $ | (48) | | | $ | 115 | | | $ | (42) | |
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 generally 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, 2023 | | As of December 31, 2022 | | As of September 30, 2022 | | As of December 31, 2021 |
Five-year CDS spread | 98 | | 63 | | 70 | | 49 |
One-year CDS spread | 41 | | 26 | | 28 | | 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 |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Fair value of credit derivatives before effect of AGC credit spread | $ | (80) | | | $ | (207) | |
Plus: Effect of AGC credit spread | 31 | | | 45 | |
Net fair value of credit derivatives | $ | (49) | | | $ | (162) | |
The fair value of CDS contracts as of September 30, 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) equity method investments; (iv) short-term investments and (iv) other investments. Equity method investments primarily consists of the investment in Sound Point and fund investments across a variety of strategies.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Investment Portfolio
Carrying Value
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Fixed-maturity securities, available-for-sale (1): | | | |
Externally managed (2) | $ | 5,316 | | | $ | 5,824 | |
Loss Mitigation Securities | 495 | | | 548 | |
Puerto Rico, New Recovery Bonds (3) | 78 | | | 358 | |
Other (4) | 378 | | | 389 | |
Fixed-maturity securities, trading - Puerto Rico, CVIs (3) | 350 | | | 303 | |
Short-term investments | 1,426 | | | 810 | |
Other invested assets: | | | |
Equity method investments: | | | |
Sound Point | 419 | | | — | |
Alternative investments (5) | 331 | | | 123 | |
Other | 15 | | | 10 | |
Total | $ | 8,808 | | | $ | 8,365 | |
____________________
(1) 7.6% and 7.4% of fixed-maturity securities were rated BIG as of September 30, 2023 and December 31, 2022, respectively, consisting primarily of Loss Mitigation Securities. 2.4% and 5.9% were not rated, as of September 30, 2023 and December 31, 2022, respectively.
(2) As of September 30, 2023 and December 31, 2022 amounts include $294 million and $305 million, respectively, of CLOs that had been managed internally by AssuredIM under an investment management agreement until it transitioned to an external manager in June 2023.
(3) These securities are not rated. On August 31, 2023, the Company satisfied its obligations under certain Puerto Rico Trusts and as a result $68 million, at fair value, of Puerto Rico New Recovery Bonds and $5 million, at fair value, of CVIs were transferred from the consolidated Puerto Rico Trusts to AGC and AGM’s investment portfolios. See Note 3, Outstanding Exposure.
(4) As of September 30, 2023 and December 31, 2022, amounts include $214 million and $232 million, respectively, of municipal bonds that had been managed by AssuredIM under an investment management agreement until June 2023, and are now managed by the U.S. Insurance Subsidiaries for their own accounts.
(5) Excludes certain investments in funds that are consolidated and accounted for as CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
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 $630 million of invested capital (at fair value), and $890 million in unfunded commitments (of which $332 million is committed to specific funds). See Note 1, Business and Basis of Presentation for a description of the Sound Point Transaction.
Of the $1.5 billion mentioned above, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million plus previously distributed gains of $132 million for a total of $882 million as of September 30, 2023. As of September 30, 2023, AGAS commitments to Sound Point and AHP funds were $703 million (of which $446 million was funded with a net asset value (NAV) of $469 million). This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance and healthcare structured capital. As of September 30, 2023, three of the six funds in which AGAS invests are accounted for as CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Accrued investment income, which is reported in “other assets,” was $78 million as of September 30, 2023 and $71 million as of December 31, 2022. In nine months 2023 and nine months 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 September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Security Type | | Percent of Total (1) | | Amortized Cost | | Allowance for Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | |
| | (dollars in millions) |
Obligations of state and political subdivisions | | 42 | % | | $ | 2,938 | | | $ | (14) | | | $ | 20 | | | $ | (178) | | | $ | 2,766 | | | |
U.S. government and agencies | | 1 | | | 65 | | | — | | | — | | | (7) | | | 58 | | | |
Corporate securities (2) | | 33 | | | 2,321 | | | (6) | | | 1 | | | (307) | | | 2,009 | | | |
Mortgage-backed securities (3): | | | | | | | | | | | | | | |
RMBS | | 6 | | | 430 | | | (20) | | | 2 | | | (82) | | | 330 | | | |
Commercial mortgage-backed securities (CMBS) | | 3 | | | 198 | | | — | | | — | | | (10) | | | 188 | | | |
Asset-backed securities: | | | | | | | | | | | | | | |
CLOs | | 7 | | | 463 | | | — | | | 1 | | | (10) | | | 454 | | | |
Other | | 6 | | | 440 | | | (46) | | | 6 | | | (31) | | | 369 | | | |
Non-U.S. government securities | | 2 | | | 116 | | | — | | | — | | | (23) | | | 93 | | | |
Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 6,971 | | | $ | (86) | | | $ | 30 | | | $ | (648) | | | $ | 6,267 | | | |
Available-for-Sale Fixed-Maturity Securities by Security Type
As of December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Security Type | | Percent of Total (1) | | Amortized Cost | | Allowance for Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | |
| | (dollars in millions) |
Obligations of state and political subdivisions | | 45 | % | | $ | 3,509 | | | $ | (14) | | | $ | 37 | | | $ | (138) | | | $ | 3,394 | | | |
U.S. government and agencies | | 2 | | | 118 | | | — | | | 1 | | | (8) | | | 111 | | | |
Corporate securities (2) | | 31 | | | 2,387 | | | (6) | | | 2 | | | (299) | | | 2,084 | | | |
Mortgage-backed securities (3): | | | | | | | | | | | | | | |
RMBS | | 5 | | | 418 | | | (19) | | | 3 | | | (62) | | | 340 | | | |
CMBS | | 4 | | | 282 | | | — | | | — | | | (11) | | | 271 | | | |
Asset-backed securities: | | | | | | | | | | | | | | |
CLOs | | 6 | | | 449 | | | — | | | — | | | (21) | | | 428 | | | |
Other | | 5 | | | 423 | | | (26) | | | 22 | | | (26) | | | 393 | | | |
Non-U.S. government securities | | 2 | | | 121 | | | — | | | — | | | (23) | | | 98 | | | |
Total available-for-sale fixed-maturity securities | | 100 | % | | $ | 7,707 | | | $ | (65) | | | $ | 65 | | | $ | (588) | | | $ | 7,119 | | | |
____________________
(1)Based on amortized cost.
(2)Includes securities issued by taxable universities and hospitals.
(3)U.S. government-agency obligations were approximately 38% and 30% of mortgage-backed securities as of September 30, 2023 and December 31, 2022, respectively, based on fair value.
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 September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss |
| (dollars in millions) |
Obligations of state and political subdivisions | $ | 1,610 | | | $ | (39) | | | $ | 899 | | | $ | (136) | | | $ | 2,509 | | | $ | (175) | |
U.S. government and agencies | 21 | | | — | | | 32 | | | (7) | | | 53 | | | (7) | |
Corporate securities | 381 | | | (14) | | | 1,396 | | | (236) | | | 1,777 | | | (250) | |
Mortgage-backed securities: | | | | | | | | | | | |
RMBS | 55 | | | (3) | | | 122 | | | (14) | | | 177 | | | (17) | |
CMBS | 3 | | | — | | | 184 | | | (10) | | | 187 | | | (10) | |
Asset-backed securities: | | | | | | | | | | | |
CLOs | 18 | | | (2) | | | 402 | | | (8) | | | 420 | | | (10) | |
Other | 1 | | | — | | | 26 | | | (2) | | | 27 | | | (2) | |
Non-U.S. government securities | 4 | | | — | | | 89 | | | (23) | | | 93 | | | (23) | |
Total | $ | 2,093 | | | $ | (58) | | | $ | 3,150 | | | $ | (436) | | | $ | 5,243 | | | $ | (494) | |
Number of securities (1) | | | 795 | | | | | 1,308 | | | | | 2,079 | |
Gross Unrealized Loss by Length of Time
for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss |
| (dollars in millions) |
Obligations of state and political subdivisions | $ | 1,763 | | | $ | (79) | | | $ | 163 | | | $ | (56) | | | $ | 1,926 | | | $ | (135) | |
U.S. government and agencies | 32 | | | — | | | 52 | | | (8) | | | 84 | | | (8) | |
Corporate securities | 1,276 | | | (95) | | | 519 | | | (147) | | | 1,795 | | | (242) | |
Mortgage-backed securities: | | | | | | | | | | | |
RMBS | 147 | | | (9) | | | 3 | | | (1) | | | 150 | | | (10) | |
CMBS | 270 | | | (11) | | | — | | | — | | | 270 | | | (11) | |
Asset-backed securities: | | | | | | | | | | | |
CLOs | 171 | | | (7) | | | 250 | | | (14) | | | 421 | | | (21) | |
Other | 27 | | | (2) | | | — | | | — | | | 27 | | | (2) | |
Non-U.S. government securities | 65 | | | (10) | | | 30 | | | (13) | | | 95 | | | (23) | |
Total | $ | 3,751 | | | $ | (213) | | | $ | 1,017 | | | $ | (239) | | | $ | 4,768 | | | $ | (452) | |
Number of securities (1) | | | 1,340 | | | | | 466 | | | | | 1,776 | |
___________________
(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 September 30, 2023 and December 31, 2022 were primarily related to higher interest rates rather than credit quality. As of September 30, 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 September 30, 2023, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 641 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2022, 567 securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $351 million as of September 30, 2023 and $329 million as of December 31, 2022.
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of September 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.
Distribution of Available-for-Sale Fixed-Maturity Securities by Contractual Maturity
As of September 30, 2023
| | | | | | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (in millions) |
Due within one year | $ | 248 | | | $ | 239 | |
Due after one year through five years | 1,526 | | | 1,406 | |
Due after five years through 10 years | 1,760 | | | 1,629 | |
Due after 10 years | 2,809 | | | 2,475 | |
Mortgage-backed securities: | | | |
RMBS | 430 | | | 330 | |
CMBS | 198 | | | 188 | |
Total | $ | 6,971 | | | $ | 6,267 | |
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 $224 million as of September 30, 2023 and $222 million as of December 31, 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 $1,107 million and $1,169 million based on fair value as of September 30, 2023 and December 31, 2022, respectively.
Income from Investments
Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments, and the size of such portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.
Puerto Rico CVIs in the investment portfolio are classified as trading securities. Equity in earnings (losses) of investees represents the Company’s interest in the earnings of its equity method investments.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Income from Investments
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Investment income: | | | | | | | |
Fixed-maturity securities, available-for-sale: | | | | | | | |
Externally managed (1) | $ | 51 | | | $ | 50 | | | $ | 156 | | | $ | 150 | |
Loss Mitigation Securities | 24 | | | 9 | | | 46 | | | 24 | |
Puerto Rico, New Recovery Bonds | 1 | | | 1 | | | 5 | | | 5 | |
Other (2) | 5 | | | 4 | | | 12 | | | 11 | |
Short-term investments | 21 | | | 4 | | | 53 | | | 5 | |
Other invested assets | — | | | — | | | 2 | | | — | |
Investment income | 102 | | | 68 | | | 274 | | | 195 | |
Investment expenses | (2) | | | (1) | | | (4) | | | (4) | |
Net investment income | $ | 100 | | | $ | 67 | | | $ | 270 | | | $ | 191 | |
| | | | | | | |
Fair value gains (losses) on trading securities (3) | $ | 4 | | | $ | (8) | | | $ | 42 | | | $ | (30) | |
Equity in earnings (losses) of investees (4) | 18 | | | (20) | | | 25 | | | (31) | |
____________________
(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 September 30, 2023 were $4 million for third quarter 2023 and $42 million for nine months 2023. 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.
(4) Beginning in the fourth quarter of 2023, equity in earnings (losses) will include the Company’s share of the earnings of the Sound Point entities, which is reported on a one-quarter lag.
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 |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Gross realized gains on sales of available-for-sale securities (1) | $ | 2 | | | $ | — | | | $ | 21 | | | $ | — | |
Gross realized losses on sales of available-for-sale securities (1) | (1) | | | (10) | | | (16) | | | (33) | |
Net foreign currency gains (losses) | (1) | | | — | | | (1) | | | (3) | |
Change in allowance for credit losses and intent to sell | (8) | | | (4) | | | (23) | | | (13) | |
Other net realized gains (losses) | (1) | | | — | | | (1) | | | 10 | |
Net realized investment gains (losses) | $ | (9) | | | $ | (14) | | | $ | (20) | | | $ | (39) | |
____________________
(1) Gross realized gains and losses on sales in all periods related primarily to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.
The proceeds from sales of fixed-maturity securities classified as available-for-sale were $73 million in third quarter 2023, $207 million in third quarter 2022, $767 million in nine months 2023 and $560 million in nine months 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.
Roll Forward of Allowance for
Credit Losses for Available-for-Sale Fixed-Maturity Securities
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Balance, beginning of period | $ | 79 | | | $ | 51 | | | $ | 65 | | | $ | 42 | |
Additions for securities for which credit losses were not previously recognized | — | | | 1 | | | — | | | 4 | |
Additions for purchases of securities accounted for as purchased financial assets with credit deterioration | — | | | 2 | | | — | | | 2 | |
Additions (reductions) for securities for which credit losses were previously recognized | 7 | | | 3 | | | 21 | | | 9 | |
| | | | | | | |
Balance, end of period | $ | 86 | | | $ | 57 | | | $ | 86 | | | $ | 57 | |
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 during third quarter 2023 and nine months 2023. Most of the Company’s securities with credit deterioration are Loss Mitigation Securities.
8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
FG VIEs
Structured Finance and Other FG VIEs
The insurance subsidiaries may result in increased claims underprovide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the Company if counterparties exercise contractualVIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.
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 obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the downgrade againstoccurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured obligors,by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed 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 VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIEs’ liabilities, which is reported in other comprehensive income (OCI). As of both September 30, 2023 and December 31, 2022, the Company consolidated 25 structured finance and other FG VIEs.
Puerto Rico Trusts
With respect to certain insured securities covered by the 2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and/or CVIs that constitute distributions under the 2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as they are paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured obligors are unable to pay. There have been no material changesbondholders under the custody receipts to the Company's potential claimsextent 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.
On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Company satisfied its obligations under such legacy insured bonds with respect to $108 million net par outstanding as of August 31, 2023, and the custodial trusts released to AGC and AGM New Recovery Bonds and/or CVIs with a fair value totaling $73 million as of August 31, 2023. As of September 30, 2023 and December 31, 2022, respectively, the Company consolidated 24 and 45 custodial trusts established as part of the 2022 Puerto Rico Resolutions discussed in Note 3, Outstanding Exposure, Exposure to Puerto Rico.
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 September 30, 2023 | | $ | 136 | | | $ | 10 | | | $ | — | | | $ | 146 | |
As of December 31, 2022 | | 204 | | | 4 | | | (4) | | | 204 | |
As of September 30, 2023, no New Recovery Bonds in the Puerto Rico Trusts were in a gross unrealized loss position. As of December 31, 2022, 14 New Recovery Bonds 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 which were in a continuous unrealized loss position for less than 12
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
months. The Company considered the credit quality, cash flows, interest rate swaps, variable rate demandmovements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss.
The Company has determined that the unrealized losses recorded as of December 31, 2022 were primarily attributable to the change in interest rates, rather than credit quality. The Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, eight securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $3 million.
The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of September 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 guaranteed investment contracts sincewithout call or prepayment penalties.
New Recovery Bonds, Available-for-Sale
Reported in FG VIEs’ Assets
Distribution by Contractual Maturity
As of September 30, 2023
| | | | | | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (in millions) |
Due after five years through 10 years | $ | 28 | | | $ | 30 | |
Due after 10 years | 108 | | | 116 | |
Total | $ | 136 | | | $ | 146 | |
Components of FG VIEs’ Assets and Liabilities
Net fair value gains and losses on FG VIEs are expected to reverse to zero by the filingmaturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contracts. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered).
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The table below shows the carrying value of FG VIEs’ assets and liabilities segregated by type of collateral.
Consolidated FG VIEs by Type of Collateral
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
FG VIEs’ assets: | | | |
U.S. RMBS first lien | $ | 146 | | | $ | 167 | |
U.S. RMBS second lien | 27 | | | 30 | |
Puerto Rico Trusts’ assets (includes $146 and $209 at fair value) (1) | 147 | | | 212 | |
Other | 7 | | | 7 | |
Total FG VIEs’ assets | $ | 327 | | | $ | 416 | |
FG VIEs’ liabilities with recourse: | | | |
U.S. RMBS first lien | $ | 156 | | | $ | 176 | |
U.S. RMBS second lien | 20 | | | 24 | |
Puerto Rico Trusts’ liabilities | 347 | | | 495 | |
Other | 8 | | | 7 | |
Total FG VIEs’ liabilities with recourse | $ | 531 | | | $ | 702 | |
FG VIEs’ liabilities without recourse: | | | |
U.S. RMBS first lien | $ | 11 | | | $ | 13 | |
Total FG VIEs’ liabilities without recourse | $ | 11 | | | $ | 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 September 30, 2023 that was reported in the condensed consolidated statements of operations for third quarter 2023 and nine months 2023 were gains of $3 million and $1 million, respectively. The change in the ISCR of the FG VIEs’ assets at FVO held as of September 30, 2022 were gains of $15 million and $11 million for third quarter 2022 and nine months 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.
Selected Information for FG VIEs’ Assets and Liabilities
Measured under the FVO
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Excess of unpaid principal over fair value of: | | | |
FG VIEs’ assets | $ | 266 | | | $ | 265 | |
FG VIEs’ liabilities with recourse | 51 | | | 21 | |
FG VIEs’ liabilities without recourse | 16 | | | 15 | |
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 29 | | | 34 | |
Unpaid principal for FG VIEs’ liabilities with recourse (1) | 582 | | | 723 | |
____________________
(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2023 through 2041.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
CIVs
In connection with the SECSound Point Transaction and AHP Transaction the Company reevaluated its consolidation conclusion for each CIV and deconsolidated all but three CIVs. As of AGL’s Annual ReportSeptember 30, 2023, CIVs consist of certain funds managed by Sound Point, that were previously managed by AssuredIM. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on Form 10-Kits power to direct the most significant activities of each VIE and its level of economic interest in the entities.
As a result of the Sound Point Transaction and AHP Transaction, during third quarter 2023 and nine months 2023, the Company deconsolidated CIV assets of $4.7 billion and CIV liabilities of $4.4 billion. The Company recognized a loss on deconsolidation of $16 million, which is reported in “fair value gains (losses) on CIVs”. During nine months 2022, the Company deconsolidated a CLO with assets and liabilities of $417 million.
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 year endedextent 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, and gains and losses on consolidation and deconsolidation of CIVs are reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates.
Number of Consolidated CIVs by Type
| | | | | | | | | | | | | | |
| | As of |
CIV Type | | September 30, 2023 | | December 31, 2022 |
Funds | | 3 | | | 8 | |
CLOs | | — | | | 10 | |
CLO warehouses | | — | | | 4 | |
Total number of consolidated CIVs (1) | | 3 | | | 22 | |
____________________
(1) As of December 31, 2016.2022, two CIVs were voting interest entities (VOEs). Funds meet the criteria for consolidating a VOE when the Company possesses substantially all of the economics and all of the decision-making authority.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Assets and Liabilities of CIVs | | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Assets: | | | |
Fund assets: | | | |
Cash and cash equivalents | $ | 7 | | | $ | 59 | |
Fund investments, at fair value | | | |
Equity securities and warrants | 79 | | | 434 | |
Structured products | 239 | | | 128 | |
Corporate securities | — | | | 96 | |
Other | 5 | | | 1 | |
CLO and CLO warehouse assets: | | | |
Cash | — | | | 38 | |
CLO investments: | | | |
Loans in CLOs and CLO warehouses, FVO | — | | | 4,570 | |
Short-term investments, at fair value | — | | | 135 | |
Due from brokers and counterparties | — | | | 32 | |
Total assets (1) | $ | 330 | | | $ | 5,493 | |
Liabilities: | | | |
CLO obligations, FVO (2) | — | | | 4,090 | |
Warehouse financing debt, FVO (3) | — | | | 313 | |
Due to brokers and counterparties | 4 | | | 112 | |
Other liabilities (4) | — | | | 110 | |
Total liabilities | $ | 4 | | | $ | 4,625 | |
____________________
(1) Includes investments in AssuredIM funds and other affiliated entities of $392 million as of December 31, 2022. Includes assets and liabilities of a VOE of $58 million and $1 million, respectively, as of December 31, 2022.
(2) As of December 31, 2022, the weighted average maturity of CLO obligations was 6.2 years and the weighted average interest rate of CLO obligations was 5.3%.
(3) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.9 years as of December 31, 2022. The weighted average interest rate of warehouse financing debt of CLO warehouses was 4.5% as of December 31, 2022.
(4) As of December 31, 2022, includes redeemable noncontrolling interests (NCI).
As of September 30, 2023, the CIVs had unfunded commitments to invest of $143 million.
As of September 30, 2023 and December 31, 2022, the CIVs included derivative contracts with notional amounts totaling $36 million and $46 million, respectively, and average notional amounts of $41 million and $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 million for nine months 2022.
NCI in 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
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 $87 million and liabilities of $7 million as of September 30, 2023, and assets of $86 million and liabilities of $12 million as of December 31, 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 15 thousand policies monitored as of September 30, 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. As of September 30, 2023 and December 31, 2022, the Company identified 66 and 85, respectively, policies that contain provisions and experienced events that may trigger consolidation.
The Company holds variable interests in non-FG VIEs which are not consolidated, as the Company is not the primary beneficiary. As of September 30, 2023, the Company’s maximum exposure to losses relating to these non-FG VIEs was $251 million, which is limited to the carrying value of these investments of $239 million and other assets of $12 million.
9. Fair Value Measurement
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third-partythird party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During Nine Months 2017,nine months 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'sasset’s or liability’s categorization within the hierarchy is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
Transfers between Levels 1, 2 and 3 are recognized at the end of the period when the transfer occurs. The Company reviews the classification between Levels 1, 2 and 3 quarterly to determine whether a transfer is necessary. During the periods
presented, there were no transfers between Level 1 and Level 2. There were no transfers into Level 3 during Third Quarter 2017. There was a transfer of a fixed-maturity security in the investment portfolio from Level 3 to Level 2 during third quarter 2023 and nine months 2023. There were no other transfers from or into Level 3 during Nine Month 2017 because starting in the second quarter of 2017 the price of the security includes a significant unobservable assumption. There were transfers of fixed-maturity securities from Level 2 into Level 3 during Third Quarter 2016 and Nine Months 2016 because of a lack of observability relating to the valuation inputs and collateral pricing.periods presented.
Measured and Carried at Fair Value
Fixed-Maturity Securities and Short-Term Investments
The fair value of bonds in the investment portfoliofixed-maturity securities is generally based on prices received from third partythird-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value measurements using their pricing models, which include available relevant market information,take into account: benchmark curves, benchmarking of likeyields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events.
Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, theThe valuation of fixed-maturity investmentssecurities is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.market-based inputs.
Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and their value is based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Annually, the Company reviews each pricing service’s procedures, controls and models used in the valuations of the Company’s investment portfolio, as well as the competency of the pricing service’s key personnel. In addition, on a quarterly basis, the Company holds a meeting of the internal valuation committee (comprised of individuals within the Company with market, valuation, accounting, and/or finance experience) that reviews and approves prices and assumptions used by the pricing services.
For Level 1 and 2 securities, the Company, on a quarterly basis, reviews internally developed analytic packages that highlight, at a CUSIP level, price changes from the previous quarter to the current quarter. Where unexpected price movements are noted for a specific CUSIP, the Company formally challenges the price provided, and reviews all key inputs utilized in the third party’s pricing model, and compares such information to management’s own market information.
For Level 3 securities, the Company, on a quarterly basis:
reviews methodologies, any model updates and inputs and compares such information to management’s own market information and, where applicable, the internal models,
reviews internally developed analytic packages that highlight, at a CUSIP level, price changes from the previous quarter to the current quarter, and evaluates, documents, and resolves any significant pricing differences with the assistance of the third party pricing source, and
compares prices received from different third party pricing sources, and evaluates, documents the rationale for, and resolves any significant pricing differences.
As of September 30, 2017,2023, the Company used models to price 91 fixed-maturity securities (primarily securities that were purchased or obtained for loss mitigation or other risk management purposes), which were 11% or $1,266 million of the Company’s fixed-maturity securities and short-term investments at fair value. Most189 securities. All Level 3 securities were priced with the assistance of an independent third-party.third parties. The pricing is based on a discounted cash flow approach using the third-party’sthird party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecastsforecasts; and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the bondsecurity including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changechanged the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.
Short-Term Investments
Other Invested Assets
As of September 30, 2017 and December 31, 2016, other invested assets includeShort-term investments carried and measured at fairthat are traded in active markets are classified as Level 1 as their value on a recurring basis of $50 million and $52 million, respectively, and include primarily an investment in the global property catastrophe risk market and an investment in a fund that invests primarily in senior loans and bonds. Fair values for the majority of these investments areis based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their respective net asset value (NAV) per share or equivalent.approaching maturity and, as such, their cost approximates fair value.
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 committed capital securities (CCS),CCS, which is recordedreported in "other assets"other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’sAGC CCS (the AGC CCS) and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (please refer to Note 15, Long Term Debt and Credit Facilities).security. The change in fair value of the AGC CCS and AGM CPS are carried at fairreported in “fair value with changes in fair value recordedgains (losses) on committed capital securities” in the condensed consolidated statementstatements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, London Interbank Offered Rate (LIBOR) curve projections, the
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3.
Supplemental Executive Retirement Plans
The Company classifiesclassified assets included in the fair value measurement of the assets of the Company'sCompany’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is valued based on the observable published daily values of the underlying mutual fundfunds included in the aforementioned plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVNAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist primarily of insured CDS contracts, and also include interest rate swaps that fallqualify as derivatives under derivative accounting standards requiringGAAP, which require fair value accounting through the statement of operations. The following is a description ofmeasurement with changes in the fair value methodology applied to the Company's insured CDS that are accounted for as credit derivatives, which constitute the vast majority of the net credit derivative liabilityreported in the condensed consolidated balance sheets.statements of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has from time-to-time 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 itsthe Company’s credit derivative contracts in determining the fair value of these contracts.
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs to derive an estimate of the fair value of the Company's contracts in its principal markets (see "Assumptions and Inputs").inputs. There is no established market where financial guaranty insured credit derivatives are actively traded,traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s transactions to establish historical price points in the hypothetical market that are used in the fair value calculation. These contracts are classified as Level 3 in the fair value hierarchy sinceas there is reliance on at least oneare multiple unobservable inputinputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
The Company’s models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely and relevant market information.
The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive or pay and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at September 30, 20172023 were such that market prices of the Company’s CDS contracts were not available.
Management considers factors such as current prices charged for similar agreements, when available, performance of underlying assets, life of the instrument, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.
Assumptions and Inputs
The various inputs and assumptions that are key to the establishmentmeasurement of the Company’s fair value for CDS contracts are as follows:
•Gross spread.
•The the gross spread, the allocation of gross spread among:
| |
◦ | among the bank profit, net spread and hedge cost and the profit the originator, usually an investment bank, realizes for structuring and funding the transaction (bank profit); |
| |
◦ | premiums paid to the Company for the Company’s credit protection provided (net spread); and
|
| |
◦ | the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company (hedge cost). |
•The weighted average life which is based on debt service schedules.
The rates used to discount future expected premium cash flows ranged from 1.36% to 2.53% at September 30, 2017 and 1.00% to 2.55% at December 31, 2016.
The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided by trustees or obtained from market sources. If observable market credit spreads are not available or reliableThe bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the underlying reference obligations, then market indices are used that most closely resembleCompany’s credit protection provided; and the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. These indices are adjusted to reflect the non-standard terms of the Company’s CDS contracts. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders who are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process.
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation tohedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit rather thanrisk exposure to the bank profit component. In the current market, it is assumed that a bank would be willingCompany.
Assured Guaranty Ltd.
Notes to accept a lower profit on distressed transactions in orderCondensed Consolidated Financial Statements (Unaudited), Continued
The primary sources of information used to remove these transactions from its financial statements.determine gross spread include:
The following spread hierarchy is utilized in determining which source of gross spread to use, with the rule being to use CDS spreads where available. If not available, CDS spreads are either interpolated or extrapolated based on similar transactions or market indices.
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating. No transactions closed during the periods presented.
•Credit spreads interpolated based upon market indices.
Credit spreads provided byindices adjusted to reflect the counterpartynon-standard terms of the CDS.Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
Information•Credit spreads provided by Credit Spread Type (1)
|
| | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
Based on actual collateral specific spreads | 12 | % | | 7 | % |
Based on market indices | 53 | % | | 77 | % |
Provided by the CDS counterparty | 35 | % | | 16 | % |
Total | 100 | % | | 100 | % |
____________________
(1) Based on par.
Over time the data inputs can change as new sources become available or existing sources are discontinued or are no longer considered to becounterparty of the most appropriate. It is the Company’s objective to move to higher levels on the hierarchy whenever possible, but it is sometimes necessary to move to lower priority inputs because of discontinued data sources or management’s assessment that the higher priority inputs are no longer considered to be representative of market spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.CDS.
The Company interpolates a curve based on the historical relationship between therates used to discount future expected premium the Company receives when a credit derivative is closedcash flows ranged from 3.62% to the daily closing price of the market index related5.41% at September 30, 2023 and 2.78% to the specific asset class and rating of the transaction. This curve indicates expected credit spreads5.08% at each indicative level on the related market index. For transactions with unique terms or characteristics where no price quotes are available, management extrapolates credit spreads based on a similar transaction for which the Company has received a spread quote from one of the first three sources within the Company’s spread hierarchy. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transaction's current spread. Counterparties determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. These quotes are validated by cross-referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness.December 31, 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 or AGM. ForAGC. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads ondo not significantly affect the Company’s name thefair value of these CDS contracts. The Company obtains the quoted price of CDS contracts traded on AGC and AGM from market data sources published by third parties. The cost to acquire CDS protection referencing AGC or AGM affects the amount of spread on CDS transactions that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC or AGM increases, the amount of premium the Company retains on a transaction generally decreases. As the cost to acquire CDS protection referencing AGC or AGM decreases, the amount of premium the Company retains on a transaction generally increases.
In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigatinglimiting the amount of unrealized gains that are recognized on certain CDS contracts. Given the current market conditions and the Company’s own credit spreads, approximately 46%11.2%, 34% and 26% based on number of transactions,fair value, of the Company'sCompany’s CDS contracts arewere fair valued using this minimum premium as of September 30, 2017, June 30, 2017 and2023. As of December 31, 2016, respectively.2022, the use of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGM's and AGC'sAGC’s credit spreads. In general, when AGM's and AGC'sAGC’s credit spreads narrow, the cost to hedge AGM's and AGC'sAGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGM's and AGC'sAGC’s credit spreads widen, the cost to hedge AGM's and AGC'sAGC’s name increases causing more transactions to price at previously established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC and AGM hedged by its counterparties, with independent third parties each reporting period.periodically. The currentimplied credit risk of AGC, indicated by the trading level of AGC’s and AGM’s own credit spread, has resultedis a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging a significant portion of its exposure to AGC and AGM. This reducescosts reduce the amount of contractual cash flows AGC and AGM can capture as premium for selling its protection.protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture.
The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain
constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company'sCompany’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.
A fair value resulting in a credit derivative assetliability on protection sold is the result of contractual cash inflows on in-force transactions in excess ofthat are lower than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would be able to realize a gainloss representing the difference between the higherlower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contractssuch contract and taking the present value ofdiscounting such amounts discounted atusing the applicable discount rate corresponding LIBOR overto the weighted average remaining life of the contract.
Example
The following is an example of how changes in gross spreads, the Company’s own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. The assumptions used in these examples are hypothetical amounts. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.
|
| | | | | | | | | | | |
| Scenario 1 | | Scenario 2 |
| bps | | % of Total | | bps | | % of Total |
Original gross spread/cash bond price (in bps) | 185 |
| | |
| | 500 |
| | |
|
Bank profit (in bps) | 115 |
| | 62 | % | | 50 |
| | 10 | % |
Hedge cost (in bps) | 30 |
| | 16 | % | | 440 |
| | 88 | % |
The premium the Company receives per annum (in bps) | 40 |
| | 22 | % | | 10 |
| | 2 | % |
In Scenario 1, the gross spread is 185 basis points. The bank or transaction originator captures 115 basis points of the original gross spread and hedges 10% of its exposure to AGC, when the CDS spread on AGC was 300 basis points (300 basis points × 10% = 30 basis points). Under this scenario the Company receives premium of 40 basis points, or 22% of the gross spread.
In Scenario 2, the gross spread is 500 basis points. The bank or transaction originator captures 50 basis points of the original gross spread and hedges 25% of its exposure to AGC, when the CDS spread on AGC was 1,760 basis points (1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread. Due to the increased cost to hedge AGC’s name, the amount of profit the bank would expect to receive, and the premium the Company would expect to receive decline significantly.
In this example, the contractual cash flows (the Company premium received per annum above) exceed the amount a market participant would require the Company to pay in today’s market to accept its obligations under the CDS contract, thus resulting in an asset.
Strengths and WeaknessesOther Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of Model
The Company’sa loss mitigation negotiated settlement that results in the termination of the obligations under the original financial guaranty insurance or insured credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
The primary strengths of the Company’s CDS modeling techniques are:
The model takes into account the transaction structure and the key drivers of market value. The transaction structure includes par insured, weighted average life, level of subordination and composition of collateral.
The model maximizes the use of market-driven inputs whenever they are available. The key inputs to the model are market-based spreads for the collateral, and the credit rating of referenced entities. These are viewed bycontract, the Company to beclassifies the key parametersassets and liabilities of that affect fair value ofVIE in the transaction.
The model is a consistent approach to valuing positions. The Company has developed a hierarchy for market-based spread inputsline items that helps mitigate the degree of subjectivity during periods of high illiquidity.
The primary weaknesses of the Company’s CDS modeling techniques are:
There is no exit market or any actual exit transactions. Therefore the Company’s exit market is a hypothetical one based on the Company’s entry market.
There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.
The markets for the inputs to the model are highly illiquid, which impacts their reliability.
Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may notmost accurately reflect the same prices observed in an actively traded market
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
nature of such assets and conditions similarliabilities, as opposed to those observed in the financial guaranty market.
These contracts were classified as Level 3 in the fair value hierarchy because there is a reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company's estimate of the value of non-standard terms and conditions of its credit derivative contracts and amount of protection purchased on AGC or AGM's name.
Fair Value Option on FG VIEs’ Assets and Liabilities
The Company elected the fair value option for all thewithin FG VIEs’ assets and FG VIEs’ liabilities. Please referThe largest of these VIEs had assets of $87 million and liabilities of $7 million as of September 30, 2023, and assets of $86 million and liabilities of $12 million as of December 31, 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 15 thousand policies monitored as of September 30, 2023, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to Note 9, Consolidated Variable Interest Entities.the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of September 30, 2023 and December 31, 2022, the Company identified 66 and 85, respectively, policies that contain provisions and experienced events that may trigger consolidation.
The FGCompany holds variable interests in non-FG VIEs issued securities collateralized by first lien and second lien RMBSwhich are not consolidated, as well as loans and receivables. The lowest level input thatthe Company is significantnot the primary beneficiary. As of September 30, 2023, the Company’s maximum exposure to losses relating to these non-FG VIEs was $251 million, which is limited to the faircarrying value measurement of these investments of $239 million and other assets of $12 million.
9. Fair Value Measurement
The Company carries a significant portion of its assets and liabilities wasat fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a Level 3 inputliability in an orderly transaction between market participants at the measurement date (i.e., unobservable), therefore management classified them as Level 3exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value hierarchy. Prices are generally determinedis based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During nine months 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 produce fair values that may not be indicative of net realizable value or future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date.
The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization within the hierarchy is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
There was a transfer of fixed-maturity security in the investment portfolio from Level 3 to Level 2 during third quarter 2023 and nine months 2023. 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 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 September 30, 2023, the Company used models to price 189 securities. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach.
approach using the third party’s proprietary pricing models. The models to price the FG VIEs’ liabilities used, where appropriate,use inputs such as estimatedprojected prepayment speeds; market values of the assets that collateralize the securities;severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; househome price depreciation/appreciationappreciation/depreciation rates based on macroeconomic forecastsforecasts; and for those liabilities insured by the Company, the benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest, taking into account the Company’s own credit risk.recent trading activity. The third-party also utilizes an internal model to determine an appropriate yield at whichused to discount the projected cash flows is determined by reviewing various attributes of the security by factoringincluding collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregateconjunction with market color, received by the third-party,data on comparable bonds.
The fair value of the Company’s FG VIE assets is generally sensitive to changes related to estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could materially change the market value of the FG VIE’s assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIE asset is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically leads to a decrease in the fair value of FG VIE assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets.
The fair value of the Company’s FG VIE liabilities is generally sensitive to the various model inputs described above. In addition, the Company’s FG VIE liabilities with recourse are also sensitive to changes in the Company’s implied credit worthiness.securities. Significant changes to any of these inputs could have materially changechanged the expected timing of expected lossescash flows within the insured transactionthese securities which is a significant factor in determining the implied benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE that is insured by the Company. In general, extending the timing of expected loss payments by the Company into the future typically leads to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIE liabilities with recourse, while asecurities.
shortening of the timing of expected loss payments by the Company typically leads to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIE liabilities with recourse.Short-Term Investments
Not Carried at Fair Value
Financial Guaranty Insurance Contracts
For financial guaranty insurance contractsShort-term investments that are acquiredtraded in a business combination, the Company measures each contract at fair value on the date of acquisition, and then follows insurance accounting guidance on a recurring basis thereafter. On a quarterly basis, the Company also discloses the fair value of its outstanding financial guaranty insurance contracts. In both cases, fairactive markets are classified as Level 1 as their 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 guarantyquoted market prices. Securities such as well as prices observed in the credit derivative market with an adjustment for illiquidity so that the terms would be similar to a financial guaranty insurance contract, and includes adjustments to the carrying value of unearned premium reserve for stressed losses, ceding commissions and return on capital. The significant inputs were not readily observable. The Company accordingly classified this fair value measurement as Level 3.
Long-Term Debt
The Company’s long-term debt, excludingdiscount notes payable, is valued by broker-dealers using third party independent pricing sources and standard market conventions. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. The fair value measurement wasare classified as Level 2 in thebecause these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value hierarchy.value.
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 notes payable was determined by calculatingcondensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the expected cash flows.estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value 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, the
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3.
Supplemental Executive Retirement Plans
The Company classified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement was classified as Level 3with changes in the fair value hierarchy.
Other Invested Assets
As of December 31, 2016, other invested assets not carried at fair value consisted primarily of an investment in a guaranteed investment contract. The fair value of the guaranteed investment contract approximated its carrying value due to its short term nature and was classified as Level 2reported in the fair value hierarchy.
Other Assets and Other Liabilities
The Company’s other assets and other liabilities consist predominantlycondensed consolidated statements of accrued interest, receivables for securities sold and payables for securities purchased, the carrying values of which approximate fair value.
Financial Instruments Carried at Fair Value
Amounts recorded at fair 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 September 30, 2017
|
| | | | | | | | | | | | | | | |
| | | Fair Value Hierarchy |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Investment portfolio, available-for-sale: | |
| | |
| | |
| | |
|
Fixed-maturity securities | |
| | |
| | |
| | |
|
Obligations of state and political subdivisions | $ | 5,705 |
| | $ | — |
| | $ | 5,623 |
| | $ | 82 |
|
U.S. government and agencies | 270 |
| | — |
| | 270 |
| | — |
|
Corporate securities | 1,976 |
| | — |
| | 1,910 |
| | 66 |
|
Mortgage-backed securities: | |
| | | | | | |
RMBS | 881 |
| | — |
| | 535 |
| | 346 |
|
Commercial mortgage-backed securities (CMBS) | 562 |
| | — |
| | 562 |
| | — |
|
Asset-backed securities | 852 |
| | — |
| | 80 |
| | 772 |
|
Foreign government securities | 300 |
| | — |
| | 300 |
| | — |
|
Total fixed-maturity securities | 10,546 |
|
| — |
| | 9,280 |
| | 1,266 |
|
Short-term investments | 949 |
| | 629 |
| | 320 |
| | — |
|
Other invested assets (1) | 7 |
| | — |
| | 0 |
| | 7 |
|
Credit derivative assets | 3 |
| | — |
| | — |
| | 3 |
|
FG VIEs’ assets, at fair value | 707 |
| | — |
| | — |
| | 707 |
|
Other assets | 117 |
| | 24 |
| | 35 |
| | 58 |
|
Total assets carried at fair value | $ | 12,329 |
| | $ | 653 |
| | $ | 9,635 |
| | $ | 2,041 |
|
Liabilities: | |
| | | | | | |
Credit derivative liabilities | $ | 305 |
| | $ | — |
| | $ | — |
| | $ | 305 |
|
FG VIEs’ liabilities with recourse, at fair value | 657 |
| | — |
| | — |
| | 657 |
|
FG VIEs’ liabilities without recourse, at fair value | 111 |
| | — |
| | — |
| | 111 |
|
Total liabilities carried at fair value | $ | 1,073 |
| | $ | — |
| | $ | — |
| | $ | 1,073 |
|
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2016
|
| | | | | | | | | | | | | | | |
| | | Fair Value Hierarchy |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Investment portfolio, available-for-sale: | |
| | |
| | |
| | |
|
Fixed-maturity securities | |
| | |
| | |
| | |
|
Obligations of state and political subdivisions | $ | 5,432 |
| | $ | — |
| | $ | 5,393 |
| | $ | 39 |
|
U.S. government and agencies | 440 |
| | — |
| | 440 |
| | — |
|
Corporate securities | 1,613 |
| | — |
| | 1,553 |
| | 60 |
|
Mortgage-backed securities: | |
| | |
| | |
| | |
|
RMBS | 987 |
| | — |
| | 622 |
| | 365 |
|
CMBS | 583 |
| | — |
| | 583 |
| | — |
|
Asset-backed securities | 945 |
| | — |
| | 140 |
| | 805 |
|
Foreign government securities | 233 |
| | — |
| | 233 |
| | — |
|
Total fixed-maturity securities | 10,233 |
| | — |
| | 8,964 |
| | 1,269 |
|
Short-term investments | 590 |
| | 319 |
| | 271 |
| | — |
|
Other invested assets (1) | 8 |
| | — |
| | 0 |
| | 8 |
|
Credit derivative assets | 13 |
| | — |
| | — |
| | 13 |
|
FG VIEs’ assets, at fair value | 876 |
| | — |
| | — |
| | 876 |
|
Other assets | 114 |
| | 24 |
| | 28 |
| | 62 |
|
Total assets carried at fair value | $ | 11,834 |
| | $ | 343 |
| | $ | 9,263 |
| | $ | 2,228 |
|
Liabilities: | |
| | |
| | |
| | |
|
Credit derivative liabilities | $ | 402 |
| | $ | — |
| | $ | — |
| | $ | 402 |
|
FG VIEs’ liabilities with recourse, at fair value | 807 |
| | — |
| | — |
| | 807 |
|
FG VIEs’ liabilities without recourse, at fair value | 151 |
| | — |
| | — |
| | 151 |
|
Total liabilities carried at fair value | $ | 1,360 |
| | $ | — |
| | $ | — |
| | $ | 1,360 |
|
____________________
| |
(1) | Excluded from the table above are investment funds of $47 million and $48 million as of September 30, 2017 and December 31, 2016, respectively, measured using NAV per share. Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. |
Changes in Level 3 Fair Value Measurements
The table below presents a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Third Quarter 2017 and 2016 and Nine Months 2017 and 2016.
Fair Value Level 3 Rollforward
Recurring Basis
Third Quarter 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities | | | | | | | | | | | |
| Obligations of State and Political Subdivisions | | Corporate Securities | | RMBS | | Asset- Backed Securities | | FG VIEs’ Assets at Fair Value | | Other (7) | | Credit Derivative Asset (Liability), net (5) | | FG VIEs' Liabilities with Recourse, at Fair Value | | FG VIEs’ Liabilities without Recourse, at Fair Value | |
| (in millions) |
Fair value as of June 30, 2017 | $ | 91 |
| | $ | 63 |
| | $ | 357 |
| | $ | 656 |
| |
| $ | 757 |
| |
| $ | 65 |
| |
| $ | (361 | ) | | $ | (689 | ) | | $ | (131 | ) | |
Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
Net income (loss) | (8 | ) | (2 | ) | 1 |
| (2 | ) | 5 |
| (2 | ) | 15 |
| (2 | ) | 4 |
| (3 | ) | (4 | ) | (4 | ) | 58 |
| (6 | ) | (3 | ) | (3 | ) | (1 | ) | (3 | ) |
Other comprehensive income (loss) | (1 | ) | | 2 |
| | (1 | ) | | 2 |
| |
| — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
Purchases | — |
| | — |
| | 13 |
| | 106 |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
Settlements | — |
| | — |
| | (28 | ) | | (7 | ) | | (36 | ) | | — |
| |
| 1 |
| |
| 35 |
| |
| 3 |
| |
|
FV VIE deconsolidations | — |
| | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | 0 |
| | 18 |
| |
Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of September 30, 2017 | $ | 82 |
| | $ | 66 |
| | $ | 346 |
| | $ | 772 |
| |
| $ | 707 |
| |
| $ | 61 |
| |
| $ | (302 | ) | | $ | (657 | ) | | $ | (111 | ) | |
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2017 | $ | (1 | ) | | $ | 2 |
| | $ | 0 |
| | $ | 2 |
| | $ | 10 |
| (3 | ) | $ | (4 | ) | (4 | ) | $ | 51 |
| (6 | ) | $ | (3 | ) | (3 | ) | $ | (1 | ) | (3 | ) |
Fair Value Level 3 Rollforward
Recurring Basis
Third Quarter 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities | | | | | | | | | | | |
| Obligations of State and Political Subdivisions | | Corporate Securities | | RMBS | | Asset- Backed Securities | | FG VIEs’ Assets at Fair Value | | Other (7) | | Credit Derivative Asset (Liability), net (5) | | FG VIEs' Liabilities with Recourse, at Fair Value | | FG VIEs’ Liabilities without Recourse, at Fair Value | |
| (in millions) |
Fair value as of June 30, 2016 | $ | 41 |
| | $ | 58 |
| | $ | 349 |
| | $ | 564 |
| | $ | 814 |
| |
| $ | 38 |
| |
| $ | (396 | ) | | $ | (790 | ) | | $ | (115 | ) | |
CIFG Acquisition | 1 |
| | — |
| | 20 |
| | 36 |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| |
Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
Net income (loss) | 1 |
| (2 | ) | 0 |
| (2 | ) | 3 |
| (2 | ) | 9 |
| (2 | ) | 20 |
| (3 | ) | (23 | ) | (4 | ) | 21 |
| (6 | ) | (21 | ) | (3 | ) | (18 | ) | (3 | ) |
Other comprehensive income (loss) | 0 |
| | 0 |
| | 2 |
| | 47 |
| | — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
Purchases | — |
| | — |
| | 24 |
| | 53 |
| | — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
Settlements | 0 |
| | — |
| | (15 | ) | | (40 | ) | | (34 | ) | | — |
| |
| (39 | ) | |
| 33 |
| |
| 3 |
| |
|
FG VIE consolidations | — |
| | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | (54 | ) | | (43 | ) | |
FG VIE deconsolidations | — |
| | — |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | 20 |
| |
Transfers into Level 3 | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of September 30, 2016 | $ | 43 |
| | $ | 58 |
| | $ | 383 |
| | $ | 691 |
| | $ | 877 |
| | $ | 15 |
| | $ | (481 | ) | | $ | (832 | ) | | $ | (153 | ) | |
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2016 | $ | 0 |
| | $ | 0 |
| | $ | 1 |
| | $ | 47 |
| | $ | 29 |
| (3 | ) | $ | (23 | ) | (4 | ) | $ | (5 | ) | (6 | ) | $ | (18 | ) | (3 | ) | $ | (17 | ) | (3 | ) |
Fair Value Level 3 Rollforward
Recurring Basis
Nine Months 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities | | | | | | | | | | | |
| Obligations of State and Political Subdivisions | | Corporate Securities | | RMBS | | Asset- Backed Securities | | FG VIEs’ Assets at Fair Value | | Other (7) | | Credit Derivative Asset (Liability), net (5) | | FG VIEs' Liabilities with Recourse, at Fair Value | | FG VIEs’ Liabilities without Recourse, at Fair Value | |
| (in millions) |
Fair value as of December 31, 2016 | $ | 39 |
| | $ | 60 |
| | $ | 365 |
| | $ | 805 |
| | $ | 876 |
| | $ | 65 |
| | $ | (389 | ) | | $ | (807 | ) | | $ | (151 | ) | |
MBIA UK Acquisition | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
Net income (loss) | (6 | ) | (2 | ) | 4 |
| (2 | ) | 23 |
| (2 | ) | 100 |
| (2 | ) | 32 |
| (3 | ) | (4 | ) | (4 | ) | 106 |
| (6 | ) | (14 | ) | (3 | ) | (4 | ) | (3 | ) |
Other comprehensive income (loss) | (4 | ) | | 2 |
| | 25 |
| | 60 |
| |
| — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
Purchases | — |
| | — |
| | 42 |
| | 162 |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
Settlements | (2 | ) | | — |
| | (109 | ) | | (362 | ) | | (117 | ) | | — |
| |
| (19 | ) | |
| 113 |
| |
| 11 |
| |
|
FG VIE consolidations | — |
| | — |
| | — |
| | — |
| |
| 21 |
| |
| — |
| |
| — |
| |
| 0 |
| | (21 | ) | |
|
FG VIE deconsolidations | — |
| | — |
| | — |
| | — |
| | (105 | ) | | — |
| | — |
| | 51 |
| | 54 |
| |
Transfers into Level 3 | 55 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of September 30, 2017 | $ | 82 |
| | $ | 66 |
| | $ | 346 |
| | $ | 772 |
| |
| $ | 707 |
| |
| $ | 61 |
| |
| $ | (302 | ) | | $ | (657 | ) | | $ | (111 | ) | |
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2017 | $ | (4 | ) | | $ | 2 |
| | $ | 25 |
| | $ | 126 |
| | $ | 50 |
| (3 | ) | $ | (4 | ) | (4 | ) | $ | 63 |
| (6 | ) | $ | (12 | ) | (3 | ) | $ | (4 | ) | (3 | ) |
Fair Value Level 3 Rollforward
Recurring Basis
Nine Months 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities | | | | | | | | | | | | | |
| Obligations of State and Political Subdivisions | | Corporate Securities | | RMBS | | Asset- Backed Securities | | Short-Term Investments | | FG VIEs’ Assets at Fair Value | | Other (7) | | Credit Derivative Asset (Liability), net (5) | | FG VIEs' Liabilities with Recourse, at Fair Value | | FG VIEs’ Liabilities without Recourse, at Fair Value | |
| (in millions) |
Fair value as of December 31, 2015 | $ | 8 |
| | $ | 71 |
| | $ | 348 |
| | $ | 657 |
| | $ | 60 |
| | $ | 1,261 |
| | $ | 65 |
| | $ | (365 | ) | | $ | (1,225 | ) | | $ | (124 | ) | |
CIFG Acquisition | 1 |
| | — |
| | 20 |
| | 36 |
| | 0 |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| |
Total pretax realized and unrealized gains/(losses) recorded in: (1) | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
Net income (loss) | 1 |
| (2 | ) | 4 |
| (2 | ) | 5 |
| (2 | ) | 20 |
| (2 | ) | 0 |
| (2 | ) | 129 |
| (3 | ) | (50 | ) | (4 | ) | 24 |
| (6 | ) | (112 | ) | (3 | ) | (14 | ) | (3 | ) |
Other comprehensive income (loss) | 1 |
| | (17 | ) | | 0 |
| | 37 |
| | 0 |
| | — |
| |
| 0 |
| |
| — |
| |
| — |
| |
| — |
| |
|
Purchases | 33 |
| | — |
| | 64 |
| | 53 |
| | — |
| | — |
| |
| — |
| |
| — |
| |
| — |
| |
| — |
| |
|
Settlements | (1 | ) | | — |
| | (54 | ) | | (134 | ) | | (60 | ) | | (590 | ) | | — |
| |
| (73 | ) | |
| 559 |
| |
| 8 |
| |
|
FG VIE consolidations | — |
| | — |
| | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | (54 | ) | | (43 | ) | |
FG VIE deconsolidations | — |
| | — |
| | 0 |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | 20 |
| |
Transfers into Level 3 | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Fair value as of September 30, 2016 | $ | 43 |
| | $ | 58 |
| | $ | 383 |
| | $ | 691 |
| | $ | 0 |
| | $ | 877 |
| | $ | 15 |
| | $ | (481 | ) | | $ | (832 | ) | | $ | (153 | ) | |
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2016 | $ | 1 |
| | $ | (17 | ) | | $ | (1 | ) | | $ | 37 |
| | $ | 0 |
| | $ | 44 |
| (3 | ) | $ | (50 | ) | (4 | ) | $ | (104 | ) | (6 | ) | $ | 1 |
| (3 | ) | $ | (14 | ) | (3 | ) |
____________________
| |
(1) | Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3. |
| |
(2) | Included in net realized investment gains (losses) and net investment income. |
| |
(3) | Included in fair value gains (losses) on FG VIEs. |
| |
(4) | Recorded in fair value gains (losses) on CCS, net realized investment gains (losses), net investment income and other income. |
| |
(5) | Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure. |
| |
(6) | Reported in net change in fair value of credit derivatives and other income. |
| |
(7) | Includes CCS and other invested assets. |
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
At September 30, 2017
|
| | | | | | | | | | | | | |
Financial Instrument Description (1) | | Fair Value at September 30, 2017 (in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average as a Percentage of Current Par Outstanding |
Assets (2): | | |
| | | | | | |
Fixed-maturity securities: | | |
| | | | | | | | |
Obligations of state and political subdivisions | | $ | 82 |
| | Yield | | 4.3 | % | - | 39.0% | | 15.9% |
| | | | | | | | | | |
Corporate securities | | 66 |
| | Yield | | 20.8% | | |
| | | | | | | | | | |
RMBS | | 346 |
| | CPR | | 1.2 | % | - | 17.4% | | 6.0% |
| | CDR | | 2.0 | % | - | 8.5% | | 6.1% |
| | Loss severity | | 40.0 | % | - | 100.0% | | 78.5% |
| | Yield | | 3.8 | % | - | 9.0% | | 5.7% |
Asset-backed securities: | | | | | | | | | | |
Triple-X life insurance transactions | | 609 |
| | Yield | | 6.1 | % | - | 6.4% | | 6.3% |
| | | | | | | | | | |
Collateralized loan obligations (CLO) /TruPS | | 104 |
| | Yield | | 2.5 | % | - | 4.5% | | 3.3% |
| | | | | | | | | | |
Others | | 59 |
| | Yield | | 10.7% | | |
| | | | | | | | | | |
FG VIEs’ assets, at fair value | | 707 |
| | CPR | | 3.5 | % | - | 13.0% | | 9.3% |
| | CDR | | 1.6 | % | - | 22.2% | | 4.3% |
| | Loss severity | | 55.0 | % | - | 100.0% | | 78.4% |
| | Yield | | 3.6 | % | - | 14.9% | | 6.5% |
| | | | | | | | | | |
Other assets | | 58 |
| | Implied Yield | | 4.8 | % | - | 5.5% | | 5.1% |
| | Term (years) | | 10 years | | |
Liabilities: | | |
| | | | | | | | |
Credit derivative liabilities, net | | (302 | ) | | Year 1 loss estimates | | 0.0 | % | - | 59.0% | | 3.4% |
| | Hedge cost (in bps) | | 20.3 |
| - | 142.5 | | 54.0 |
| | Bank profit (in bps) | | 3.8 |
| - | 825.0 | | 102.9 |
| | Internal floor (in bps) | | 7.0 |
| - | 100.0 | | 24.9 |
| | Internal credit rating | | AAA |
| - | CCC | | AA- |
| | | | | | | | | | |
FG VIEs’ liabilities, at fair value | | (768 | ) | | CPR | | 3.5 | % | - | 13.0% | | 9.3% |
| | CDR | | 1.6 | % | - | 22.2% | | 4.3% |
| | Loss severity | | 55.0 | % | - | 100.0% | | 78.4% |
| | Yield | | 3.1 | % | - | 14.9% | | 4.9% |
___________________
| |
(1) | Discounted cash flow is used as valuation technique for all financial instruments. |
| |
(2) | Excludes several investments recorded in other invested assets with fair value of $7 million. |
Quantitative Information About Level 3 Fair Value Inputs
At December 31, 2016
|
| | | | | | | | | | | | | |
Financial Instrument Description (1) | | Fair Value at December 31, 2016 (in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average as a Percentage of Current Par Outstanding |
Assets (2): | | |
| | | | | | | | |
Fixed-maturity securities: | | |
| | | | | | | | |
Obligations of state and political subdivisions | | $ | 39 |
| | Yield | | 4.3 | % | - | 22.8% | | 11.1% |
| | | | | | | | | | |
Corporate securities | | 60 |
| | Yield | | 20.1% | | |
| | | | | | | | | | |
RMBS | | 365 |
| | CPR | | 1.6 | % | - | 17.0% | | 4.6% |
| | CDR | | 1.5 | % | - | 10.1% | | 6.7% |
| | Loss severity | | 30.0 | % | - | 100.0% | | 77.8% |
| | Yield | | 3.3 | % | - | 9.7% | | 6.0% |
Asset-backed securities: | | | | | | | | | | |
Triple-X life insurance transactions | | 425 |
| | Yield | | 5.7 | % | - | 6.0% | | 5.8% |
| | | | | | | | | | |
Collateralized debt obligations (CDO) | | 332 |
| | Yield | | 10.0% | | |
| | | | | | | | | | |
CLO/TruPS | | 19 |
| | Yield | | 1.5 | % | - | 4.8% | | 3.1% |
| | | | | | | | | | |
Others | | 29 |
| | Yield | | 7.2% | | |
| | | | | | | | | | |
FG VIEs’ assets, at fair value | | 876 |
| | CPR | | 3.5 | % | - | 12.0% | | 7.8% |
| | CDR | | 2.5 | % | - | 21.6% | | 5.7% |
| | Loss severity | | 35.0 | % | - | 100.0% | | 78.6% |
| | Yield | | 2.9 | % | - | 20.0% | | 6.5% |
| | | | | | | | | | |
Other assets | | 62 |
| | Implied Yield | | 4.5 | % | - | 5.1% | | 4.8% |
| | Term (years) | | 10 years | | |
Liabilities: | | |
| | | | | | | | |
Credit derivative liabilities, net | | (389 | ) | | Year 1 loss estimates | | 0.0 | % | - | 38.0% | | 1.3% |
| | Hedge cost (in bps) | | 7.2 |
| - | 118.1 | | 24.5 |
| | Bank profit (in bps) | | 3.8 |
| - | 825.0 | | 61.8 |
| | Internal floor (in bps) | | 7.0 |
| - | 100.0 | | 13.9 |
| | Internal credit rating | | AAA |
| - | CCC | | AA+ |
| | | | | | | | | | |
FG VIEs’ liabilities, at fair value | | (958 | ) | | CPR | | 3.5 | % | - | 12.0% | | 7.8% |
| | CDR | | 2.5 | % | - | 21.6% | | 5.7% |
| | Loss severity | | 35.0 | % | - | 100.0% | | 78.6% |
| | Yield | | 2.4 | % | - | 20.0% | | 5.0% |
____________________
| |
(1) | Discounted cash flow is used as valuation technique for all financial instruments. |
| |
(2) | Excludes several investments recorded in other invested assets with fair value of $8 million. |
The carrying amount and estimated fair value of the Company’s financial instruments are presented in the following table.
Fair Value of Financial Instruments
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Fixed-maturity securities | $ | 10,546 |
| | $ | 10,546 |
| | $ | 10,233 |
| | $ | 10,233 |
|
Short-term investments | 949 |
| | 949 |
| | 590 |
| | 590 |
|
Other invested assets | 62 |
| | 64 |
| | 146 |
| | 147 |
|
Credit derivative assets | 3 |
| | 3 |
| | 13 |
| | 13 |
|
FG VIEs’ assets, at fair value | 707 |
| | 707 |
| | 876 |
| | 876 |
|
Other assets | 291 |
| | 291 |
| | 205 |
| | 205 |
|
Liabilities: | |
| | |
| | |
| | |
|
Financial guaranty insurance contracts (1) | 3,402 |
| | 8,311 |
| | 3,483 |
| | 8,738 |
|
Long-term debt | 1,292 |
| | 1,636 |
| | 1,306 |
| | 1,546 |
|
Credit derivative liabilities | 305 |
| | 305 |
| | 402 |
| | 402 |
|
FG VIEs’ liabilities with recourse, at fair value | 657 |
| | 657 |
| | 807 |
| | 807 |
|
FG VIEs’ liabilities without recourse, at fair value | 111 |
| | 111 |
| | 151 |
| | 151 |
|
Other liabilities | 220 |
| | 220 |
| | 12 |
| | 12 |
|
____________________
| |
(1) | Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance. |
| |
8. | Contracts Accounted for as Credit Derivatives |
operations. The Company has a portfolio of financial guarantydid not enter into CDS contracts that meetwith the definition of a derivative in accordance with GAAP (primarily CDS). The credit derivative portfolio also includes interest rate swaps.
Credit derivative transactions are governed by ISDA documentationintent to trade these contracts and have different characteristics from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract;contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company on occasion has from time-to-time mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions were generally terminated for an amount that approximated the present value of future premiums or for a negotiated amount, rather than at fair value.
Credit Derivative Net Par OutstandingThe terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by Sector
companies outside the financial guaranty industry. The estimated remaining weighted average lifenon-standard terms generally include the absence of creditcollateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives was 10.2 years at September 30, 2017 and 5.3 years at December 31, 2016. The componentsit sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative net par outstanding are presented below.
Credit Derivatives
|
| | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
Asset Type | | Net Par Outstanding | | Weighted Average Credit Rating | | Net Par Outstanding | | Weighted Average Credit Rating |
| | (dollars in millions) |
Pooled corporate obligations: | | |
| | | | |
| | |
CLO/collateralized bond obligations | | $ | 199 |
| | AAA | | $ | 2,022 |
| | AAA |
Synthetic investment grade pooled corporate | | 547 |
| | AAA | | 7,224 |
| | AAA |
TruPS CDOs | | 898 |
| | A- | | 1,179 |
| | BBB+ |
Total pooled corporate obligations | | 1,644 |
| | AA | | 10,425 |
| | AAA |
U.S. RMBS | | 1,003 |
| | AA | | 1,142 |
| | AA- |
Pooled infrastructure | | 1,553 |
| | AAA | | 1,513 |
| | AAA |
Infrastructure finance | | 847 |
| | BBB+ | | 1,021 |
| | BBB+ |
Other(1) | | 2,488 |
| | A- | | 2,896 |
| | A |
Total | | $ | 7,535 |
| | AA- | | $ | 16,997 |
| | AA+ |
____________________
| |
(1) | This comprises numerous transactions across various asset classes, such as commercial receivables, international RMBS, regulated utilities and consumer receivables. |
Except for TruPS CDOs,contracts in determining the Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and industries. Most pooled corporate transactions are structured to limit exposure to any given obligor and industry. A large portion of the Company’s pooled corporate exposure consists of CLO or synthetic pooled corporate obligations. Most of these CLOs have an average obligor size of less than 1% of the total transaction and typically restrict the maximum exposure to any one industry to approximately 10%. The Company’s exposure also benefits from embedded credit enhancement in the transactions which allows a transaction to sustain a certain level of losses in the underlying collateral, further insulating the Company from industry specific concentrations of credit risk on these transactions.
The Company’s TruPS CDO asset pools are generally less diversified by obligors and industries than the typical CLO asset pool. Also, the underlying collateral in TruPS CDOs consists primarily of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts and other real estate related issuers while CLOs typically contain primarily senior secured obligations. However, to mitigate these risks TruPS CDOs were typically structured with higher levels of embedded credit enhancement than typical CLOs.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
|
| | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
Ratings | | Net Par Outstanding | | % of Total | | Net Par Outstanding | | % of Total |
| | (dollars in millions) |
AAA | | $ | 2,956 |
| | 39.3 | % | | $ | 10,967 |
| | 64.6 | % |
AA | | 1,247 |
| | 16.5 |
| | 2,167 |
| | 12.7 |
|
A | | 1,628 |
| | 21.6 |
| | 1,499 |
| | 8.8 |
|
BBB | | 1,008 |
| | 13.4 |
| | 1,391 |
| | 8.2 |
|
BIG | | 696 |
| | 9.2 |
| | 973 |
| | 5.7 |
|
Credit derivative net par outstanding | | $ | 7,535 |
| | 100.0 | % | | $ | 16,997 |
| | 100.0 | % |
Fair Value of Credit Derivatives
Net Change in Fair Value of Credit Derivative Gain (Loss)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Realized gains on credit derivatives | $ | 4 |
| | $ | 11 |
| | $ | 15 |
| | $ | 39 |
|
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (5 | ) | | 4 |
| | 4 |
| | 8 |
|
Realized gains (losses) and other settlements | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
Net unrealized gains (losses): | | | | | | | |
Pooled corporate obligations | 35 |
| | 3 |
| | 41 |
| | (37 | ) |
U.S. RMBS | 11 |
| | (12 | ) | | 24 |
| | 0 |
|
Pooled infrastructure | (1 | ) | | 4 |
| | 4 |
| | 10 |
|
Infrastructure finance | 0 |
| | 1 |
| | 2 |
| | 0 |
|
Other | 14 |
| | 10 |
| | 16 |
| | 4 |
|
Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
Net change in fair value of credit derivatives | $ | 58 |
| | $ | 21 |
| | $ | 106 |
| | $ | 24 |
|
Terminations and Settlements
of Direct Credit Derivative Contracts
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Net par of terminated credit derivative contracts | $ | 40 |
| | $ | 1,071 |
| | $ | 273 |
| | $ | 3,507 |
|
Realized gains on credit derivatives | 0 |
| | 3 |
| | 0 |
| | 11 |
|
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (3 | ) | | — |
| | (15 | ) | | — |
|
Net unrealized gains (losses) on credit derivatives | 8 |
| | 11 |
| | 24 |
| | 81 |
|
During Third Quarter 2017, unrealized fair value gains were generated primarily as a result of CDS terminations in the Other sector, run-off of net par outstanding, and tighter implied net spreads. The tighter implied net spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM, which management refers to as the CDS spread on AGC and AGM, increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Nine Months 2017, unrealized fair value gains were generated primarily as a result of CDS terminations, run-off of net par outstanding, and tighter implied net spreads. The tighter implied spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Third Quarter 2016, unrealized fair value gains were generated primarily as a result of CDS terminations in the pooled corporate and other sectors and price improvements on the underlying collateral of the Company’s CDS. This was the primary driver of the unrealized fair value gains in the pooled corporate CLO, and other sectors. The unrealized fair value gains were partially offset by unrealized losses resulting from wider implied net spreads across all sectors. The wider implied net
spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased significantly during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.
During Nine Months 2016, unrealized fair value losses were generated primarily in the trust preferred sector, due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year and five year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased. The unrealized fair value losses were partially offset by unrealized fair value gains which resulted from the terminations of several CDS transactions during the period. The majority of the CDS transactions were terminated as a result of settlement agreements with the relevant CDS counterparties.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. Thethese contracts.
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts also reflectsprimarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the changeexit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit cost based onspread affects the price to purchase credit protection on AGC and AGM. The Company determinespricing of its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date.transactions.
CDS Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
|
| | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of June 30, 2017 | | As of December 31, 2016 | | As of September 30, 2016 | | As of June 30, 2016 | | As of December 31, 2015 |
Five-year CDS spread: | | | | | | | | | | | |
AGC | 190 |
| | 136 |
| | 158 |
| | 170 |
| | 265 |
| | 376 |
|
AGM | 190 |
| | 140 |
| | 158 |
| | 170 |
| | 265 |
| | 366 |
|
One-year CDS spread | | |
|
| | | |
|
| | | | |
AGC | 81 |
| | 15 |
| | 35 |
| | 31 |
| | 45 |
| | 139 |
|
AGM | 81 |
| | 15 |
| | 29 |
| | 31 |
| | 47 |
| | 131 |
|
Fair Value of Credit Derivatives Assets (Liabilities)
and Effect of AGC and AGM
Credit Spreads
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Fair value of credit derivatives before effect of AGC and AGM credit spreads | $ | (630 | ) | | $ | (811 | ) |
Plus: Effect of AGC and AGM credit spreads | 328 |
| | 422 |
|
Net fair value of credit derivatives | $ | (302 | ) | | $ | (389 | ) |
The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at September 30, 2017, before considering2023 were such that market prices of the implicationsCompany’s CDS contracts were not available.
Assumptions and Inputs
The various inputs and assumptions that are key to the measurement of AGC’sthe 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The primary sources of information used to determine gross spread include:
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
•Credit spreads provided by the counterparty of the CDS.
The rates used to discount future expected premium cash flows ranged from 3.62% to 5.41% at September 30, 2023 and 2.78% to 5.08% at December 31, 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 a direct resultnot permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of continued widelimiting the amount of unrealized gains that are recognized on certain CDS contracts. Given market conditions and the Company’s own credit spreads, inapproximately 11.2%, based on fair value, of the fixed income security markets and ratings downgrades. The asset classes that remain most affected are TruPS and pooled corporate securitiesCompany’s CDS contracts were fair valued using this minimum premium as well as 2005-2007 vintages of Alt-A, Option ARM and subprime RMBS transactions. The mark to market benefit between September 30, 2017 and2023. As of December 31, 2016, resulted primarily from several CDS terminations and2022, the use of the minimum premium did not have a narrowingsignificant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC’s credit spreads. In general, when AGC’s credit spreads relatednarrow, the cost to hedge AGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC’s credit spreads widen, the Company's TruPS and U.S. RMBS obligations.
Management believes thatcost to hedge AGC’s name increases causing more transactions to price at established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s and AGM’sown credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads overwiden, the past several years has beenhedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture.
The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the correlation between AGC’s and AGM’s risk profilefact that the contractual terms of the Company’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.
A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are lower than what a hypothetical financial guarantor could receive if it sold protection on the same risk profileas of the broader financial markets. Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security markets. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high yield CDO, TruPS CDO, and CLO markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.
The following table presents the fair value and the present value of expected claim payments or recoveries (i.e. net expected loss to be paid as described in Note 5) for contracts accounted for as derivatives.
Net Fair Value and Expected Losses
of Credit Derivatives
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Fair value of credit derivative asset (liability), net | $ | (302 | ) | | $ | (389 | ) |
Expected loss to be (paid) recovered | 6 |
| | (10 | ) |
Collateral Posting for Certain Credit Derivative Contracts
The transaction documentation for $502 million of the CDS insured by AGC requires AGC to post collateral, in some cases subject to a cap, to secure its obligation to make payments under such contracts. Eligible collateral is generally cash or U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. The table below summarizes AGC’s CDS collateral posting requirements as of September 30, 2017 and December 31, 2016.
AGC Insured CDS Collateral Posting Requirements
|
| | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | (in millions) |
Gross par of CDS with collateral posting requirement | | $ | 502 |
| | $ | 690 |
|
Maximum posting requirement | | 469 |
| | 674 |
|
Collateral posted | | 18 |
| | 116 |
|
The reduction in the collateral posting requirement is primarily attributable to the termination in February 2017 byreporting date. If the Company ofwere able to freely exchange these contracts (i.e., assuming its remaining CDS contracts with one of its counterparties asdid 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 hadis entitled and the current market premiums for a posting requirement; the CDS contracts related to approximately $183 million in gross par and $73 million of collateral posted as of December 31, 2016.
Sensitivity to Changes in Credit Spread
The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both assume.
Effect of Changes in Credit Spread
A of September 30, 2017
|
| | | | | | | | |
Credit Spreads(1) | | Estimated Net Fair Value (Pre-Tax) | | Estimated Change in Gain/(Loss) (Pre-Tax) |
| | (in millions) |
100% widening in spreads | | $ | (531 | ) | | $ | (229 | ) |
50% widening in spreads | | (417 | ) | | (115 | ) |
25% widening in spreads | | (359 | ) | | (57 | ) |
10% widening in spreads | | (325 | ) | | (23 | ) |
Base Scenario | | (302 | ) | | — |
|
10% narrowing in spreads | | (279 | ) | | 23 |
|
25% narrowing in spreads | | (245 | ) | | 57 |
|
50% narrowing in spreads | | (188 | ) | | 114 |
|
____________________
| |
(1) | Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread. |
| |
9. | Consolidated Variable Interest Entities |
Consolidated FG VIEs
similar contract. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Assured Guaranty does not act as the servicer or collateral manager for any VIE obligations insured by its companies. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate interest income that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.
Assured Guaranty is not primarily liable for the debt obligations issued by the VIEs it insures and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its Subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on VIE liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero at maturity of the VIE debt, except for net premiums received and net claims paid by Assured Guaranty under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 5, Expected Loss to be Paid.
As part of the terms of its financial guaranty contracts, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically
increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The Company obtains protective rights under its insurance contracts that give the Company additional controls over a VIE if there is either deterioration of deal performance or in the financial health of the deal servicer. The Company is deemed to be the control party for certain VIEs under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. If the protective rights that could make the Company the control party have not been triggered, then the VIE is not consolidated. If the Company is deemed no longer to have those protective rights, the transaction is deconsolidated.
Number of FG VIEs Consolidated
|
| | | | | |
| Nine Months |
| 2017 | | 2016 |
| |
Beginning of the period, December 31 | 32 |
| | 34 |
|
Consolidated | 1 |
| | 1 |
|
Deconsolidated | (2 | ) | | (2 | ) |
Matured | — |
| | (1 | ) |
End of the period, September 30 | 31 |
| | 32 |
|
The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately $102 million at September 30, 2017 and $137 million at December 31, 2016. The aggregate unpaid principal of the FG VIEs’ assets was approximately $369 million greater than the aggregate fair value at September 30, 2017. The aggregate unpaid principal of the FG VIEs’ assets was approximately $432 million greater than the aggregate fair value at December 31, 2016.
The change in the instrument-specific credit risk of the FG VIEs’ assets held as of September 30, 2017 that was recorded in the consolidated statements of operations for Third Quarter 2017 and Nine Months 2017 were gains of $8 million and gains of $32 million, respectively. The change in the instrument-specific credit risk of the FG VIEs’ assets held as of September 30, 2016 that was recorded in the consolidated statements of operations for Third Quarter 2016 and Nine Months 2016 were gains of $1 million and gains of $36 million, respectively. To calculate the instrument specific credit risk, the changes indetermines the fair value of its CDS contracts by applying the FG VIE assets are allocateddifference between changes that are duethe current net spread and the contractual net spread for the remaining duration of each contract to the instrument specific credit risknotional value of such contract and changes duediscounting such amounts using the applicable discount rate corresponding to other factors, including interest rates. The instrument specific credit risk amount is determined by using expected contractual cash flows versus current expected cash flows discounted at original contractual rate. The net present value is calculated by discounting the expected cash flowsweighted average remaining life of the underlying security, at the relevant effective interest rate.contract.
The unpaid principal for FG VIE liabilities with recourse, which represent obligations insured by AGC or AGM, was $705 million and $871 million as of September 30, 2017 and December 31, 2016, respectively. FG VIE liabilities with recourse will mature at various dates ranging from 2025 to 2038. The aggregate unpaid principal balance of the FG VIE liabilities with and without recourse was approximately $75 million greater than the aggregate fair value of the FG VIEs’ liabilities as of September 30, 2017. The aggregate unpaid principal balance was approximately $109 million greater than the aggregate fair value of the FG VIEs' liabilities as of December 31, 2016.
The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the consolidated financial statements, segregated by the types of assets that collateralize their respective debt obligations for FG VIE liabilities with recourse.
Consolidated FG VIEs
By Type of Collateral
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Assets | | Liabilities | | Assets | | Liabilities |
| (in millions) |
With recourse: | |
| | |
| | |
| | |
|
U.S. RMBS first lien | $ | 378 |
| | $ | 400 |
| | $ | 473 |
| | $ | 509 |
|
U.S. RMBS second lien | 150 |
| | 188 |
| | 178 |
| | 223 |
|
Manufactured housing | 68 |
| | 69 |
| | 74 |
| | 75 |
|
Total with recourse | 596 |
| | 657 |
| | 725 |
| | 807 |
|
Without recourse | 111 |
| | 111 |
| | 151 |
| | 151 |
|
Total | $ | 707 |
| | $ | 768 |
| | $ | 876 |
| | $ | 958 |
|
The consolidation of FG VIEs affects net income and shareholders' equity due to (i) changes in fair value gains (losses) on FG VIE assets and liabilities, (ii) the elimination of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse and (iii) the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE debt. Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. Such eliminations are included in the table below to present the full effect of consolidating FG VIEs.
Effect of Consolidating FG VIEs on Net Income (Loss),
Cash Flows From Operating Activities and Shareholders' Equity
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Net earned premiums | $ | (3 | ) | | $ | (4 | ) | | $ | (11 | ) | | $ | (12 | ) |
Net investment income | (2 | ) | | (1 | ) | | (4 | ) | | (8 | ) |
Net realized investment gains (losses) | 0 |
| | 0 |
| | 0 |
| | 1 |
|
Fair value gains (losses) on FG VIEs | 3 |
| | (11 | ) | | 25 |
| | 11 |
|
Loss and LAE | 1 |
| | (1 | ) | | 5 |
| | 3 |
|
Effect on income before tax | (1 | ) | | (17 | ) | | 15 |
| | (5 | ) |
Less: tax provision (benefit) | 0 |
| | (6 | ) | | 5 |
| | (2 | ) |
Effect on net income (loss) | $ | (1 | ) | | $ | (11 | ) | | $ | 10 |
| | $ | (3 | ) |
| | | | | | | |
Effect on cash flows from operating activities | $ | 6 |
| | $ | 11 |
| | $ | 16 |
|
| $ | 16 |
|
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Effect on shareholders' equity (decrease) increase | $ | 1 |
| | $ | (9 | ) |
Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. During Third Quarter 2017 and Nine Months 2017, the Company recorded pre-tax net fair value gains on consolidated FG VIEs of $3 million and $25 million, respectively. During Third Quarter 2017, the primary driver of the gain was price depreciation on the FG VIE recourse liabilities during the quarter resulting from the Company's credit risk. During the Nine Months 2017, the primary driver of the gain is price appreciation on the FG VIE assets resulting from improvements in the underlying collateral.
During Third Quarter 2016, the Company recorded a pre-tax net fair value loss on consolidated FG VIEs of $11 million and during Nine Months 2016, the Company recorded a gain of $11 million. The primary drivers of the loss during Third Quarter 2016 were the net mark-to-market losses due to price depreciation on the FG VIE assets, resulting from declines in value in the underlying collateral, and the price appreciation on the FG VIE recourse liabilities during the quarter, resulting from the Company's credit risk. The primary driver of the Nine Months 2016 gain in fair value of FG VIEs assets and liabilities was net mark-to-market gains due to price appreciation on the FG VIE assets during the nine months period resulting from improvements in the underlying collateral.
Other Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement agreement that results in the termination of the obligations under the original insured financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of those VIEsthat VIE in the line items that most accurately reflect the
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
nature of the items,such assets and liabilities, as opposed to within the FG VIEVIEs’ assets and FG VIEVIEs’ liabilities. The largest of these VIEs had assets of $87 million and liabilities of $7 million as of September 30, 2023, and assets of $86 million and liabilities of $12 million as of December 31, 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 15 thousand policies monitored as of September 30, 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. As of September 30, 20172023 and December 31, 2016,2022, the Company had financial guaranty contracts outstanding for approximately 520identified 66 and 60085, respectively, policies that contain provisions and experienced events that may trigger consolidation.
The Company holds variable interests in non-FG VIEs respectively, that it didwhich are not consolidate based onconsolidated, as the Company’s analyses which indicate that itCompany is not the primary beneficiary of any other VIEs. The Company’s exposure provided through its financial guaranties with respect to debt obligations of special purpose entities is included within net par outstanding in Note 4, Outstanding Exposure.
Net Investment Income and Realized Gains (Losses)
Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Accrued investment income, which is recorded in Other Assets, was $102 million and $91 million as of September 30, 2017 and December 31, 2016, respectively.
Net Investment Income
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Income from fixed-maturity securities managed by third parties | $ | 74 |
| | $ | 75 |
| | $ | 224 |
| | $ | 231 |
|
Income from internally managed securities: | | | | | | | |
Fixed maturities (1) | 27 |
| | 19 |
| | 100 |
| | 58 |
|
Other | 1 |
| | 2 |
| | 5 |
| | 8 |
|
Gross investment income | 102 |
| | 96 |
| | 329 |
| | 297 |
|
Investment expenses | (3 | ) | | (2 | ) | | (7 | ) | | (6 | ) |
Net investment income | $ | 99 |
| | $ | 94 |
| | $ | 322 |
| | $ | 291 |
|
____________________
(1) Nine Months 2017 includes accretion on Zohar II Notes.
Net Realized Investment Gains (Losses)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Gross realized gains on available-for-sale securities (1) | $ | 23 |
| | $ | 4 |
| | $ | 92 |
| | $ | 24 |
|
Gross realized losses on available-for-sale securities | (3 | ) | | (1 | ) | | (9 | ) | | (3 | ) |
Net realized gains (losses) on other invested assets | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Other-than-temporary impairment | (13 | ) | | (5 | ) | | (29 | ) | | (26 | ) |
Net realized investment gains (losses) | $ | 7 |
| | $ | (2 | ) | | $ | 54 |
| | $ | (5 | ) |
____________________
| |
(1) | Nine Months 2017 includes a gain on Zohar II Notes used as consideration for the MBIA UK Acquisition. Please refer to Note 2, Acquisitions. |
The following table presents the roll-forward of the credit losses of fixed-maturity securities for which the Company has recognized an other-than-temporary-impairment and where the portion of the fair value adjustment related to other factors was recognized in OCI.
Roll Forward of Credit Losses
in the Investment Portfolio
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Balance, beginning of period | $ | 145 |
| | $ | 108 |
| | $ | 134 |
| | $ | 108 |
|
Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized | 3 |
| | 1 |
| | 6 |
| | 3 |
|
Reductions for securities sold and other settlements | 0 |
| | — |
| | (4 | ) | | (4 | ) |
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized | 5 |
| | 1 |
| | 17 |
| | 3 |
|
Balance, end of period | $ | 153 |
| | $ | 110 |
| | $ | 153 |
| | $ | 110 |
|
Investment Portfolio
Fixed-Maturity Securities and Short-Term Investments
by Security Type
beneficiary. As of September 30, 20172023, the Company’s maximum exposure to losses relating to these non-FG VIEs was $251 million, which is limited to the carrying value of these investments of $239 million and other assets of $12 million.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Category | | Percent of Total(1) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | AOCI(2) Gain (Loss) on Securities with Other-Than-Temporary Impairment | | Weighted Average Credit Rating (3) |
| | (dollars in millions) |
Fixed-maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
Obligations of state and political subdivisions | | 49 | % | | $ | 5,445 |
| | $ | 277 |
| | $ | (17 | ) | | $ | 5,705 |
| | $ | 21 |
| | AA- |
U.S. government and agencies | | 2 |
| | 256 |
| | 14 |
| | 0 |
| | 270 |
| | 0 |
| | AA+ |
Corporate securities | | 18 |
| | 1,932 |
| | 62 |
| | (18 | ) | | 1,976 |
| | (6 | ) | | A+ |
Mortgage-backed securities(4): | | 0 |
| | | | | | |
| | | | |
| | |
RMBS | | 8 |
| | 866 |
| | 27 |
| | (12 | ) | | 881 |
| | 2 |
| | BBB+ |
CMBS | | 5 |
| | 551 |
| | 15 |
| | (4 | ) | | 562 |
| | — |
| | AAA |
Asset-backed securities | | 6 |
| | 682 |
| | 170 |
| | 0 |
| | 852 |
| | 143 |
| | B |
Foreign government securities | | 3 |
| | 313 |
| | 6 |
| | (19 | ) | | 300 |
| | — |
| | AA |
Total fixed-maturity securities | | 91 |
| | 10,045 |
| | 571 |
| | (70 | ) | | 10,546 |
| | 160 |
| | A+ |
Short-term investments | | 9 |
| | 948 |
| | 1 |
| | 0 |
| | 949 |
| | — |
| | AAA |
Total investment portfolio | | 100 | % | | $ | 10,993 |
| | $ | 572 |
| | $ | (70 | ) | | $ | 11,495 |
| | $ | 160 |
| | A+ |
9. Fair Value Measurement
Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Category | | Percent of Total(1) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | AOCI Gain (Loss) on Securities with Other-Than-Temporary Impairment | | Weighted Average Credit Rating (3) |
| | (dollars in millions) |
Fixed-maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
Obligations of state and political subdivisions | | 50 | % | | $ | 5,269 |
| | $ | 202 |
| | $ | (39 | ) | | $ | 5,432 |
| | $ | 13 |
| �� | AA |
U.S. government and agencies | | 4 |
| | 424 |
| | 17 |
| | (1 | ) | | 440 |
| | — |
| | AA+ |
Corporate securities | | 15 |
| | 1,612 |
| | 32 |
| | (31 | ) | | 1,613 |
| | (8 | ) | | A- |
Mortgage-backed securities(4): | | |
| | |
| | |
| | |
| | |
| | |
| | |
RMBS | | 9 |
| | 998 |
| | 27 |
| | (38 | ) | | 987 |
| | (21 | ) | | A- |
CMBS | | 5 |
| | 575 |
| | 13 |
| | (5 | ) | | 583 |
| | — |
| | AAA |
Asset-backed securities | | 8 |
| | 835 |
| | 110 |
| | 0 |
| | 945 |
| | 33 |
| | B |
Foreign government securities | | 3 |
| | 261 |
| | 4 |
| | (32 | ) | | 233 |
| | — |
| | AA |
Total fixed-maturity securities | | 94 |
| | 9,974 |
| | 405 |
| | (146 | ) | | 10,233 |
| | 17 |
| | A+ |
Short-term investments | | 6 |
| | 590 |
| | 0 |
| | 0 |
| | 590 |
| | — |
| | AAA |
Total investment portfolio | | 100 | % | | $ | 10,564 |
| | $ | 405 |
| | $ | (146 | ) | | $ | 10,823 |
| | $ | 17 |
| | A+ |
____________________
| |
(1) | Based on amortized cost. |
| |
(2) | Accumulated OCI (AOCI). See also Note 17, Shareholders' Equity for additional information as applicable. |
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
| |
(3) | Ratings in the tables above represent the lower of the Moody’s and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-quality, liquid instruments. |
| |
(4) | Government-agency obligations were approximately 39% of mortgage backed securities as of September 30, 2017 and 42% as of December 31, 2016 based on fair value. |
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During nine months 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 investment portfoliovaluation methods produce fair values that may not be indicative of net realizable value or future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in tax-exempt and taxable municipal securities includes issuances by a wide numbermaterially different estimate of municipal authorities acrossfair value at the U.S. and its territories.reporting date.
The following tables summarize, for all fixed-maturity securities in an unrealized loss position,categorization within the aggregate fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels, with Level 1 being the highest and gross unrealized lossLevel 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 lengthobservable market inputs.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the amounts have continuously beendetermination of fair value requires significant management judgment or estimation.
There was a transfer of fixed-maturity security in an unrealized loss position.the investment portfolio from Level 3 to Level 2 during third quarter 2023 and nine months 2023. There were no other transfers from or into Level 3 during the periods presented.
Carried at Fair Value
Fixed-Maturity Securities
Gross Unrealized Loss by Length
The fair value of Timefixed-maturity securities is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news.
Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. The valuation of fixed-maturity securities is more subjective when markets are less liquid due to the lack of market-based inputs.
As of September 30, 20172023, the Company used models to price 189 securities. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecasts; and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the security including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.
Short-Term Investments
Short-term investments that are traded in active markets are classified as Level 1 as their value is based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| (dollars in millions) |
Obligations of state and political subdivisions | $ | 445 |
| | $ | (10 | ) | | $ | 253 |
| | $ | (7 | ) | | $ | 698 |
| | $ | (17 | ) |
U.S. government and agencies | 114 |
| | 0 |
| | 4 |
| | 0 |
| | 118 |
| | 0 |
|
Corporate securities | 136 |
| | (1 | ) | | 252 |
| | (17 | ) | | 388 |
| | (18 | ) |
Mortgage-backed securities: | | | | | | | |
| |
|
| |
|
|
RMBS | 107 |
| | (1 | ) | | 170 |
| | (11 | ) | | 277 |
| | (12 | ) |
CMBS | 50 |
| | 0 |
| | 76 |
| | (4 | ) | | 126 |
| | (4 | ) |
Asset-backed securities | 66 |
| | 0 |
| | 3 |
| | 0 |
| | 69 |
| | 0 |
|
Foreign government securities | 35 |
| | (1 | ) | | 147 |
| | (18 | ) | | 182 |
| | (19 | ) |
Total | $ | 953 |
| | $ | (13 | ) | | $ | 905 |
| | $ | (57 | ) | | $ | 1,858 |
| | $ | (70 | ) |
Number of securities (1) | |
| | 292 |
| | |
| | 230 |
| | |
| | 513 |
|
Number of securities with other-than-temporary impairment | |
| | 9 |
| | |
| | 14 |
| | |
| | 23 |
|
Other Assets
Fixed-MaturityCommitted Capital Securities
Gross Unrealized Loss by Length
Each of TimeAGC 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.
As
The fair value of December 31, 2016
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, the
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| (dollars in millions) |
Obligations of state and political subdivisions | $ | 1,110 |
| | $ | (38 | ) | | $ | 6 |
| | $ | (1 | ) | | $ | 1,116 |
| | $ | (39 | ) |
U.S. government and agencies | 87 |
| | (1 | ) | | — |
| | — |
| | 87 |
| | (1 | ) |
Corporate securities | 492 |
| | (11 | ) | | 118 |
| | (20 | ) | | 610 |
| | (31 | ) |
Mortgage-backed securities: | |
| | |
| | |
| | |
| |
|
| |
|
|
RMBS | 391 |
| | (23 | ) | | 94 |
| | (15 | ) | | 485 |
| | (38 | ) |
CMBS | 165 |
| | (5 | ) | | — |
| | — |
| | 165 |
| | (5 | ) |
Asset-backed securities | 36 |
| | 0 |
| | 0 |
| | 0 |
| | 36 |
| | 0 |
|
Foreign government securities | 44 |
| | (5 | ) | | 114 |
| | (27 | ) | | 158 |
| | (32 | ) |
Total | $ | 2,325 |
| | $ | (83 | ) | | $ | 332 |
| | $ | (63 | ) | | $ | 2,657 |
| | $ | (146 | ) |
Number of securities (1) | |
| | 622 |
| | |
| | 60 |
| | |
| | 676 |
|
Number of securities with other-than-temporary impairment | |
| | 8 |
| | |
| | 9 |
| | |
| | 17 |
|
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.___________________
| |
(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.
|
Supplemental Executive Retirement Plans
The Company classified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations.
OfContracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the securitiesInsurance 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 unrealized loss positionevent of default or termination event that entitles the Company to terminate such contracts; however, the Company has from time-to-time mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions were generally terminated for 12 monthsan amount that approximated the present value of future premiums or more as of September 30, 2017, 28 securities had unrealized losses greaterfor a negotiated amount, rather than 10% of bookat fair value.
The total unrealized loss for these securities as of September 30, 2017 was $26 million. As of December 31, 2016,terms of the securitiesCompany’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 an unrealized loss positiondetermining the fair value of these contracts.
Due to the lack of quoted prices and other observable inputs for 12 monthsits instruments or more, 41 securities had unrealized losses greater than 10%for similar instruments, the Company determines the fair value of book value with an unrealized loss of $59 million. The Companyits credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the unrealized losses recordedexit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as of September 30, 2017 were yield-related and notLevel 3 in the result of other-than-temporary-impairment.
The amortized cost and estimated fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of available-for-sale fixed maturity securities by contractual maturity asthe value of September 30, 2017 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
Distribution of Fixed-Maturity Securities
by Contractual Maturity
As of September 30, 2017
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (in millions) |
Due within one year | $ | 249 |
| | $ | 250 |
|
Due after one year through five years | 1,518 |
| | 1,552 |
|
Due after five years through 10 years | 2,280 |
| | 2,365 |
|
Due after 10 years | 4,581 |
| | 4,936 |
|
Mortgage-backed securities: | |
| | |
|
RMBS | 866 |
| | 881 |
|
CMBS | 551 |
| | 562 |
|
Total | $ | 10,045 |
| | $ | 10,546 |
|
Based on fair value, investments and restricted cash that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise restricted total $286 million and $285 million, as of September 30, 2017 and December 31, 2016, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,676 million and $1,420 million, based on fair value as of September 30, 2017 and December 31, 2016, respectively.
The fair value of the Company’s pledged securitiescredit derivative contracts represents the difference between the present value of remaining premiums the Company expects to securereceive 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 September 30, 2023 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 obligations underoutstanding 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The primary sources of information used to determine gross spread include:
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS exposure totaled $18 millioncontracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and $116 millionsimilar time to maturity.
•Credit spreads provided by the counterparty of the CDS.
The rates used to discount future expected premium cash flows ranged from 3.62% to 5.41% at September 30, 2023 and 2.78% to 5.08% at December 31, 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 limiting the amount of unrealized gains that are recognized on certain CDS contracts. Given market conditions and the Company’s own credit spreads, approximately 11.2%, based on fair value, of the Company’s CDS contracts were fair valued using this minimum premium as of September 30, 2017 and December 31, 2016, respectively. Please refer to Note 8. Contracts Accounted for as Credit Derivatives, for more information.
No material investments of the Company were non-income producing for Nine Months 2017 and Nine Months 2016, respectively.
Externally Managed Portfolio
The majority of the investment portfolio is managed by five outside managers. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The Company's investment guidelines generally do not permit its outside managers to purchase securities rated lower than A- by S&P or A3 by Moody’s, excluding a 5% allocation to corporate securities not rated lower than BBB by S&P or Baa2 by Moody’s.
Internally Managed Portfolio
The investment portfolio tables shown above include both assets managed externally and internally. In the table below, more detailed information is provided for the component of the total investment portfolio that is internally managed (excluding short-term investments). The internally managed portfolio, as defined below, represents approximately 11% and 15% of the investment portfolio, on a fair value basis as of September 30, 2017 and December 31, 2016, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an attractive investment opportunity.
One of the Company's strategies for mitigating losses has been to purchase securities it has insured that have expected losses (loss mitigation securities), at discounted prices. In addition, the Company holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of our financial guaranties (other risk management assets). During 2016, the Company established an alternative investments group to focus on deploying a portion of the Company's excess capital to pursue acquisitions and develop new business opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its core competencies. The alternative investments group has been investigating a number of such opportunities, including, among others, both controlling and non-controlling investments in investment managers.
Internally Managed Portfolio
Carrying Value
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Assets purchased for loss mitigation and other risk management purposes: | | | |
Fixed-maturity securities, at fair value | $ | 1,220 |
| | $ | 1,492 |
|
Other invested assets | 20 |
| | 107 |
|
Other | 76 |
| | 55 |
|
Total | $ | 1,316 |
| | $ | 1,654 |
|
Cash and Restricted Cash
The following table provides a reconciliation of the cash reported on the consolidated balance sheets and the cash and restricted cash reported in the statements of cash flows.
Cash and Restricted Cash
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 | | As of September 30, 2016 | | As of December 31, 2015 |
| (in millions) |
Cash | $ | 72 |
| | $ | 118 |
| | $ | 98 |
| | $ | 166 |
|
Restricted cash (1) | 0 |
| | 9 |
| | 1 |
| | 0 |
|
Total cash and restricted cash | $ | 72 |
| | $ | 127 |
| | $ | 99 |
| | $ | 166 |
|
____________________
| |
(1) | Amounts relate to cash held in trust accounts and are reported in other assets in consolidated balance sheets. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. |
| |
11. | Insurance Company Regulatory Requirements |
Dividend Restrictions and Capital Requirements
Under New York insurance law, AGM and MAC may only pay dividends out of "earned surplus," which is the portion of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM and MAC may each pay dividends without the prior approval of the New York Superintendent of Financial Services (New York Superintendent) that, together with all dividends declared or distributed by it during the preceding 12 months, do not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income during that period.
The maximum amount available during 2017 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $196 million. Of such $196 million, approximately $54 million is available for distribution in the fourth quarter of 2017. Through August 25, 2017, MAC paid $36 million in dividends based on dividend capacity at that point. After the $250 million share repurchase on September 25, 2017, as discussed below, MAC has no additional dividend capacity for the remainder of 2017.
Under Maryland's insurance law, AGC may, with prior notice to the Maryland Insurance Commissioner, pay an ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. The maximum amount available during 2017 for AGC to distribute as ordinary dividends is approximately $107 million. Of such $107 million, approximately $41 million is available for distribution in the fourth quarter of 2017.
For AG Re, any distribution (including repurchase of shares) of any share capital, contributed surplus or other statutory capital that would reduce its total statutory capital by 15% or more of its total statutory capital as set out in its previous year's financial statements requires the prior approval of the Bermuda Monetary Authority (Authority). Separately, dividends are paid out of an insurer's statutory surplus and cannot exceed that surplus. Further, annual dividends cannot exceed 25% of total statutory capital and surplus as set out in its previous year's financial statements, which is $314 million, without AG Re certifying to the Authority that it will continue to meet required margins.2023. As of December 31, 2016,2022, the Authority now requires insurersuse of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to prepare statutorychanges 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 statementsguaranty 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 applicable 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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The primary strengths of the Company’s CDS modeling techniques are:
•The model takes into account the transaction structure and the key drivers of market value.
•The model maximizes the use of market-driven inputs whenever they are available.
•The model is a consistent approach to valuing positions.
The primary weaknesses of the Company’s CDS modeling techniques are:
•There is no exit market or any actual exit transactions; therefore, the Company’s exit market is a hypothetical one based on the Company’s entry market.
•There is a very limited market in accordancewhich 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. Structured finance and other FG VIEs’ assets and liabilities are carried at fair value under the FVO and are classified as Level 3.
The fair value of the residential mortgage loan FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the fair value of the FG VIEs’ assets and the implied collateral losses within 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 prices of the assets and liabilities of the FG VIEs are generally determined with the particular accounting principles adoptedassistance of an independent third party, based on a discounted cash flow approach. 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 insurer (which,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 casePuerto Rico Trusts including the value of AG Re,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 change in fair value of FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for (i) the change in fair value attributable to change in ISCR on FG
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
VIEs’ liabilities, and (ii) unrealized gains and losses on the New Recovery Bonds in the Puerto Rico Trusts, which are U.S. GAAP)reported in OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs.” Investment income on the New Recovery Bonds and changes in fair value on the CVIs in the Puerto Rico Trusts are all reported in “fair value gains (losses) on FG VIEs” on the condensed consolidated statement of operations.
Assets and Liabilities of CIVs
Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third-party data generally at the average between the offer and bid prices. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; and/or (vi) 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.
Until July 1, 2023, the consolidated CLOs were collateralized financing entities (CFEs), subject to certain adjustments.and therefore, the debt issued by, and loans held by, the consolidated CLOs were measured under the FVO using the CFE practical expedient. Loans in CLOs were priced using a loan pricing service which aggregated quotes from loan market participants. The loans were all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt was measured on the basis of this new requirement,the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs were measured at fair value and the debt of consolidated CLOs were 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 was 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 were warehoused in an investment vehicle, such vehicle was not considered a CFE. The Company had 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 securitized and became a CLO.
As of December 31, 2022, Level 2 assets in the CIVs included assets of the consolidated CLOs and certain assets previously non-admitted by AG Re are now admitted, resultingof the consolidated funds. Level 3 assets in an increasethe CIVs included the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs included senior warehouse financing debt used to AG Re’s statutory capitalfund a CLO warehouse (measured under the FVO). Level 3 liabilities of the CIVs included various tranches of CLO debt, first loss subordinated warehouse financing and surplus limitation. Basedsecuritized borrowing. Significant changes to any of the inputs described above could have a material effect on the foregoing limitations, in 2017 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $128 million without the prior approvalfair value of the Authorityconsolidated assets and (ii) declareliabilities.
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 September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
Assets: | | | | | | | |
Fixed-maturity securities, available-for-sale | | | | | | | |
Obligations of state and political subdivisions | $ | — | | | $ | 2,764 | | | $ | 2 | | | $ | 2,766 | |
U.S. government and agencies | — | | | 58 | | | — | | | 58 | |
Corporate securities | — | | | 2,009 | | | — | | | 2,009 | |
Mortgage-backed securities: | | | | | | | |
RMBS | — | | | 177 | | | 153 | | | 330 | |
CMBS | — | | | 188 | | | — | | | 188 | |
Asset-backed securities | — | | | 27 | | | 796 | | | 823 | |
Non-U.S. government securities | — | | | 93 | | | — | | | 93 | |
Total fixed-maturity securities, available-for-sale | — | | | 5,316 | | | 951 | | | 6,267 | |
Fixed-maturity securities, trading | — | | | 350 | | | — | | | 350 | |
Short-term investments | 1,418 | | | 8 | | | — | | | 1,426 | |
Other invested assets (1) | — | | | — | | | 3 | | | 3 | |
FG VIEs’ assets | — | | | 146 | | | 180 | | | 326 | |
Assets of CIVs: | | | | | | | |
Equity securities and warrants | — | | | 4 | | | 75 | | | 79 | |
Structured products | — | | | 66 | | | 173 | | | 239 | |
Total assets of CIVs | — | | | 70 | | | 248 | | | 318 | |
Other assets | 51 | | | 48 | | | 13 | | | 112 | |
Total assets carried at fair value | $ | 1,469 | | | $ | 5,938 | | | $ | 1,395 | | | $ | 8,802 | |
Liabilities: | | | | | | | |
Credit derivative liabilities | $ | — | | | $ | — | | | $ | 50 | | | $ | 50 | |
FG VIEs’ liabilities (3) | — | | | — | | | 542 | | | 542 | |
Total liabilities carried at fair value | $ | — | | | $ | — | | | $ | 592 | | | $ | 592 | |
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, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
Assets: | | | | | | | |
Fixed-maturity securities, available-for sale | | | | | | | |
Obligations of state and political subdivisions | $ | — | | | $ | 3,347 | | | $ | 47 | | | $ | 3,394 | |
U.S. government and agencies | — | | | 111 | | | — | | | 111 | |
Corporate securities | — | | | 2,084 | | | — | | | 2,084 | |
Mortgage-backed securities: | | | | | | | |
RMBS | — | | | 161 | | | 179 | | | 340 | |
CMBS | — | | | 271 | | | — | | | 271 | |
Asset-backed securities | — | | | 27 | | | 794 | | | 821 | |
Non-U.S. government securities | — | | | 98 | | | — | | | 98 | |
Total fixed-maturity securities, available-for-sale | — | | | 6,099 | | | 1,020 | | | 7,119 | |
Fixed-maturity securities, trading | — | | | 303 | | | — | | | 303 | |
Short-term investments | 771 | | | 39 | | | — | | | 810 | |
Other invested assets (1) | 2 | | | — | | | 5 | | | 7 | |
FG VIEs’ assets | — | | | 209 | | | 204 | | | 413 | |
Assets of CIVs (2): | | | | | | | |
Fund investments: | | | | | | | |
Equity securities and warrants | — | | | 5 | | | 297 | | | 302 | |
Corporate securities | — | | | — | | | 96 | | | 96 | |
Structured products | — | | | 82 | | | 46 | | | 128 | |
CLOs and CLO warehouse assets: | | | | | | | |
Loans | — | | | 4,570 | | | — | | | 4,570 | |
Short-term investments | 135 | | | — | | | — | | | 135 | |
Total assets of CIVs | 135 | | | 4,657 | | | 439 | | | 5,231 | |
Other assets | 54 | | | 46 | | | 48 | | | 148 | |
Total assets carried at fair value | $ | 962 | | | $ | 11,353 | | | $ | 1,716 | | | $ | 14,031 | |
Liabilities: | | | | | | | |
Credit derivative liabilities | $ | — | | | $ | — | | | $ | 163 | | | $ | 163 | |
FG VIEs’ liabilities (3) | — | | | — | | | 715 | | | 715 | |
Liabilities of CIVs: | | | | | | | |
CLO obligations of CFEs | — | | | — | | | 4,090 | | | 4,090 | |
Warehouse financing debt | — | | | 277 | | | 36 | | | 313 | |
Securitized borrowing | — | | | — | | | 28 | | | 28 | |
Total liabilities of CIVs | — | | | 277 | | | 4,154 | | | 4,431 | |
Other liabilities | — | | | 7 | | | — | | | 7 | |
Total liabilities carried at fair value | $ | — | | | $ | 284 | | | $ | 5,032 | | | $ | 5,316 | |
___________________
(1)Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis.
(2) As of December 31, 2022, excludes $5 million in investments in AssuredIM funds for which the Company recorded a 100% NCI. The consolidation of these funds resulted in a gross up of assets and pay dividendsNCI on the consolidated financial statements; however, it resulted in no economic equity or net income attributable to AGL.
(3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Level 3 Fair Value Measurements
The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during third quarter 2023, third quarter 2022, nine months 2023 and nine months 2022.
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 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 June 30, 2023 | $ | 46 | | | $ | 162 | | | $ | 800 | | | $ | 188 | | | $ | 290 | | | $ | 84 | | | $ | — | | | $ | 33 | | |
Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
Net income (loss) | — | | | 4 | | (1) | 13 | | (1) | 1 | | (2) | 5 | | (4) | — | | | 7 | | (4) | (20) | | (3) |
Other comprehensive income (loss) | (3) | | | (6) | | | (2) | | | — | | | — | | | — | | | — | | | — | | |
Purchases | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | |
Sales | — | | | — | | | — | | | — | | | (4) | | | — | | | — | | | — | | |
Settlements | (1) | | | (7) | | | (15) | | | (9) | | | — | | | — | | | — | | | — | | |
Consolidations | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Deconsolidations | — | | | — | | | — | | | — | | | (219) | | | (84) | | | 166 | | | — | | |
Transfers out of Level 3 | (40) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Fair value as of September 30, 2023 | $ | 2 | | | $ | 153 | | | $ | 796 | | | $ | 180 | | | $ | 75 | | | $ | — | | | $ | 173 | | | $ | 13 | | |
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in: | | | | | | | | | | | | | | | | |
Earnings | | | | | | | $ | — | | | $ | 6 | | (4) | $ | — | | | $ | 7 | | (4) | $ | (20) | | (3) |
OCI | $ | — | | | $ | (6) | | | $ | 3 | | | | | | | | | | | $ | — | | |
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 2023
| | | | | | | | | | | | | | | | | | | | |
| Credit Derivative Liability, net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| (in millions) |
Fair value as of June 30, 2023 | $ | (57) | | | $ | (699) | | | $ | (4,199) | | |
Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
Net income (loss) | 9 | | (6) | 17 | | (2) | — | | |
Other comprehensive income (loss) | — | | | 13 | | | — | | |
| | | | | | |
| | | | | | |
Settlements | (1) | | | 127 | | | — | | |
| | | | | | |
Deconsolidations | — | | | — | | | 4,199 | | |
Fair value as of September 30, 2023 | $ | (49) | | | $ | (542) | | | $ | — | | |
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in: | | | | | | |
Earnings | $ | 9 | | (6) | $ | 9 | | (2) | $ | — | | |
OCI | | | $ | 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
Third 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 June 30, 2022 | $ | 51 | | | $ | 184 | | | $ | 805 | | | $ | 223 | | | $ | 258 | | | $ | 90 | | | $ | 38 | | | $ | 37 | | |
Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
Net income (loss) | — | | | 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 | | | | | | | | | | | $ | — | | |
Roll Forward of Level 3 Assets (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 | | |
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
Nine 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) | 11 | | (1) | 13 | | (1) | — | | | 45 | | (4) | (3) | | (4) | 9 | | (4) | (33) | | (3) |
Other comprehensive income (loss) | (3) | | | (14) | | | (10) | | | — | | | — | | | — | | | — | | | — | | |
Purchases | — | | | — | | | 23 | | | — | | | 41 | | | 6 | | | — | | | — | | |
Sales | — | | | — | | | (2) | | | — | | | (89) | | | (15) | | | (48) | | | — | | |
Settlements | (3) | | | (23) | | | (22) | | | (24) | | | — | | | — | | | — | | | (4) | | |
| | | | | | | | | | | | | | | | |
Deconsolidations | — | | | — | | | — | | | — | | | (219) | | | (84) | | | 166 | | | — | | |
Transfers out of Level 3 | (40) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Fair value as of September 30, 2023 | $ | 2 | | | $ | 153 | | | $ | 796 | | | $ | 180 | | | $ | 75 | | | $ | — | | | $ | 173 | | | $ | 13 | | |
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in: | | | | | | | | | | | | | | | | |
Earnings | | | | | | | $ | (3) | | (2) | $ | 6 | | (4) | $ | — | | | $ | 7 | | (4) | $ | (33) | | (3) |
OCI | $ | — | | | $ | (13) | | | $ | — | | | | | | | | | | | $ | — | | |
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Nine 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) | 115 | | (6) | 18 | | (2) | (45) | | (4) |
Other comprehensive income (loss) | — | | | 14 | | | (13) | | |
| | | | | | |
| | | | | | |
Settlements | (2) | | | 141 | | | 13 | | |
| | | | | | |
Deconsolidations | — | | | — | | | 4,199 | | |
Fair value as of September 30, 2023 | $ | (49) | | | $ | (542) | | | $ | — | | |
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in: | | | | | | |
Earnings | $ | 114 | | (6) | $ | 11 | | (2) | $ | — | | |
OCI | | | $ | 14 | | | $ | — | | |
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
Nine 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) | — | | | 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 Assets (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 | | |
____________________
(1)Included in “net realized investment gains (losses)” and “net investment income.”
(2)Included in “fair value gains (losses) on FG VIEs.”
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss).”
(4)Reported in “fair value gains (losses) on CIVs.”
(5)Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the condensed consolidated balance sheets based on net exposure by transaction.
(6)Reported in “fair value gains (losses) on credit derivatives.”
(7)Includes CCS and other invested assets.
(8)Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
As of September 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Instrument Description | | Fair Value Assets (Liabilities) (in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
Investments (2): | | | | | | | | |
Fixed-maturity securities, available-for-sale (1): | | | | | | | | | | |
Obligations of state and political subdivisions | | $ | 2 | | | Yield | | 8.8 | % | - | 21.5% | | 9.1% |
RMBS | | 153 | | | CPR | | 0.0 | % | - | 15.0% | | 3.9% |
| | CDR | | 1.4 | % | - | 16.0% | | 5.7% |
| | Loss severity | | 50.0 | % | - | 125.0% | | 82.6% |
| | Yield | | 8.2 | % | - | 11.9% | | 9.7% |
Asset-backed securities: | | | | | | | | | | |
Life insurance transactions | | 331 | | | Yield | | 8.1% | | |
CLOs | | 454 | | | Discount margin | | 1.3 | % | - | 7.8% | | 2.7% |
Others | | 11 | | | Yield | | 6.3 | % | - | 12.3% | | 12.1% |
FG VIEs’ assets (1) | | 180 | | | CPR | | 0.1 | % | - | 21.2% | | 8.0% |
| | CDR | | 1.3 | % | - | 41.0% | | 9.3% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 82.6% |
| | Yield | | 8.1 | % | - | 11.5% | | 10.1% |
Assets of CIVs (3): | | | | | | | | | | |
Equity securities and warrants | | 75 | | | Discount rate | | 20.9% | | |
| | | | Market multiple-price to book | | 1.10x | | |
| | | | Market multiple-price to earnings | | 5.25x | | |
| | | | Terminal growth rate | | 4.0% | | |
| | | | Exit multiple-price to book | | 1.10x | | |
| | | | Exit multiple-price to earnings | | 5.25x | | |
Structured products | | 173 | | | Yield | | 7.5 | % | - | 28.1% | | 17.9% |
Other assets (1) | | 12 | | | Implied Yield | | 7.7 | % | - | 8.2% | | 7.9% |
| | Term (years) | | 10 years | | |
Credit derivative liabilities, net (1) | | (49) | | | Hedge cost (in bps) | | 17.2 | - | 39.2 | | 24.1 |
| | Bank profit (in bps) | | 115.5 | - | 293.2 | | 155.7 |
| | Internal floor (in bps) | | 10.0 | | |
| | Internal credit rating | | AAA | - | CCC | | A |
FG VIEs’ liabilities (1) | | (542) | | | CPR | | 0.1 | % | - | 21.2% | | 8.0% |
| | CDR | | 1.3 | % | - | 41.0% | | 9.3% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 82.6% |
| | Yield | | 5.5 | % | - | 11.5% | | 6.5% |
___________________
(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 $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.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Instrument Description | | Fair Value Assets (Liabilities) (in millions) | | Significant Unobservable Inputs | | Range | | Weighted Average (4) |
Investments (2): | | | | | | | | | | |
Fixed-maturity securities, available-for-sale (1): | | | | | | | | | | |
Obligations of state and political subdivisions | | $ | 47 | | | Yield | | 7.4 | % | - | 13.5% | | 9.4% |
RMBS | | 179 | | | CPR | | 3.8 | % | - | 16.1% | | 8.2% |
| | CDR | | 1.5 | % | - | 12.0% | | 5.9% |
| | Loss severity | | 50.0 | % | - | 125.0% | | 82.5% |
| | Yield | | 7.5 | % | - | 11.3% | | 9.0% |
Asset-backed securities: | | | | | | | | | | |
Life insurance transactions | | 342 | | | Yield | | 11.3% | | |
CLOs | | 428 | | | Discount margin | | 1.8 | % | - | 4.1% | | 3.0% |
Others | | 24 | | | Yield | | 7.4 | % | - | 12.9% | | 12.8% |
FG VIEs’ assets (1) | | 204 | | | CPR | | 0.9 | % | - | 21.9% | | 12.9% |
| | CDR | | 1.3 | % | - | 41.0% | | 7.6% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 81.0% |
| | Yield | | 6.6 | % | - | 10.9% | | 7.5% |
Assets of CIVs (3): | | | | | | | | | | |
Equity securities and warrants | | 297 | | | Yield | | 10.0% | | |
| | | | Discount rate | | 19.8% | - | 25.1% | | 22.7% |
| | | | Market multiple-enterprise value/revenue | | 1.05x | - | 1.10x | | 1.08x |
| | | | Market multiple-enterprise value/EBITDA (6) | | 2.50x | - | 11.00x | | 10.25x |
| | | | Market multiple-price to book | | 1.15x | | |
| | | | Market multiple-price to earnings | | 4.50x | | |
| | | | Terminal growth rate | | 3.0% | - | 4.0% | | 3.5% |
| | | | Exit multiple-EBITDA | | 8.00x | - | 12.00x | | 10.53x |
| | | | Exit multiple-price to book | | 1.30x | | |
| | | | Exit multiple-price to earnings | | 5.50x | | |
| | | | Cost | | 1.00x | | |
Corporate securities | | 96 | | | Discount rate | | 20.8 | % | - | 23.8% | | 21.7% |
| | | | Yield | | 16.3% | | |
| | | | Exit multiple-EBITDA | | 8.00x | | |
| | | | Cost | | 1.00x | | |
| | | | Market multiple-enterprise value/EBITDA | | 2.50x | - | 2.75x | | 2.63x |
Structured products | | 46 | | | Yield | | 12.8 | % | - | 37.1% | | 18.9% |
Other assets (1) | | 47 | | | Implied Yield | | 7.7 | % | - | 8.4% | | 8.1% |
| | | | Term (years) | | 10 years | | |
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 $5 million.
(3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
(6) Earnings before interest, taxes, depreciation, and amortization (EBITDA).
Not Carried at Fair Value
Financial Guaranty Insurance Contracts
Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, and also includes adjustments for stressed losses, ceding commissions and return on capital. The Company classified the fair value of financial guaranty insurance contracts as Level 3.
Long-Term Debt
Long-term debt issued by the U.S. Holding Companies is valued by broker-dealers using third-party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry.
Assets and Liabilities of CIVs
Cash equivalents are recorded at cost which approximates fair value. Due from/to brokers and counterparties primarily consists of cash, margin deposits, 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 aggregateenforceable 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
As of December 31, 2022, $35 million of AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain consolidated European CLOs, which was required to comply with its European risk retention obligations, were included in “other liabilities.”
The carrying amount up to approximately $314 millionand 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, 2023 | | As of December 31, 2022 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| (in millions) |
Assets (liabilities): | | | | | | | |
Assets of CIVs (1) | $ | 21 | | | $ | 21 | | | $ | 46 | | | $ | 46 | |
Other assets (including other invested assets) (2) | 106 | | | 107 | | | 92 | | | 93 | |
Financial guaranty insurance contracts (3) | (2,280) | | | (1,712) | | | (2,335) | | | (986) | |
Long-term debt | (1,693) | | | (1,477) | | | (1,675) | | | (1,477) | |
Liabilities of CIVs (4) | (4) | | | (4) | | | (170) | | | (170) | |
Other liabilities (5) | (17) | | | (17) | | | (43) | | | (43) | |
____________________
(1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2) Primarily includes accrued interest, a participation loan, and receivables for securities sold, for which carrying value approximates fair value. Also includes note receivable from Sound Point as of September 30, 2017. Such dividend capacity is further limited2023 and management fees receivables as of December 31, 2022.
(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, as of December 31, 2022, 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 through the end of June 30, 2023. Upon closing of the Sound Point Transaction and the AHP Transaction, the Company deconsolidated the transferred AssuredIM subsidiaries and reports its investment in Sound Point as an equity method investment (on a one-quarter lag). As a result, the Company no longer has asset management fee revenues on its consolidated statement of operations.
Asset Management Fees
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Management fees | $ | — | | | $ | 11 | | | $ | 21 | | | $ | 41 | |
Performance fees | — | | | 2 | | | 18 | | | 17 | |
Reimbursable fund expenses | — | | | 3 | | | 14 | | | 13 | |
Total asset management fees | $ | — | | | $ | 16 | | | $ | 53 | | | $ | 71 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
11. Long-Term Debt
The principal and carrying values of the Company’s debt are presented in the table below.
Principal and Carrying Amounts of Long-Term Debt
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| Principal | | Carrying Value | | Principal | | Carrying Value |
| (in millions) |
AGUS 5% Senior Notes | $ | — | | | $ | — | | | $ | 330 | | | $ | 329 | |
AGUS 6.125% Senior Notes | 350 | | | 345 | | | — | | | — | |
AGUS 3.15% Senior Notes | 500 | | | 495 | | | 500 | | | 495 | |
AGUS 7% Senior Notes | 200 | | | 198 | | | 200 | | | 198 | |
AGUS 3.6% Senior Notes | 400 | | | 395 | | | 400 | | | 395 | |
AGUS Series A Enhanced Junior Subordinated Debentures | 150 | | | 150 | | | 150 | | | 150 | |
AGMH Junior Subordinated Debentures (1) | 146 | | | 110 | | | 146 | | | 108 | |
Total | $ | 1,746 | | | $ | 1,693 | | | $ | 1,726 | | | $ | 1,675 | |
____________________
(1) Carrying amounts are different than principal amounts primarily due to fair value adjustments at the date of the AGMH acquisition, which are accreted into interest expense over the remaining terms of these obligations. Net of AGMH’s long-term debt purchased by AGUS.
6.125% Senior Notes. On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028 (6.125% Senior Notes) for net proceeds of $345 million. The net proceeds from the actual amountissuance were used for the redemption on September 25, 2023, of AG Re’s unencumbered assets, which amount changes$330 million of AGUS’s debt maturing in 2024. AGUS may redeem all or part of the 6.125% Senior Notes at any time or from time to time due in partprior to collateral posting requirements. AsAugust 15, 2028 (the date that is one month prior to the maturity of September 30, 2017, AG Re had unencumbered assetsthe 6.125% Senior Notes), at its option, at a redemption price equal to the greater of: (i) 100% of approximately $572 million.
U.K. company law prohibits eachthe principal amount of AGE, AGLNthe 6.125% Senior Notes being redeemed; and AGUK(ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 6.125% Senior Notes being redeemed (excluding interest accrued to the redemption date) from declaring a dividendthe redemption date to its shareholders unless it has “profits available for distribution.” The determinationAugust 15, 2028 discounted to the date of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictionsredemption on a general insurer's ability to declaresemi-annual basis (assuming a dividend, the Prudential Regulation Authority's capital requirements may in practice act as360-day year consisting of twelve 30-day months) at a restriction on dividends. In addition, AGLN currently must confirm that the Prudential Regulation Authority does not objectdiscount rate equal to the payment of any dividend to its parent company before AGLN makes any dividend payment.
Dividendstreasury rate plus 30 bps; plus, in each case, accrued and Repayments
By Insurance Company Subsidiaries
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Dividends paid by AGC to AGUS | $ | 15 |
| | $ | 15 |
| | $ | 66 |
| | $ | 38 |
|
Dividends paid by AGM to AGMH | 63 |
| | 65 |
| | 142 |
| | 192 |
|
Dividends paid by AG Re to AGL | 45 |
| | 35 |
| | 125 |
| | 85 |
|
Dividends paid by MAC to MAC Holdings (1) | 12 |
| | — |
| | 36 |
| | — |
|
Repayment of surplus note by MAC to AGM | — |
| | — |
| | — |
| | 100 |
|
Repayment of surplus note by MAC to MAC Holdings (1) | — |
| | — |
| | — |
| | 300 |
|
Redemption of common stock by MAC to MAC Holdings (1) | 250 |
| | — |
| | 250 |
| | — |
|
____________________
| |
(1) | MAC Holdings distributed nearly the entire amounts to AGM and AGC, in proportion to their ownership percentages. |
Stock Redemption by MAC
On August 17, 2017,unpaid interest on the New York Superintendent approved MAC's request to repurchase 64,322 of its shares of
common stock from its direct parent, MAC Holdings, for approximately $250 million. MAC implemented the stock
redemption plan on September 25, 2017, transferring approximately $104 million in cash and $146 million in marketable
securities to MAC Holdings, which then distributed such assets to its shareholders, AGM and AGC, in proportion to their
respective 61% and 39% ownership interests, such that AGM received approximately $152 million ($6 million in cash and
$146 million in securities) and AGC received approximately $98 million (all in cash). Each share repurchased by MAC was
retired and ceased6.125% Senior Notes to be an authorized share. Pursuantredeemed to, MAC's Amendedbut excluding, the redemption date. AGUS may redeem all or part of the 6.125% Senior Notes at any time or from time to time on and Restated Charter,after August 15, 2028, at its option, at a redemption price equal to 100% of the par valueprincipal amount of MAC'sthe 6.125% Senior Notes being redeemed, plus accrued and unpaid interest on the 6.125% Senior Notes to be redeemed to, but excluding, the redemption date. The 6.125% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by AGL. The 6.125% Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding. The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.
remaining shares of common stock issued and outstanding increased automatically in order to maintain MAC's total paid-in
capital at $15 million.
12. Income Taxes
Overview
AGL and its "Bermuda Subsidiaries," which consist ofBermuda subsidiaries AG Re, AGRO and Cedar Personnel Ltd., (collectively, the Bermuda Subsidiaries) are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGLAGL’s U.S., U.K. and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL's U.S. and U.K.French subsidiaries are subject to income taxes imposed by U.S., U.K. and U.K.French authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code (the Code) to be taxed as a U.S. domestic corporation.
In November 2013, AGL becameis 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. AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The main rate of corporation tax is 19% beginning April 1, 2017.
AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. AGE, the Company’s U.K. subsidiary, had previously elected under Section 953(d) of the Code to be taxed as a U.S. company. In January 2017, AGE filed
a request with the U.S. Internal Revenue Service (IRS) to revoke the election, which was approved in May 2017. As a result of the revocation of the Section 953(d) election, AGE will no longer be liable to pay future U.S. taxes beginning in 2017.
On January 10, 2017, AGC purchased MBIA UK, a U.K.-based insurance company. After the purchase, MBIA UK changed its name to AGLN and continues to file its tax returns in the U.K. as a separate entity. For additional information on the MBIA UK Acquisition, please refer to Note 2, Acquisitions. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries, AGRO and AG Intermediary Inc., file their own consolidated federal income tax return.
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
In July of 2023, the U.K. government passed legislation to implement the Organization for Economic Co-Operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two income inclusion rule. This includes a multinational top-up tax which will apply to large multinational corporations for accounting periods beginning on or after December 31, 2023. It is expected this will apply to AGL and subsidiaries, requiring a minimum effective rate of 15% in all jurisdictions in which it operates.
In addition, in August of 2023 the Bermuda government released the first of two public consultations for the introduction of a corporate income tax in Bermuda in response to the Pillar II initiatives. The Bermuda tax is expected to be enacted in 2023 to be effective in 2025. According to a second public consultation paper issued by the Ministry of Finance of the Bermuda Government, the Government of Bermuda believes it is reasonable and proportionate for any new Bermuda corporate income tax regime to supersede any existing tax assurances given to companies such as AGL and its Bermuda subsidiaries.
The Company is assessing the impact of both the U.K. legislation and the Bermuda proposal.
Tax Assets (Liabilities)
Deferred and Current Tax Assets (Liabilities)
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Net deferred tax assets (liabilities) | $ | 82 | | | $ | 114 | |
Net current tax assets (liabilities) | 34 | | | 63 | |
Valuation Allowance
During 2023, the Company recorded a return to provision adjustment, which included the utilization of $3 million in foreign tax credits, thereby reducing the Company’s foreign tax credits (FTC) from $5 million as of December 31, 2022 to $2 million as of September 30, 2023. As of September 30, 2023, the Company believes that the weight of the positive evidence outweighs the negative evidence regarding the realization of the Company’s foreign tax credits, resulting in the release of the corresponding valuation allowance.
The Company came to the conclusion that it is more likely than not that the 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 September 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'sCompany’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pretaxpre-tax income for the full year 2017.2023. 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 35%, U.K. subsidiaries21% and the French subsidiary taxed at the U.K. blendedFrench marginal corporate tax rate of 19.25% unless taxed as a U.S. controlled foreign corporation,25%, 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
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
subsequent to April 1, 2017,2023, the U.K. corporation tax rate has been reducedincreased to 19%25%. For the periods between April 1, 2015 and March 31, 2017,full year 2023, the U.K. corporationsubsidiaries will be taxed at the U.K. blended marginal corporate tax rate was 20%of 23.5%. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions.
A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below.
Effective Tax Rate Reconciliation
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Expected tax provision (benefit) | $ | 45 | | | $ | (6) | | | $ | 88 | | | $ | 6 | |
Tax-exempt interest | (3) | | | (3) | | | (9) | | | (10) | |
NCI | (1) | | | 1 | | | (4) | | | (5) | |
Return to provision adjustment | (6) | | | (20) | | | (6) | | | (20) | |
State taxes | 1 | | | 2 | | | 8 | | | 10 | |
Foreign taxes | 7 | | | (1) | | | 8 | | | 9 | |
Taxes on reinsurance | (1) | | | — | | | (1) | | | (1) | |
Stock based compensation | 2 | | | — | | | 2 | | | 4 | |
Other | (1) | | | — | | | (2) | | | 1 | |
Total provision (benefit) for income taxes | $ | 43 | | | $ | (27) | | | $ | 84 | | | $ | (6) | |
Effective tax rate | 21.4 | % | | 123.5 | % | | 18.1 | % | | (12.1) | % |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 |
| 2016 |
| (in millions) |
Expected tax provision (benefit) at statutory rates in taxable jurisdictions | $ | 116 |
| | $ | 150 |
| | $ | 245 |
| | $ | 234 |
|
Tax-exempt interest | (12 | ) | | (12 | ) | | (36 | ) | | (38 | ) |
Gain on bargain purchase | — |
| | (125 | ) | | (20 | ) | | (125 | ) |
State taxes | 1 |
| | 0 |
| | 7 |
| | 1 |
|
Change in liability for uncertain tax positions | 8 |
| | 8 |
| | (27 | ) | | 10 |
|
Effect of provision to tax return filing adjustments | (8 | ) | | (16 | ) | | (8 | ) | | (16 | ) |
Other | 0 |
| | (4 | ) | | (4 | ) | | (4 | ) |
Total provision (benefit) for income taxes | $ | 105 |
| | $ | 1 |
| | $ | 157 |
| | $ | 62 |
|
Effective tax rate | 33.6 | % | | 0.3 | % | | 18.8 | % | | 8.3 | % |
The change in liability for uncertain tax positions for Nine Months 2017 is driven by the closure of the 2009 – 2012 IRS Audit, see "Audits" below for further discussion.
The expected tax provision at statutory rates in taxable jurisdictions(benefit) is calculated as the sum of pretaxpre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Pretax income of the Company’s subsidiaries which are not U.S. or U.K. domiciled but are subject to U.S. or U.K. tax by election, establishment of tax residency or as controlled foreign corporations, are included at the U.S. or U.K. statutory tax rate. Where there is a pretaxpre-tax loss in one jurisdiction and pretaxpre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.
The following table presents pretaxtables present pre-tax income and revenue by jurisdiction.
PretaxPre-tax Income (Loss) by Tax Jurisdiction
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
U.S. | $ | 233 | | | $ | 3 | | | $ | 458 | | | $ | 112 | |
Bermuda | (17) | | | 10 | | | 41 | | | 27 | |
U.K. | (10) | | | (30) | | | (25) | | | (75) | |
Other | (4) | | | (5) | | | (8) | | | (15) | |
Total | $ | 202 | | | $ | (22) | | | $ | 466 | | | $ | 49 | |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
United States | $ | 337 |
| | $ | 432 |
| | $ | 713 |
| | $ | 681 |
|
Bermuda | (18 | ) | | 56 |
| | 143 |
| | 88 |
|
U.K. | (6 | ) | | (8 | ) | | (21 | ) | | (23 | ) |
Total | $ | 313 |
| | $ | 480 |
| | $ | 835 |
| | $ | 746 |
|
Revenue by Tax Jurisdiction
| | | | | | | | | | | | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | | 2023 | | 2022 | | 2023 | | 2022 |
| 2017 | | 2016 | | 2017 | | 2016 | | (in millions) |
| (in millions) | |
United States | $ | 566 |
| | $ | 499 |
| | $ | 1,305 |
| | $ | 1,041 |
| |
U.S. | | U.S. | $ | 373 | | | $ | 60 | | | $ | 901 | | | $ | 435 | |
Bermuda | 61 |
| | 69 |
| | 165 |
| | 170 |
| Bermuda | 30 | | | 4 | | | 123 | | | 43 | |
U.K. | (4 | ) | | (2 | ) | | (12 | ) | | (4 | ) | U.K. | 1 | | | (21) | | | 22 | | | (39) | |
Other | | Other | (1) | | | (2) | | | — | | | (8) | |
Total | $ | 623 |
| | $ | 566 |
| | $ | 1,458 |
| | $ | 1,207 |
| Total | $ | 403 | | | $ | 41 | | | $ | 1,046 | | | $ | 431 | |
PretaxPre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.
Assured Guaranty Ltd.
As part of the Radian Asset Acquisition, the Company acquired $19 million of foreign tax credits (FTC) which will expire in 2020. In addition, AGE had $1 million of FTC priorNotes to revoking its election to be taxed as a U.S. company in 2017. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC will not be utilized, and therefore recorded a valuation allowance with respect to this tax attribute.Condensed Consolidated Financial Statements (Unaudited), Continued
The Company came to the conclusion that it is more likely than not that the remaining net deferred tax asset will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years, and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with this deferred tax asset. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.
Audits
As of September 30, 2017,2023, AGUS had open tax years with the U.S. Internal Revenue Service (IRS) for 2018 forward and is currently under audit for the 2018 and 2019 tax years. As of September 30, 2023, Assured Guaranty Overseas US Holdings Inc. had open tax years with the IRS for 2013 to present. In December 2016, the IRS issued a Revenue Agent Report (RAR) which did not identify any material adjustments that were not already accounted for in the prior periods. In April 2017, the Company received a final letter from the IRS to close the audit with no additional findings or changes,2019 forward and as a result the Company released previously recorded uncertain tax position reserves and accrued interest of approximately $37 million in the second quarter of 2017. Assured Guaranty Oversees US Holdings Inc. has open tax years of 2014 forward. The Company's U.K. subsidiaries areis not currently under examinationaudit with the IRS. In September 2022, His Majesty’s Revenue & Customs completed a business risk review of Assured Guaranty that commenced in July 2022 and have open tax years of 2015 forward. CIFGNA, which was acquired by AGC during 2016,assigned a low-risk rating for corporate taxes in the U.K. The Company’s French subsidiary is not currently under examination and has open tax years of 2014 to present. The Company's French subsidiary, CIFGE, is not currently under examination and has open years of 2014 to present.2019 forward.
Uncertain Tax Positions
The Company's policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued $1.2 million for Nine Months 2017 and $2 million for the full year 2016. As of September 30, 2017 and December 31, 2016, the Company has accrued $2 million and $7 million of interest, respectively.
The total amount of reserves for unrecognized tax positions, including accrued interest, as of September 30, 2017 and December 31, 2016 that would affect the effective tax rate, if recognized, was $30 million and $57 million, respectively. The reduction in reserves is driven by the closure of the 2009- 2012 IRS Audit.
| |
13. | Reinsurance and Other Monoline Exposures |
The Company assumes exposure (Assumed Business) and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of ceding commissions. Substantially all of the Company’s Assumed Business and Ceded Business relates to financial guaranty insurance, except for a modest amount that relates to non-financial guaranty business assumed by AGRO. The Company historically entered into, and with respect to new business originated by AGRO continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.
The following table presents the components of premiums and losses reported in the consolidated statements of operations and the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and non-financial guaranty).
Effect of Reinsurance on Statement of Operations
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Premiums Written: | | | | | | | |
Direct | $ | 46 |
| | $ | 17 |
| | $ | 227 |
| | $ | 80 |
|
Assumed (1) | (1 | ) | | (1 | ) | | 8 |
| | (9 | ) |
Ceded (2) | 27 |
| | 0 |
| | 37 |
| | (17 | ) |
Net | $ | 72 |
| | $ | 16 |
| | $ | 272 |
| | $ | 54 |
|
Premiums Earned: | | | | | | | |
Direct | $ | 186 |
| | $ | 237 |
| | $ | 516 |
| | $ | 647 |
|
Assumed | 6 |
| | 6 |
| | 20 |
| | 19 |
|
Ceded | (6 | ) | | (12 | ) | | (24 | ) | | (38 | ) |
Net | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
Loss and LAE: | | | | | | | |
Direct | $ | 231 |
| | $ | 7 |
| | $ | 377 |
| | $ | 217 |
|
Assumed | (1 | ) | | (1 | ) | | (1 | ) | | (4 | ) |
Ceded | (7 | ) | | (15 | ) | | (22 | ) | | (30 | ) |
Net | $ | 223 |
| | $ | (9 | ) | | $ | 354 |
| | $ | 183 |
|
____________________
| |
(1) | Negative assumed premiums written were due to changes in expected debt service schedules. |
(2) Positive ceded premiums written were due to commutations and changes in expected debt service schedules.
In addition to the items presented in the table above, the Company records in the consolidated statements of operations, the effect of assumed and ceded credit derivative exposures. These amounts were losses of $0.2 million in Third Quarter 2017, $25 million in Third Quarter 2016, $0.8 million for Nine Months 2017 and $26 million for Nine Months 2016.
Amounts Due (To) From All Reinsurers
As of September 30, 2017
|
| | | | | | | | | | | | | | | |
| Assumed Premium, net of Commissions | | Ceded Premium, net of Commissions | | Assumed Expected Loss to be Paid | | Ceded Expected Loss to be Paid |
| (in millions) |
Reinsurers rated investment grade | $ | 5 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
Reinsurers rated BIG or not rated: | | | | | | | |
American Overseas Reinsurance Company Limited | — |
| | (4 | ) | | — |
| | 36 |
|
Syncora | 13 |
| | (18 | ) | | — |
| | (11 | ) |
Ambac | 31 |
| | — |
| | 1 |
| | — |
|
MBIA | 0 |
| | — |
| | (3 | ) | | — |
|
Financial Guaranty Insurance Company and FGIC UK Limited | 3 |
| | — |
| | (16 | ) | | — |
|
Ambac Assurance Corp. Segregated Account | 6 |
| | — |
| | (46 | ) | | — |
|
Subtotal | 53 |
| | (22 | ) | | (64 | ) | | 25 |
|
Other | 0 |
| | (3 | ) | | — |
| | — |
|
Total | $ | 58 |
| | $ | (25 | ) | | $ | (63 | ) | | $ | 25 |
|
Assumed and Ceded Financial Guaranty Business
The Company assumes financial guaranty business (Assumed Financial Guaranty Business) from third party insurers, primarily other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a portion of the ceding company's premium for the insured risk (typically, net of a ceding commission). The Company’s facultative and treaty agreements are generally subject to termination at the option of the ceding company:
if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum financial strength rating, or
upon certain changes of control of the Company.
Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, attributable to reinsurance assumed pursuant to such agreements after which the Company would be released from liability with respect to the Assumed Financial Guaranty Business.
Upon the occurrence of the conditions set forth in the first bullet above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.
The downgrade of the financial strength ratings of AG Re or of AGC gives certain ceding companies the right to recapture business they had ceded to AG Re and AGC, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve. With respect to a significant portion of the Company's in-force Assumed Financial Guaranty Business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the third party ceding company may have the right to recapture business it had ceded to AG Re and/or AGC, and in connection therewith, to receive payment from AG Re or AGC of an amount equal to the statutory unearned premium (net of ceding commissions) and statutory loss reserves (if any) associated with that business, plus, in certain cases, an additional required payment. As of September 30, 2017, if each third party insurer ceding business to AG Re and/or AGC had a right to recapture such business, and chose to exercise such right, the aggregate amounts that AG Re and AGC could be required to pay to all such companies would be approximately $49 million and $16 million, respectively.
The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk. Under these relationships, the Company ceded a portion of its insured risk to the reinsurer in exchange for the reinsurer receiving a
share of the Company's premiums for the insured risk (typically, net of a ceding commission). The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers. The Company’s ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain triggering events, such as reinsurer downgrades.
During the first quarter of 2017, the Company entered into a commutation agreement to reassume the entire portfolio previously ceded to one of its unaffiliated reinsurers, consisting predominantly (over 97%) of U.S. public finance and international public and project finance exposures. During Third Quarter 2017, the Company entered into two commutation agreements. In one case, it reassumed the entire portfolio previously ceded to one of its unaffiliated reinsurers under quota share reinsurance, consisting predominantly of U.S. public finance and international public and project finance exposures. In the other case, it reassumed a portion of the portfolio previously ceded to one of its other unaffiliated reinsurers. The table below summarizes the effect of commutations.
Commutations of Ceded Reinsurance Contracts
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Increase (decrease) in net unearned premium reserve | $ | 62 |
| | $ | — |
| | $ | 80 |
| | $ | — |
|
Increase (decrease) in net par outstanding | 3,455 |
| | 28 |
| | 4,628 |
| | 28 |
|
Commutation gains (losses) | 255 |
| | 8 |
| | 328 |
| | 8 |
|
Other Exposures to Monoline Financial Guaranty Insurers
In addition to the Company’s assumed and ceded reinsurance arrangements with other monoline financial guaranty insurers, the Company may also have exposure to such companies in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by such other monoline financial guaranty insurers. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed-maturity securities that are wrapped by monolines and whose value may change based on the rating of the monoline. As of September 30, 2017, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $98 million insured by National Public Finance Guarantee Corporation (National), $69 million insured by Ambac and $8 million insured by other guarantors.
Reinsurance and Other Exposures to Monolines
|
| | | | | | | | | | | | |
| | Par Outstanding |
| | As of September 30, 2017 |
Reinsurer | | Ceded Par Outstanding (1) | | Assumed Par Outstanding | | Second-to- Pay Insured Par Outstanding (2) |
| | (in millions) |
Reinsurers rated investment grade: | | | | | | |
National | | $ | — |
| | $ | 3,245 |
| | $ | 2,730 |
|
Subtotal | | — |
| | 3,245 |
| | 2,730 |
|
Reinsurers rated BIG or not rated: | | | | | | |
American Overseas Reinsurance Company Limited (3) | | 2,445 |
| | — |
| | — |
|
Syncora (3) | | 1,994 |
| | 674 |
| | 1,156 |
|
ACA Financial Guaranty Corp. | | 208 |
| | — |
| | 10 |
|
Ambac and Ambac Assurance UK Limited | | 112 |
| | 4,902 |
| | 1,927 |
|
MBIA | | — |
| | 137 |
| | 565 |
|
Financial Guaranty Insurance Company and FGIC UK Limited | | — |
| | 275 |
| | 821 |
|
Ambac Assurance Corp. Segregated Account | | — |
| | 567 |
| | 51 |
|
Subtotal | | 4,759 |
| | 6,555 |
| | 4,530 |
|
Other (3) | | 52 |
| | 111 |
| | 410 |
|
Total | | $ | 4,811 |
| | $ | 9,911 |
| | $ | 7,670 |
|
____________________
| |
(1) | Of the total ceded par to reinsurers rated BIG or not rated, $305 million is rated BIG. |
| |
(2) | The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG, and/or not rated, is $774 million. |
| |
(3) | The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of September 30, 2017 was approximately $123 million.
|
Assumed and Ceded Non-Financial Guaranty Business
As described in Note 4, Outstanding Exposure, Non-Financial Guaranty Insurance, the Company, through AGRO, assumes non-financial guaranty business from third party insurers (Assumed Non-Financial Guaranty Business). It also retrocedes some of this business to third party reinsurers. The downgrade of AGRO’s financial strength rating by S&P below “A” would require AGRO to post, as of September 30, 2017, an estimated $5 million of collateral in respect of certain of its Assumed Non-Financial Guaranty Business. A further downgrade of AGRO’s S&P rating below A- would give the company ceding such business the right to recapture the business for AGRO’s collateral amount, and, if also accompanied by a downgrade of AGRO's financial strength rating by A.M. Best Company, Inc. below A-, would also require AGRO to post, as of September 30, 2017, an estimated $5 million of collateral in respect of a different portion of AGRO’s Assumed Non-Financial Guaranty Business. AGRO’s ceded contracts generally have equivalent provisions requiring the assuming reinsurer to post collateral and/or allowing AGRO to recapture the ceded business upon certain triggering events, such as reinsurer rating downgrades.
Excess of Loss Reinsurance Facility
AGC, AGM and MAC entered into a $360 million aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2016, that covers losses occurring either from January 1, 2016 through December 31, 2023, or January 1, 2017 through December 31, 2024, at the option of AGC, AGM and MAC. It terminates on January 1, 2018, unless AGC, AGM and MAC choose to extend it. The facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2015, excluding credits that were rated non-investment grade as of December 31, 2015 by Moody’s or S&P or internally by AGC, AGM or MAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The
facility attaches when AGC’s, AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed $1.25 billion in the aggregate. The facility covers a portion of the next $400 million of losses, with the reinsurers assuming pro rata in the aggregate $360 million of the $400 million of losses and AGC, AGM and MAC jointly retaining the remaining $40 million. The reinsurers are required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. AGC, AGM and MAC paid approximately $9 million of premiums in 2016 for the term January 1, 2016 through December 31, 2016 and approximately $9 million of premiums for January 1, 2017 through December 31, 2017.
14. Commitments and Contingencies
Legal Proceedings
Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations or liquidity in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of the Company'sAGL’s insurance subsidiaries assert claimsare involved in legal proceedings againstlitigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company has commencedis involved in a number of legal actions in the U.S.Federal District Court for the District of Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See the "Exposure“Exposure to Puerto Rico"Rico” section of Note 4,3, Outstanding Exposure, for a description of such actions. See also the "Recovery Litigation" section of Note 5, Expected Loss to be Paid, for a description of recovery litigation unrelated to Puerto Rico. The amounts,impact, if any, the Company will recover inof these and other proceedings to recoveron the amount of recoveries the Company receives and losses areit pays in the future is uncertain, and recoveries, or failure to obtain recoveries, inthe impact of any one or more of these proceedings during any quarter or year could be material to the Company'sCompany’s results of operations in that particular quarter or year. 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 subpoenasduces tecum and interrogatories from regulators from time to time.
The Company establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is disclosed, including matters discussed below. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
Litigation
On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial Products Inc. (AGFP), an affiliate of AGC, which, in the past, had provided credit protection to counterparties under CDS. AGC acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the State of New York alleged that AGFP improperly terminated(the Court), asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination in December 2008 of nine credit derivative transactions between LBIE and AGFP and improperly calculatedasserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination payment in connection with the terminationJuly 2009 of 28 other credit derivative transactions between LBIE and AGFP.AGFP and AGFP’s calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP properlyhad terminated the transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFPproperly calculated that LBIE owes AGFP approximately $29$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. On February 3, 2012, AGFP filed a motion to dismiss certain of the counts in the complaint, and on March 15, 2013, the courtCourt granted AGFP'sAGFP’s motion to dismiss in respect of the count relating to improper termination of the nine credit derivative transactions and denied AGFP's motion to dismiss the counts relatingnarrowed LBIE’s claim with respect to the remaining28 other credit derivative transactions. Following a bench trial, on March 8, 2023, the Court rendered its decision and found in favor of AGFP. On FebruaryJune 30, 2023, the clerk entered judgment in favor of AGFP in the amount of approximately $54 million plus prejudgment simple interest at an annual rate of 8%. On September 22, 2016,2023, LBIE appealed this judgment. On July 1, 2023, AGFP filedmoved the Court to award it approximately $58 million for attorneys’ fees and expenses AGFP incurred through March 2023. The parties reached a confidential settlement with respect to this motion for summary judgmentattorneys’ fees, and AGFP withdrew the motion without prejudice on the remaining causes of action asserted by LBIE and on AGFP's counterclaims. Oral argument on AGFP's motion took place on July 21, 2016. LBIE's administrators disclosedOctober 30, 2023. The Company did not accrue in an April 10, 2015 report to LBIE’s unsecured creditors that LBIE's valuation expert has calculated LBIE's claim for damages in aggregateits financial statements for the 28 transactionsjudgment it was awarded or the attorneys’ fees it sought.
Assured Guaranty Ltd.
Notes to range between a minimum of approximately $200 million and a maximum of approximately $500 million, depending on what adjustment, if any, is made for AGFP's credit risk and excluding any applicable interest.
Proceedings Resolved Since December 31, 2016
On December 22, 2014, Deutsche Bank National Trust Company, as indenture trustee for the AAA Trust 2007-2 Re-REMIC (the Trustee)Condensed Consolidated Financial Statements (Unaudited), filed a “trust instructional proceeding” petition in the State of California Superior Court (Probate Division, Orange County), seeking the court’s instruction as to how it should allocate the losses resulting from its December 2014 sale of four RMBS owned by the AAA Trust 2007-2 Re-REMIC. This sale of approximately $70 million principal balance of RMBS was made pursuant to AGC’s liquidation direction in November 2014, and resulted in approximately $27 million of gross proceeds to the Re-REMIC. On December 22, 2014, AGC directed the indenture trustee to allocate to the uninsured Class A-3 Notes the losses realized from the sale. On May 4, 2015, the Superior Court rejected AGC’s allocation direction, and ordered the Trustee to allocate to the Class A-3 noteholders a pro rata share of the $27 million of gross proceeds. On May 17, 2017, the California Court of Appeal upheld the Superior Court’s rejection of AGC’s allocation direction. On June 15, 2017, the California Court of Appeal denied AGC’s petition for a rehearing, pursuant to an order that modified its initial opinion and affirmed the Superior Court’s May 4, 2015 order.
On September 25, 2013, Wells Fargo Bank, N.A., as trust administrator of the MASTR Adjustable Rate Mortgages Trust 2007-3 (Wells Fargo), filed an interpleader complaint in the U.S. District Court for the Southern District of New York seeking adjudication of a dispute between Wales LLC (Wales) and AGM as to whether AGM is entitled to reimbursement from certain cashflows for principal claims paid in respect of insured certificates. After the court issued an opinion on September 30, 2016, denying a motion for judgment on the pleadings filed by Wales, Wales sold its interests in the MASTR Adjustable Rate Mortgage Trust 2007-3 certificates, and on March 20, 2017, the court dismissed the case.
| |
15. | Long-Term Debt and Credit Facilities |
The principal and carrying values of the Company’s long-term debt are presented in the table below.
Principal and Carrying Amounts of Debt
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Principal |
| Carrying Value |
| Principal |
| Carrying Value |
| (in millions) |
AGUS: | |
|
| |
|
| |
|
| |
|
7% Senior Notes (1) | $ | 200 |
| | $ | 197 |
|
| $ | 200 |
| | $ | 197 |
|
5% Senior Notes (1) | 500 |
|
| 496 |
| | 500 |
| | 496 |
|
Series A Enhanced Junior Subordinated Debentures (2) | 150 |
| | 150 |
|
| 150 |
| | 150 |
|
Total AGUS | 850 |
| | 843 |
|
| 850 |
| | 843 |
|
AGMH(3): | |
| | |
|
| |
| | |
|
67/8% QUIBS (1) | 100 |
| | 70 |
|
| 100 |
| | 69 |
|
6.25% Notes (1) | 230 |
| | 142 |
|
| 230 |
| | 141 |
|
5.6% Notes (1) | 100 |
| | 56 |
|
| 100 |
| | 56 |
|
Junior Subordinated Debentures (2) | 300 |
| | 191 |
|
| 300 |
| | 187 |
|
Total AGMH | 730 |
| | 459 |
|
| 730 |
| | 453 |
|
AGM(3): | |
| | |
|
| |
| | |
|
AGM Notes Payable | 8 |
| | 8 |
|
| 9 |
| | 10 |
|
Total AGM | 8 |
| | 8 |
| | 9 |
| | 10 |
|
Purchased debt (4) | (28 | ) | | (18 | ) | | — |
| | — |
|
Total | $ | 1,560 |
| | $ | 1,292 |
|
| $ | 1,589 |
| | $ | 1,306 |
|
14. Shareholders’ Equity ____________________
| |
(1) | AGL fully and unconditionally guarantees these obligations |
| |
(2) | Guaranteed by AGL on a junior subordinated basis. |
| |
(3) | Carrying amounts are different than principal amounts due primarily to fair value adjustments at the AGMH acquisition date, which are accreted or amortized into interest expense over the remaining terms of these obligations.
|
| |
(4) | In 2017, AGUS purchased $28 million principal amount of AGMH's outstanding Junior Subordinated Debentures. |
Intercompany Credit Facility and Intercompany Debt
On October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. Such commitment terminates on October 25, 2018 (the loan termination date). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable Federal short-term or mid-term interest rate, as the case may be, as determined under Section 1274(d) of the Code, and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan termination date. No amounts are currently outstanding under the credit facility.
In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. During 2016, AGUS repaid $20 million in outstanding principal as well as accrued and unpaid interest, and the parties agreed to extend the maturity date of the loan from May 2017 to November 2019. As of September 30, 2017, $70 million remained outstanding.
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. The custodial trusts were created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company does not consider itself to be the primary beneficiary of the trusts and the trusts are not consolidated in Assured Guaranty's financial statements.
The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase the AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.
Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 basis points, and the annualized rate on the AGM CPS is one-month LIBOR plus 200 basis points.
Please refer to Note 7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement discussion.
16. Earnings Per Share
Computation of EPS
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Basic EPS: | | | | | | | |
Net income (loss) attributable to AGL | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
Less: Distributed and undistributed income (loss) available to nonvested shareholders | 0 |
| | 1 |
| | 1 |
| | 1 |
|
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 208 |
| | $ | 478 |
| | $ | 677 |
| | $ | 683 |
|
Basic shares | 118.7 |
| | 131.9 |
| | 121.8 |
| | 134.0 |
|
Basic EPS | $ | 1.75 |
| | $ | 3.63 |
| | $ | 5.56 |
| | $ | 5.10 |
|
| | | | | | | |
Diluted EPS: | | | | | | | |
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 208 |
| | $ | 478 |
| | $ | 677 |
| | $ | 683 |
|
Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted | $ | 208 |
| | $ | 478 |
| | $ | 677 |
| | $ | 683 |
|
| | | | | | | |
Basic shares | 118.7 |
| | 131.9 |
| | 121.8 |
| | 134.0 |
|
Dilutive securities: | | | | | | | |
Options and restricted stock awards | 2.0 |
| | 0.9 |
| | 1.7 |
| | 0.9 |
|
Diluted shares | 120.7 |
| | 132.8 |
| | 123.5 |
| | 134.9 |
|
Diluted EPS | $ | 1.72 |
| | $ | 3.60 |
| | $ | 5.48 |
| | $ | 5.06 |
|
Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | — |
| | 0.0 |
| | 0.1 |
| | 0.5 |
|
Other Comprehensive Income
The following tables present the changes in each component of AOCIaccumulated other comprehensive income (AOCI) and the effect of reclassifications out of AOCI oninto the respective line itemslines in net income.the condensed consolidated statements of operations.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Third Quarter 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, June 30, 2023 | $ | (284) | | | $ | (115) | | | $ | (22) | | | $ | (42) | | | $ | 5 | | | $ | (458) | |
Other comprehensive income (loss) before reclassifications | (115) | | | (14) | | | 10 | | | (1) | | | — | | | (120) | |
Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
Net realized investment gains (losses) | (2) | | | (7) | | | — | | | — | | | — | | | (9) | |
| | | | | | | | | | | |
Fair value gains (losses) on CIVs | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| | | | | | | | | | | |
Total before tax | (2) | | | (7) | | | — | | | (6) | | | — | | | (15) | |
Tax (provision) benefit | — | | | 1 | | | — | | | 1 | | | — | | | 2 | |
Total amount reclassified from AOCI, net of tax | (2) | | | (6) | | | — | | | (5) | | | — | | | (13) | |
Other comprehensive income (loss) | (113) | | | (8) | | | 10 | | | 4 | | | — | | | (107) | |
Balance, September 30, 2023 | $ | (397) | | | $ | (123) | | | $ | (12) | | | $ | (38) | | | $ | 5 | | | $ | (565) | |
|
| | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| (in millions) |
Balance, June 30, 2017 | $ | 228 |
| | $ | 107 |
| | $ | (27 | ) | | $ | 7 |
| | $ | 315 |
|
Other comprehensive income (loss) before reclassifications | 27 |
| | (15 | ) | | 3 |
| | — |
| | 15 |
|
Amounts reclassified from AOCI to: | | | | | | | | | |
Net realized investment gains (losses) | (24 | ) | | 17 |
| | — |
| | — |
| | (7 | ) |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
|
Interest expense | — |
| | — |
| | — |
| | 0 |
| | 0 |
|
Total before tax | (24 | ) | | 17 |
| | — |
| | 0 |
| | (7 | ) |
Tax (provision) benefit | 9 |
| | (6 | ) | | — |
| | 0 |
| | 3 |
|
Total amount reclassified from AOCI, net of tax | (15 | ) | | 11 |
| | — |
| | 0 |
| | (4 | ) |
Net current period other comprehensive income (loss) | 12 |
| | (4 | ) | | 3 |
| | 0 |
| | 11 |
|
Balance, September 30, 2017 | $ | 240 |
| | $ | 103 |
| | $ | (24 | ) | | $ | 7 |
| | $ | 326 |
|
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Third Quarter 20162022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, June 30, 2022 | $ | (205) | | | $ | (107) | | | $ | (19) | | | $ | (45) | | | $ | 6 | | | $ | (370) | |
Other comprehensive income (loss) before reclassifications | (286) | | | (1) | | | (3) | | | (4) | | | — | | | (294) | |
Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
Net realized investment gains (losses) | (11) | | | (3) | | | — | | | — | | | — | | | (14) | |
| | | | | | | | | | | |
Total before tax | (11) | | | (3) | | | — | | | — | | | — | | | (14) | |
Tax (provision) benefit | 2 | | | — | | | — | | | — | | | — | | | 2 | |
Total amount reclassified from AOCI, net of tax | (9) | | | (3) | | | — | | | — | | | — | | | (12) | |
Other comprehensive income (loss) | (277) | | | 2 | | | (3) | | | (4) | | | — | | | (282) | |
Balance, September 30, 2022 | $ | (482) | | | $ | (105) | | | $ | (22) | | | $ | (49) | | | $ | 6 | | | $ | (652) | |
|
| | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| (in millions) |
Balance, June 30, 2016 | $ | 426 |
| | $ | (24 | ) | | $ | (26 | ) | | $ | 7 |
| | $ | 383 |
|
Other comprehensive income (loss) before reclassifications | (33 | ) | | 13 |
| | (5 | ) | | — |
| | (25 | ) |
Amounts reclassified from AOCI to: | | | | | | | | |
|
|
Net realized investment gains (losses) | (3 | ) | | 4 |
| | — |
| | — |
| | 1 |
|
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
|
Interest expense | — |
| | — |
| | — |
| | 0 |
| | 0 |
|
Total before tax | (3 | ) | | 4 |
| | — |
| | 0 |
| | 1 |
|
Tax (provision) benefit | 0 |
| | (1 | ) | | — |
| | 0 |
| | (1 | ) |
Total amount reclassified from AOCI, net of tax | (3 | ) | | 3 |
| | — |
| | 0 |
| | — |
|
Net current period other comprehensive income (loss) | (36 | ) | | 16 |
| | (5 | ) | | 0 |
| | (25 | ) |
Balance, September 30, 2016 | $ | 390 |
| | $ | (8 | ) | | $ | (31 | ) | | $ | 7 |
| | $ | 358 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Nine Months 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2022 | $ | (343) | | | $ | (110) | | | $ | (23) | | | $ | (45) | | | $ | 6 | | | $ | (515) | |
Other comprehensive income (loss) before reclassifications | (54) | | | (31) | | | 9 | | | 2 | | | — | | | (74) | |
Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
Net realized investment gains (losses) | 2 | | | (22) | | | — | | | — | | | — | | | (20) | |
Fair value gains (losses) on FG VIEs | — | | | — | | | (2) | | | — | | | — | | | (2) | |
Fair value gains (losses) on CIVs | — | | | — | | | — | | | (6) | | | — | | | (6) | |
Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Total before tax | 2 | | | (22) | | | (2) | | | (6) | | | 1 | | | (27) | |
Tax (provision) benefit | (2) | | | 4 | | | — | | | 1 | | | — | | | 3 | |
Total amount reclassified from AOCI, net of tax | — | | | (18) | | | (2) | | | (5) | | | 1 | | | (24) | |
Other comprehensive income (loss) | (54) | | | (13) | | | 11 | | | 7 | | | (1) | | | (50) | |
Balance, September 30, 2023 | $ | (397) | | | $ | (123) | | | $ | (12) | | | $ | (38) | | | $ | 5 | | | $ | (565) | |
|
| | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| (in millions) |
Balance, December 31, 2016 | $ | 171 |
| | $ | 10 |
| | $ | (39 | ) | | $ | 7 |
| | $ | 149 |
|
Other comprehensive income (loss) before reclassifications | 133 |
| | 81 |
| | 15 |
| | — |
| | 229 |
|
Amounts reclassified from AOCI to: | | | | | | | | | |
Net realized investment gains (losses) | (71 | ) | | 18 |
| | — |
| | — |
| | (53 | ) |
Net investment income | (28 | ) | | — |
| | — |
| | — |
| | (28 | ) |
Interest expense | — |
| | — |
| | — |
| | 0 |
| | 0 |
|
Total before tax | (99 | ) | | 18 |
| | — |
| | 0 |
| | (81 | ) |
Tax (provision) benefit | 35 |
| | (6 | ) | | — |
| | 0 |
| | 29 |
|
Total amount reclassified from AOCI, net of tax | (64 | ) | | 12 |
| | — |
| | 0 |
| | (52 | ) |
Net current period other comprehensive income (loss) | 69 |
| | 93 |
| | 15 |
| | 0 |
| | 177 |
|
Balance, September 30, 2017 | $ | 240 |
| | $ | 103 |
| | $ | (24 | ) | | $ | 7 |
| | $ | 326 |
|
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Nine Months 20162022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 no Other-Than-Temporary Impairment | | Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment | | Cumulative Translation Adjustment | | Cash Flow Hedge | | Total Accumulated Other Comprehensive Income |
| (in millions) |
Balance, December 31, 2015 | $ | 260 |
| | $ | (15 | ) | | $ | (16 | ) | | $ | 8 |
| | $ | 237 |
|
Other comprehensive income (loss) before reclassifications | 146 |
| | (10 | ) | | (15 | ) | | — |
| | 121 |
|
Amounts reclassified from AOCI to: | | | | | | | | | |
Net realized investment gains (losses) | (20 | ) | | 25 |
| | — |
| | — |
| | 5 |
|
Net investment income | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
Interest expense | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Total before tax | (23 | ) | | 25 |
| | — |
| | (1 | ) | | 1 |
|
Tax (provision) benefit | 7 |
| | (8 | ) | | — |
| | 0 |
| | (1 | ) |
Total amount reclassified from AOCI, net of tax | (16 | ) | | 17 |
| | — |
| | (1 | ) | | 0 |
|
Net current period other comprehensive income (loss) | 130 |
| | 7 |
| | (15 | ) | | (1 | ) | | 121 |
|
Balance, September 30, 2016 | $ | 390 |
| | $ | (8 | ) | | $ | (31 | ) | | $ | 7 |
| | $ | 358 |
|
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Share Repurchase
The following table presents share repurchases since January 2016.
Share Repurchases
|
| | | | | | | | | | | |
Period | | Number of Shares Repurchased | | Total Payments (in millions) | | Average Price Paid Per Share |
2016 (January 1 - March 31) | | 3,038,928 |
| | $ | 75 |
| | $ | 24.69 |
|
2016 (April 1 - June 30) | | 2,331,474 |
| | 60 |
| | 25.73 |
|
2016 (July 1 - September 30) | | 2,050,229 |
| | 55 |
| | 26.83 |
|
2016 (October 1 - December 31, 2016) | | 3,300,617 |
| | 116 |
| | 35.09 |
|
Total 2016 | | 10,721,248 |
| | 306 |
| | 28.53 |
|
2017 (January 1 - March 31) | | 5,430,041 |
| | 216 |
| | 39.83 |
|
2017 (April 1 - June 30, 2017) | | 3,456,711 |
| | 135 |
| | 39.05 |
|
2017 (July 1 - September 30, 2017) | | 1,847,901 |
| | $ | 80 |
| | 43.29 |
|
2017 (October 1 - through November 2, 2017) | | 533,618 |
| | $ | 20 |
| | 37.48 |
|
Total 2017 | | 11,268,271 |
| | 451 |
| | 40.05 |
|
Cumulative repurchases since the beginning of 2013 | | 79,911,478 |
| | 2,166 |
| | 27.11 |
|
TheOn November 1, 2023, the Board of Directors (the Board) authorized on November 1, 2017,the repurchase of an additional $300 million of share repurchases. The total remaining capacity for share repurchases under the Board of Directorsits common shares. Under this and previous authorizations, was $398 million as of November 2, 2017.7, 2023, the Company was authorized to purchase $372 million of its common shares. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company'sCompany’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date.
Share Repurchases
Deferred Compensation | | | | | | | | | | | | | | | | | | | | |
Period | | Number of Shares Repurchased | | Total Payments (in millions) | | Average Price Paid Per Share |
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 - September 30) | | 1,065,902 | | | 64 | | | 59.67 | |
2023 (October 1 - November 7) | | 682,676 | | | 42 | | | 61.17 | |
Total 2023 | | 2,238,889 | | | $ | 132 | | | 58.83 | |
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
15. Earnings Per Share
The Company used a portionComputation of its share repurchase program to repurchase 297,131 common shares from its Chief Executive Officer and 23,062 common shares from its General Counsel on January 6, 2017. The shares were purchased at the closing priceEarnings Per Share
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions, except per share amounts) |
Basic Earnings Per Share (EPS): | | | | | | | |
Net income (loss) attributable to AGL | $ | 157 | | | $ | 11 | | | $ | 363 | | | $ | 30 | |
Less: Distributed and undistributed income (loss) available to nonvested shareholders | 2 | | | — | | | 3 | | | — | |
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 155 | | | $ | 11 | | | $ | 360 | | | $ | 30 | |
Basic shares | 58.5 | | | 61.7 | | | 58.9 | | | 63.9 | |
Basic EPS | $ | 2.65 | | | $ | 0.18 | | | $ | 6.11 | | | $ | 0.47 | |
| | | | | | | |
Diluted EPS: | | | | | | | |
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 155 | | | $ | 11 | | | $ | 360 | | | $ | 30 | |
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 | $ | 155 | | | $ | 11 | | | $ | 360 | | | $ | 30 | |
Basic shares | 58.5 | | | 61.7 | | | 58.9 | | | 63.9 | |
Dilutive securities: | | | | | | | |
Restricted stock awards | 1.1 | | | 1.2 | | | 1.1 | | | 1.2 | |
Diluted shares | 59.6 | | | 62.9 | | | 60.0 | | | 65.1 | |
Diluted EPS | $ | 2.60 | | | $ | 0.18 | | | $ | 5.99 | | | $ | 0.46 | |
Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | 0.1 | | | 0.1 | | | 0.1 | | | 0.8 | |
Table of a common share of the Company on the New York Stock Exchange on January 6, 2017. Separately, these officers also received 297,131 and 23,062 common shares, respectively, on January 6, 2017 in settlement of 297,131 share units and 23,062 share units held by them in the employer stock fund of the Assured Guaranty Ltd. Supplemental Employee Retirement Plan (the AGL SERP). The distribution of shares occurred in January 2017 pursuant to the terms of an amendment adopted in 2011 to the AGL SERP. Such amendment was adopted to comply with requirements of Section 409A of the Code and Section 457A of the Code, which required all grandfathered amounts (within the meaning of Section 457A of the Code), including the units in the employer stock fund in the AGL SERP, to be included in the income of the applicable participant no later than 2017.Contents
| |
18. | Subsidiary Information |
The following tables present the condensed consolidating financial information for AGUS and AGMH, 100%-owned subsidiaries of AGL, which have issued publicly traded debt securities (please refer to Note 15, Long Term Debt and Credit Facilities). The information for AGL, AGUS and AGMH presents its subsidiaries on the equity method of accounting. The following tables reflect transfers of businesses between entities within the consolidated group that occurred in the current reporting period consistently for all prior periods presented.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
ASSETS | |
| | |
| | |
| | |
| | |
| | |
|
Total investment portfolio and cash | $ | 47 |
| | $ | 143 |
| | $ | 24 |
| | $ | 11,776 |
| | $ | (327 | ) | | $ | 11,663 |
|
Investment in subsidiaries | 6,799 |
| | 6,257 |
| | 4,216 |
| | 208 |
| | (17,480 | ) | | — |
|
Premiums receivable, net of commissions payable | — |
| | — |
| | — |
| | 1,076 |
| | (154 | ) | | 922 |
|
Ceded unearned premium reserve | — |
| | — |
| | — |
| | 1,009 |
| | (901 | ) | | 108 |
|
Deferred acquisition costs | — |
| | — |
| | — |
| | 150 |
| | (45 | ) | | 105 |
|
Reinsurance recoverable on unpaid losses | — |
| | — |
| | — |
| | 394 |
| | (355 | ) | | 39 |
|
Credit derivative assets | — |
| | — |
| | — |
| | 50 |
| | (47 | ) | | 3 |
|
Deferred tax asset, net | — |
| | 76 |
| | — |
| | 153 |
| | (94 | ) | | 135 |
|
Intercompany receivable | — |
| | — |
| | — |
| | 70 |
| | (70 | ) | | — |
|
Financial guaranty variable interest entities’ assets, at fair value | — |
| | — |
| | — |
| | 707 |
| | — |
| | 707 |
|
Dividend receivable from affiliate | 25 |
| | — |
| | — |
| | — |
| | (25 | ) | | — |
|
Other | 22 |
| | 28 |
| | 51 |
| | 1,100 |
| | (234 | ) | | 967 |
|
TOTAL ASSETS | $ | 6,893 |
| | $ | 6,504 |
| | $ | 4,291 |
| | $ | 16,693 |
| | $ | (19,732 | ) | | $ | 14,649 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
| | |
| | |
| | |
| | |
|
Unearned premium reserves | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,565 |
| | $ | (968 | ) | | $ | 3,597 |
|
Loss and LAE reserve | — |
| | — |
| | — |
| | 1,646 |
| | (320 | ) | | 1,326 |
|
Long-term debt | — |
| | 843 |
| | 459 |
| | 8 |
| | (18 | ) | | 1,292 |
|
Intercompany payable | — |
| | 70 |
| | — |
| | 300 |
| | (370 | ) | | — |
|
Credit derivative liabilities | — |
| | — |
| | — |
| | 352 |
| | (47 | ) | | 305 |
|
Deferred tax liabilities, net | — |
| | — |
| | 87 |
| | — |
| | (87 | ) | | — |
|
Financial guaranty variable interest entities’ liabilities, at fair value | — |
| | — |
| | — |
| | 768 |
| | — |
| | 768 |
|
Dividend payable to affiliate | — |
| | 25 |
| | — |
| | — |
| | (25 | ) | | — |
|
Other | 15 |
| | 19 |
| | 22 |
| | 815 |
| | (388 | ) | | 483 |
|
TOTAL LIABILITIES | 15 |
| | 957 |
| | 568 |
| | 8,454 |
| | (2,223 | ) | | 7,771 |
|
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD. | 6,878 |
| | 5,547 |
| | 3,723 |
| | 8,031 |
| | (17,301 | ) | | 6,878 |
|
Noncontrolling interest | — |
| | — |
| | — |
| | 208 |
| | (208 | ) | | — |
|
TOTAL SHAREHOLDERS' EQUITY | 6,878 |
| | 5,547 |
| | 3,723 |
| | 8,239 |
| | (17,509 | ) | | 6,878 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 6,893 |
| | $ | 6,504 |
| | $ | 4,291 |
| | $ | 16,693 |
| | $ | (19,732 | ) | | $ | 14,649 |
|
CONDENSED CONSOLIDATING BALANCE SHEET
ASITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF DECEMBER 31, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
ASSETS | |
| | |
| | |
| | |
| | |
| | |
|
Total investment portfolio and cash | $ | 36 |
| | $ | 384 |
| | $ | 22 |
| | $ | 11,029 |
| | $ | (368 | ) | | $ | 11,103 |
|
Investment in subsidiaries | 6,164 |
| | 5,696 |
| | 3,799 |
| | 296 |
| | (15,955 | ) | | — |
|
Premiums receivable, net of commissions payable | — |
| | — |
| | — |
| | 699 |
| | (123 | ) | | 576 |
|
Ceded unearned premium reserve | — |
| | — |
| | — |
| | 1,099 |
| | (893 | ) | | 206 |
|
Deferred acquisition costs | — |
| | — |
| | — |
| | 156 |
| | (50 | ) | | 106 |
|
Reinsurance recoverable on unpaid losses | — |
| | — |
| | — |
| | 484 |
| | (404 | ) | | 80 |
|
Credit derivative assets | — |
| | — |
| | — |
| | 69 |
| | (56 | ) | | 13 |
|
Deferred tax asset, net | — |
| | 16 |
| | — |
| | 597 |
| | (116 | ) | | 497 |
|
Intercompany receivable | — |
| | — |
| | — |
| | 70 |
| | (70 | ) | | — |
|
Financial guaranty variable interest entities’ assets, at fair value | — |
| | — |
| | — |
| | 876 |
| | — |
| | 876 |
|
Dividend receivable from affiliate | 300 |
|
| — |
|
| — |
|
| — |
| | (300 | ) | | — |
|
Other | 11 |
| | 78 |
| | 26 |
| | 801 |
| | (222 | ) | | 694 |
|
TOTAL ASSETS | $ | 6,511 |
| | $ | 6,174 |
| | $ | 3,847 |
| | $ | 16,176 |
| | $ | (18,557 | ) | | $ | 14,151 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
| | |
| | |
| | |
| | |
|
Unearned premium reserves | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,488 |
| | $ | (977 | ) | | $ | 3,511 |
|
Loss and LAE reserve | — |
| | — |
| | — |
| | 1,596 |
| | (469 | ) | | 1,127 |
|
Long-term debt | — |
| | 843 |
| | 453 |
| | 10 |
| | — |
| | 1,306 |
|
Intercompany payable | — |
| | 70 |
| | — |
| | 300 |
| | (370 | ) | | — |
|
Credit derivative liabilities | — |
| | — |
| | — |
| | 458 |
| | (56 | ) | | 402 |
|
Deferred tax liabilities, net | — |
| | — |
| | 88 |
| | — |
| | (88 | ) | | — |
|
Financial guaranty variable interest entities’ liabilities, at fair value | — |
| | — |
| | — |
| | 958 |
| | — |
| | 958 |
|
Dividend payable to affiliate | — |
| | 300 |
| | — |
| | — |
| | (300 | ) | | — |
|
Other | 7 |
| | 3 |
| | 14 |
| | 665 |
| | (346 | ) | | 343 |
|
TOTAL LIABILITIES | 7 |
| | 1,216 |
| | 555 |
| | 8,475 |
| | (2,606 | ) | | 7,647 |
|
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD. | 6,504 |
| | 4,958 |
| | 3,292 |
| | 7,405 |
| | (15,655 | ) | | 6,504 |
|
Noncontrolling interest | — |
| | — |
| | — |
| | 296 |
| | (296 | ) | | — |
|
TOTAL SHAREHOLDERS’ EQUITY | 6,504 |
| | 4,958 |
| | 3,292 |
| | 7,701 |
| | (15,951 | ) | | 6,504 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 6,511 |
| | $ | 6,174 |
| | $ | 3,847 |
| | $ | 16,176 |
| | $ | (18,557 | ) | | $ | 14,151 |
|
CONDENSED CONSOLIDATING STATEMENTFINANCIAL CONDITION AND RESULTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 190 |
| | $ | (4 | ) | | $ | 186 |
|
Net investment income | 0 |
| | 0 |
| | 0 |
| | 101 |
| | (2 | ) | | 99 |
|
Net realized investment gains (losses) | — |
| | 0 |
| | 0 |
| | (9 | ) | | 16 |
| | 7 |
|
Net change in fair value of credit derivatives: | | | | | | | | | | | |
Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | (1 | ) | | 0 |
| | (1 | ) |
Net unrealized gains (losses) | — |
| | — |
| | — |
| | 59 |
| | — |
| | 59 |
|
Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 58 |
| | 0 |
| | 58 |
|
Other | 3 |
| | — |
| | — |
| | 302 |
| | (32 | ) | | 273 |
|
TOTAL REVENUES | 3 |
| | 0 |
| | 0 |
| | 642 |
| | (22 | ) | | 623 |
|
EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
Loss and LAE | — |
| | — |
| | — |
| | 250 |
| | (27 | ) | | 223 |
|
Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 8 |
| | (3 | ) | | 5 |
|
Interest expense | — |
| | 12 |
| | 13 |
| | 3 |
| | (4 | ) | | 24 |
|
Other operating expenses | 10 |
| | 1 |
| | 0 |
| | 91 |
| | (44 | ) | | 58 |
|
TOTAL EXPENSES | 10 |
| | 13 |
| | 13 |
| | 352 |
| | (78 | ) | | 310 |
|
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (7 | ) | | (13 | ) | | (13 | ) | | 290 |
| | 56 |
| | 313 |
|
Total (provision) benefit for income taxes | — |
| | 4 |
| | 4 |
| | (94 | ) | | (19 | ) | | (105 | ) |
Equity in net earnings of subsidiaries | 215 |
| | 237 |
| | 178 |
| | 8 |
| | (638 | ) | | — |
|
NET INCOME (LOSS) | $ | 208 |
| | $ | 228 |
| | $ | 169 |
| | $ | 204 |
| | $ | (601 | ) | | $ | 208 |
|
Less: noncontrolling interest | — |
| | — |
| | — |
| | 8 |
| | (8 | ) | | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 208 |
| | $ | 228 |
| | $ | 169 |
| | $ | 196 |
| | $ | (593 | ) | | $ | 208 |
|
| | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) | $ | 219 |
| | $ | 237 |
| | $ | 178 |
| | $ | 274 |
| | $ | (689 | ) | | $ | 219 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 239 |
| | $ | (8 | ) | | $ | 231 |
|
Net investment income | 0 |
| | 0 |
| | 0 |
| | 95 |
| | (1 | ) | | 94 |
|
Net realized investment gains (losses) | 0 |
| | 3 |
| | 0 |
| | (2 | ) | | (3 | ) | | (2 | ) |
Net change in fair value of credit derivatives: | | | | | | | | | | | |
Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | 15 |
| | 0 |
| | 15 |
|
Net unrealized gains (losses) | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 21 |
| | 0 |
| | 21 |
|
Bargain purchase gain and settlement of pre-existing relationship | — |
| | — |
| | — |
| | 257 |
| | 2 |
| | 259 |
|
Other | 0 |
| | — |
| | — |
| | (37 | ) | | — |
| | (37 | ) |
TOTAL REVENUES | 0 |
| | 3 |
| | 0 |
| | 573 |
| | (10 | ) | | 566 |
|
EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
Loss and LAE | — |
| | — |
| | — |
| | (15 | ) | | 6 |
| | (9 | ) |
Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 9 |
| | (5 | ) | | 4 |
|
Interest expense | — |
| | 13 |
| | 13 |
| | 3 |
| | (3 | ) | | 26 |
|
Other operating expenses | 7 |
| | 1 |
| | 1 |
| | 58 |
| | (2 | ) | | 65 |
|
TOTAL EXPENSES | 7 |
| | 14 |
| | 14 |
| | 55 |
| | (4 | ) | | 86 |
|
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (7 | ) | | (11 | ) | | (14 | ) | | 518 |
| | (6 | ) | | 480 |
|
Total (provision) benefit for income taxes | — |
| | 4 |
| | 5 |
| | (13 | ) | | 3 |
| | (1 | ) |
Equity in net earnings of subsidiaries | 486 |
| | 433 |
| | 82 |
| | 11 |
| | (1,012 | ) | | — |
|
NET INCOME (LOSS) | $ | 479 |
| | $ | 426 |
| | $ | 73 |
| | $ | 516 |
| | $ | (1,015 | ) | | $ | 479 |
|
Less: noncontrolling interest | — |
| | — |
| | — |
| | 11 |
| | (11 | ) | | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 479 |
| | $ | 426 |
| | $ | 73 |
| | $ | 505 |
| | $ | (1,004 | ) | | $ | 479 |
|
| | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) | $ | 454 |
| | $ | 414 |
| | $ | 51 |
| | $ | 497 |
| | $ | (962 | ) | | $ | 454 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 523 |
| | $ | (11 | ) | | $ | 512 |
|
Net investment income | 0 |
| | 1 |
| | 0 |
| | 325 |
| | (4 | ) | | 322 |
|
Net realized investment gains (losses) | — |
| | 0 |
| | 0 |
| | 53 |
| | 1 |
| | 54 |
|
Net change in fair value of credit derivatives: | | | | | | | | | | | |
Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | 19 |
| | 0 |
| | 19 |
|
Net unrealized gains (losses) | — |
| | — |
| | — |
| | 87 |
| | — |
| | 87 |
|
Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 106 |
| | 0 |
| | 106 |
|
Bargain purchase gain and settlement of pre-existing relationships | — |
| | — |
| | — |
| | 58 |
| | 0 |
| | 58 |
|
Other | 8 |
| | — |
| | — |
| | 527 |
| | (129 | ) | | 406 |
|
TOTAL REVENUES | 8 |
| | 1 |
| | 0 |
| | 1,592 |
| | (143 | ) | | 1,458 |
|
EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
Loss and LAE | — |
| | — |
| | — |
| | 301 |
| | 53 |
| | 354 |
|
Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 19 |
| | (6 | ) | | 13 |
|
Interest expense | — |
| | 36 |
| | 40 |
| | 8 |
| | (11 | ) | | 73 |
|
Other operating expenses | 30 |
| | 8 |
| | 1 |
| | 286 |
| | (142 | ) | | 183 |
|
TOTAL EXPENSES | 30 |
| | 44 |
| | 41 |
| | 614 |
| | (106 | ) | | 623 |
|
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (22 | ) | | (43 | ) | | (41 | ) | | 978 |
| | (37 | ) | | 835 |
|
Total (provision) benefit for income taxes | — |
| | 13 |
| | 15 |
| | (194 | ) | | 9 |
| | (157 | ) |
Equity in net earnings of subsidiaries | 700 |
| | 574 |
| | 422 |
| | 22 |
| | (1,718 | ) | | — |
|
NET INCOME (LOSS) | $ | 678 |
| | $ | 544 |
| | $ | 396 |
| | $ | 806 |
| | $ | (1,746 | ) | | $ | 678 |
|
Less: noncontrolling interest | — |
| | — |
| | — |
| | 22 |
| | (22 | ) | | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 678 |
| | $ | 544 |
| | $ | 396 |
| | $ | 784 |
| | $ | (1,724 | ) | | $ | 678 |
|
| | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) | $ | 855 |
| | $ | 705 |
| | $ | 484 |
| | $ | 1,004 |
| | $ | (2,193 | ) | | $ | 855 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
REVENUES | |
| | |
| | |
| | |
| | |
| | |
|
Net earned premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | 653 |
| | $ | (25 | ) | | $ | 628 |
|
Net investment income | 0 |
| | 0 |
| | 0 |
| | 293 |
| | (2 | ) | | 291 |
|
Net realized investment gains (losses) | 0 |
| | 3 |
| | 0 |
| | (4 | ) | | (4 | ) | | (5 | ) |
Net change in fair value of credit derivatives: | | | | | | | | | | | |
Realized gains (losses) and other settlements | — |
| | — |
| | — |
| | 47 |
| | — |
| | 47 |
|
Net unrealized gains (losses) | — |
| | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) |
Net change in fair value of credit derivatives | — |
| | — |
| | — |
| | 24 |
| | — |
| | 24 |
|
Bargain purchase gain and settlement of pre-existing relationship | — |
| | — |
| | — |
| | 257 |
| | 2 |
| | 259 |
|
Other | 0 |
| | 0 |
| | 0 |
| | 10 |
| | 0 |
| | 10 |
|
TOTAL REVENUES | 0 |
| | 3 |
| | 0 |
| | 1,233 |
| | (29 | ) | | 1,207 |
|
EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
Loss and LAE | — |
| | — |
| | — |
| | 182 |
| | 1 |
| | 183 |
|
Amortization of deferred acquisition costs | — |
| | — |
| | — |
| | 23 |
| | (10 | ) | | 13 |
|
Interest expense | — |
| | 39 |
| | 40 |
| | 8 |
| | (10 | ) | | 77 |
|
Other operating expenses | 23 |
| | 1 |
| | 2 |
| | 165 |
| | (3 | ) | | 188 |
|
TOTAL EXPENSES | 23 |
| | 40 |
| | 42 |
| | 378 |
| | (22 | ) | | 461 |
|
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES | (23 | ) | | (37 | ) | | (42 | ) | | 855 |
| | (7 | ) | | 746 |
|
Total (provision) benefit for income taxes | — |
| | 13 |
| | 15 |
| | (94 | ) | | 4 |
| | (62 | ) |
Equity in net earnings of subsidiaries | 707 |
| | 623 |
| | 272 |
| | 34 |
| | (1,636 | ) | | — |
|
NET INCOME (LOSS) | $ | 684 |
| | $ | 599 |
| | $ | 245 |
| | $ | 795 |
| | $ | (1,639 | ) | | $ | 684 |
|
Less: noncontrolling interest | — |
| | — |
| | — |
| | 34 |
| | (34 | ) | | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD. | $ | 684 |
| | $ | 599 |
| | $ | 245 |
| | $ | 761 |
| | $ | (1,605 | ) | | $ | 684 |
|
| | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) | $ | 805 |
| | $ | 660 |
| | $ | 261 |
| | $ | 923 |
| | $ | (1,844 | ) | | $ | 805 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
Net cash flows provided by (used in) operating activities | $ | 503 |
| | $ | 175 |
| | $ | 105 |
| | $ | 469 |
| | $ | (898 | ) | | $ | 354 |
|
Cash flows from investing activities | |
| | |
| | |
| | |
| | |
| | |
|
Fixed-maturity securities: | |
| | |
| | |
| | |
| | |
| | |
|
Purchases | — |
| | (75 | ) | | (15 | ) | | (1,552 | ) | | 27 |
| | (1,615 | ) |
Sales | — |
| | 112 |
| | 12 |
| | 1,004 |
| | — |
| | 1,128 |
|
Maturities | — |
| | 7 |
| | 0 |
| | 682 |
| | — |
| | 689 |
|
Sales (purchases) of short-term investments, net | (11 | ) | | 218 |
| | 3 |
| | (450 | ) | | — |
| | (240 | ) |
Net proceeds from financial guaranty variable entities’ assets | — |
| | — |
| | — |
| | 117 |
| | — |
| | 117 |
|
Investment in subsidiaries | — |
| | (28 | ) | | — |
| | (69 | ) | | 97 |
| | — |
|
Proceeds from sale of subsidiaries | — |
| | — |
| | — |
| | 139 |
| | (139 | ) | | — |
|
Acquisition of MBIA UK, net of cash acquired | — |
| | — |
| | — |
| | 95 |
| | — |
| | 95 |
|
Other | — |
| | — |
| | — |
| | 58 |
| | — |
| | 58 |
|
Net cash flows provided by (used in) investing activities | (11 | ) | | 234 |
| | — |
| | 24 |
| | (15 | ) | | 232 |
|
Cash flows from financing activities | |
| | |
| | |
| | |
| | |
| | |
|
Return of capital | — |
| | — |
| | — |
| | (70 | ) | | 70 |
| | — |
|
Capital contribution | — |
| | — |
| | 25 |
| | 3 |
| | (28 | ) | | — |
|
Dividends paid | (53 | ) | | (390 | ) | | (128 | ) | | (380 | ) | | 898 |
| | (53 | ) |
Repurchases of common stock | (431 | ) | | — |
| | — |
| | — |
| | — |
| | (431 | ) |
Repurchases of common stock to pay withholding taxes | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (13 | ) |
Net paydowns of financial guaranty variable entities’ liabilities | — |
| | — |
| | — |
| | (124 | ) | | — |
| | (124 | ) |
Repayment/ extinguishment of long-term debt | — |
| | — |
| | — |
| | (2 | ) | | (27 | ) | | (29 | ) |
Proceeds from options exercises | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
Net cash flows provided by (used in) financing activities | (492 | ) | | (390 | ) | | (103 | ) | | (573 | ) | | 913 |
| | (645 | ) |
Effect of exchange rate changes | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Increase (decrease) in cash and restricted cash | 0 |
| | 19 |
| | 2 |
| | (76 | ) | | — |
| | (55 | ) |
Cash and restricted cash at beginning of period | 0 |
| | 1 |
| | 0 |
| | 126 |
| | — |
| | 127 |
|
Cash and restricted cash at end of period | $ | 0 |
| | $ | 20 |
| | $ | 2 |
| | $ | 50 |
| | $ | — |
| | $ | 72 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Assured Guaranty Ltd. (Parent) | | AGUS (Issuer) | | AGMH (Issuer) | | Other Entities | | Consolidating Adjustments | | Assured Guaranty Ltd. (Consolidated) |
Net cash flows provided by (used in) operating activities | $ | 288 |
| | $ | 171 |
| | $ | 159 |
| | $ | 3 |
| | $ | (810 | ) | | $ | (189 | ) |
Cash flows from investing activities | |
| | |
| | |
| | |
| | |
| | |
|
Fixed-maturity securities: | |
| | |
| | |
| | |
| | |
| | |
|
Purchases | (4 | ) | | (44 | ) | | (10 | ) | | (970 | ) | | — |
| | (1,028 | ) |
Sales | 4 |
| | — |
| | 12 |
| | 861 |
| | — |
| | 877 |
|
Maturities | — |
| | 23 |
| | — |
| | 838 |
| | — |
| | 861 |
|
Sales (purchases) of short-term investments, net | (49 | ) | | (3 | ) | | (1 | ) | | 133 |
| | — |
| | 80 |
|
Net proceeds from financial guaranty variable entities’ assets | — |
| | — |
| | — |
| | 590 |
| | — |
| | 590 |
|
Investment in subsidiaries | — |
| | — |
| | — |
| | 4 |
| | (4 | ) | | — |
|
Acquisition of CIFG, net of cash acquired | — |
| | — |
| | — |
| | (442 | ) | | 7 |
| | (435 | ) |
Other | — |
| | 7 |
| | — |
| | (12 | ) | | (7 | ) | | (12 | ) |
Net cash flows provided by (used in) investing activities | (49 | ) | | (17 | ) | | 1 |
| | 1,002 |
| | (4 | ) | | 933 |
|
Cash flows from financing activities | |
| | |
| | |
| | |
| | |
| | |
Return of capital | — |
| | — |
| | — |
| | (4 | ) | | 4 |
| | — |
|
Dividends paid | (52 | ) | | (223 | ) | | (158 | ) | | (429 | ) | | 810 |
| | (52 | ) |
Repurchases of common stock | (190 | ) | | — |
| | — |
| | — |
| | — |
| | (190 | ) |
Share repurchases to pay withholding taxes
| (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
Net paydowns of financial guaranty variable entities’ liabilities | — |
| | — |
| | — |
| | (567 | ) | | — |
| | (567 | ) |
Payment of long-term debt | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Proceeds from options exercises
| 6 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
|
Net cash flows provided by (used in) financing activities | (238 | ) |
| (223 | ) |
| (158 | ) |
| (1,002 | ) |
| 814 |
|
| (807 | ) |
Effect of exchange rate changes | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
Increase (decrease) in cash and restricted cash | 1 |
| | (69 | ) | | 2 |
| | (1 | ) | | — |
| | (67 | ) |
Cash and restricted cash at beginning of period | 0 |
| | 95 |
| | 8 |
| | 63 |
| | — |
| | 166 |
|
Cash and restricted cash at end of period | $ | 1 |
| | $ | 26 |
| | $ | 10 |
| | $ | 62 |
| | $ | — |
| | $ | 99 |
|
| |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.
Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are:
•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 or stagflation;
•geopolitical risk, including Russia’s invasion of Ukraine and the resulting economic sanctions, volatility in energy prices, potential for increased cyberattacks, and risk of intentional or accidental escalation between The North Atlantic Treaty Organization (NATO) and Russia, conflict in the Middle East, confrontation over Iran’s nuclear program, and United States (U.S.) – China strategic competition and the pursuit of technological independence;
•the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings;
•public health crises, including pandemics and endemics, and the governmental and private actions taken in response to such 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 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;
•reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty'sGuaranty’s insurance;
rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL's subsidiaries have insured;
developments in the world’s financial and capital markets that adversely affect obligors’ payment rates, Assured Guaranty’s loss experience, or its exposure to refinancing risk in transactions (which could result in substantial liquidity claims on its guarantees);
•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;estimates for insurance exposures, including as a result of the final resolution of Assured Guaranty’s remaining Puerto Rico exposures or the amounts recovered on securities received in connection with the resolution of Puerto Rico exposures already resolved;
•the impact of the Company satisfying its obligations under insurance policies with respect to legacy insured Puerto Rico bonds;
•increased competition, including from new entrants into the financial guaranty industry;industry, nonpayment insurance and other forms of capital saving or risk syndication available to 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 other negative or unanticipated consequences;
•the impacts of the completion of Assured Guaranty’s transactions with Sound Point Capital Management, LP (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 asset management business contributed to Sound Point 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, contracts accounted for as derivatives, and certain consolidated variable interest entities (VIEs);
•rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on obligors, including sovereign debtors, resultingwatch for downgrade, or a change in a reduction in the valuerating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities in Assured Guaranty’s investment portfolio and in collateral posted by and to Assured Guaranty;AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured;
•the inability of Assured Guaranty to access external sources of capital on acceptable terms;
changes in the world’s credit markets, segments thereof, interest rates or general economic conditions;
the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default swap form;
•changes in applicable accounting policies or practices;
•changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions;
the impact of changes in the world’s economy and credit and currency markets and in applicable laws or regulations relating to the decision of the United Kingdom (U.K.) to exit the European Union (EU);
the possibility that acquisitions or alternative investments made by Assured Guaranty do not result in the benefits anticipated or subject Assured Guaranty to unanticipated consequences;
deterioration in the financial condition of Assured Guaranty’s reinsurers, the amount and timing of reinsurance recoverables actually received and the risk that reinsurers may dispute amounts owed to Assured Guaranty under its reinsurance agreements;
•difficulties with the execution of Assured Guaranty’s business strategy;
•loss of key personnel;
•the effects of mergers, acquisitions and divestitures;
•natural or man-made catastrophes;catastrophes or pandemics;
•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 U.S. Securities and Exchange Commission (the SEC)(SEC);
•other risks and uncertainties that have not been identified at this time; and
•management’s response to these factors.
The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements and risk factors that are included in this Form 10-Q, as well as the risk factors included in AGL's 2016the Company’s 2022 Annual Report on Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC.
If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.
For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Available Information
The Company maintains an Internetinternet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (under assuredguaranty.com/www.assuredguaranty.com/sec-filings) the Company's annual reportCompany’s Annual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under assuredguaranty.com/www.assuredguaranty.com/governance) links to the Company'sCompany’s Corporate Governance Guidelines, itsthe Company’s Global Code of Conduct, AGL'sEthics, AGL’s Bye-Laws and the charters for the committees of its Board committees.of Directors. In addition, the SEC maintains 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 assuredguaranty.com/www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-informationand Businesses pages)tab at www.assuredguaranty.com/businesses). The Company also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses thisits web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company'sCompany’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company'sCompany’s press releases, SEC filings, public conference calls, presentations and webcasts.
The information contained on, or that may be accessed through, the Company'sCompany’s web site or social media account is not incorporated by reference into, and is not a part of, this report.
Overview
This executive summary
Business
The Company reports its results of management’s discussionoperations in two distinct segments, Insurance and analysis highlights selected informationAsset Management, consistent with the manner in which the Company’s chief operating decision maker reviews the business to assess performance and may not contain allallocate resources. The Company’s Corporate division and other activities (including financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs)) are presented separately.
In the Insurance segment, the Company provides credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. Until July 1, 2023, the Company served as investment advisor to collateralized loan obligations (CLOs) and opportunity funds, through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM). Beginning July 1, 2023, the Company participates in the asset management business through its ownership interest in Sound Point as described below.
The Corporate division consists primarily of interest expense on the information that is important to readersdebt of this Quarterly Report. For a more detailed description of events, trendsAssured Guaranty US Holdings Inc. (AGUS) and uncertainties,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 capital, liquidity,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 operationalmanager, and market risks(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 critical accounting policiesLetter Agreement, the Sound Point Transaction). As of September 30, 2023, Sound Point is the fifth largest CLO manager by assets under management (AUM) in the world (based on September 30, 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 estimates affectingcontrolled by the managing partner of AHP (AHP Transaction). In connection with the AHP Transaction, the Company this Quarterly Report should be readagreed to remain a strategic investor in its entiretycertain AHP investment vehicles, is retaining certain carried interest in AHP entities and in addition to AGL's 2016 Annual Report on Form 10-K.received other consideration.
Economic Environment
The Company believes reported statistics indicate that positive economic momentumReal gross domestic product (GDP) increased at an annual rate of 4.9% in the United States (U.S.) since the beginning of 2016 has continued through the three-month period ended September 30, 2017 (Third Quarter 2017)2023 (third quarter 2023), compared to an increase of 2.1% in the second quarter of 2023, according to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA). At the end of September 2023, the U.S. unemployment rate, seasonally adjusted, stood at 3.8%, up slightly from the 3.6% rate where it had started the quarter, and down from the COVID-19 pandemic high of 14.7% in April 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default.
According to the U.S. Bureau of Labor Statistics (BLS), for the months of July through September 2017, the U.S. economy added an estimated 274 thousand jobs. Additionally, the BLS estimated that the seasonally adjusted monthly unemployment rate fell to 4.2% in September 2017, down from 4.4% at the end of the second quarter of 2017 and 4.5% at the end of the first quarter of 2017, and was lower than the May 2017 unemployment figure of 4.3%, which was already a 16-year low. The BLS’ analysis of the net effect of the hurricanes was to reduce the estimate of total non-farm payroll employment for September, while having no discernible effect on the national unemployment rate.
The U.S. Bureau of Economic Analysis reported that real gross domestic product (GDP) increased at an annualized rate of 3.1% in the second quarter of 2017, more than double the annualizedinflation rate in the first quarter of 2017. This representsU.S. before seasonal adjustment for the thirteenth consecutive quarter of positive growth in real GDP.
U.S. home prices also continued to rise,12-month period ending September 2023, as measured by the S&P CoreLogic Case-Shiller U.S. National HomeConsumer Price Index whichfor All Urban Consumers (CPI-U), was 3.7%, as compared to 3.0% for the 12-month period ending June 2023. According to the United Kingdom’s (U.K.) Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) was 6.3% for the 12 months through September 2023, down from 7.3% for the 12 months ended June 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 reported net par outstanding for certain U.K
exposures with approximately $21.2 billion of net par outstanding as of September 30, 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 annual gain in Julyinstallment basis over the term of 5.9% while the 20-City Composite posted a 5.8% year-over-year gain.exposure.
At the September 20, 2017 meeting ofWith the Federal Open Market Committee (FOMC), acknowledging the need to combat inflation, in March 2022 the FOMC maintainedbegan again raising the target range for the federal funds rate between 1.00% and 1.25%, and reiterated its prior positionstated that additional rate hikes were very likely in 2018, with one also possible at the end of this year. The FOMC announced that in October 2017 it planned to begin the balance sheet normalization program that was outlined in June, reducingwould reduce its holdings in a gradualof treasury securities and predictable manner. Theagency debt and agency mortgage-backed securities. From March 2022 through July 26, 2023, the FOMC pointed again to sustained strength inraised the labor market, increased household spending, and expanded business investments as the primary drivers to increasetarget range for the federal funds rate going forward.from a range of 0% to 0.25% where it started 2022 to a range of 5.25% to 5.50% at its July 25-26, 2023 meeting. The FOMC has repeatedly declared that it seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In its statement,determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the FOMC notedindicated that it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic growthactivity and inflation, and economic and financial developments. Since its July 25-26, 2023 meeting, the FOMC has maintained the federal funds rate at 5.25% to 5.50%, including through its most recent meeting held October 31 – November 1, 2023, stating that it would continue to assess additional information and its implications for monetary policy.
The level and direction of interest rates and credit spreads impact the Company in numerous ways. On the one hand, higher interest rates may reduce the fair value of fixed-maturity securities currently held in the Third Quarter was held backCompany’s investment portfolio, dampen municipal bond issuance and negatively impact the finances of some of the obligors whose payments the Company insures. On the other hand, higher interest rates are often accompanied by wider spreads, which may make the severe economic disruptions caused by Hurricanes Harvey, Irma,Company’s credit enhancement products more attractive in the U.S. municipal bond market and Maria,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 3.77% for the quarter ended September 2023, higher than the 3.41% average for the quarter ended June 2023, and higher than the 3.22% average for the quarter ended September 2022. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 101 basis points (bps) in the quarter ended September 2023, which is the same spread as the quarter ended June 2023, but noted that growth would likely bounce back as economic activity resumes and rebuilding begins. Please refer to Part I, Item I, Financial Statements, Note 4, Outstanding Exposure and Note 5, Expected Loss to be Paid,wider than the 95 bps average for information on the effects of these hurricanes on the Company's Puerto Rico and other Caribbean exposures.
quarter ended September 2022. The Company believes that, continued increases in stock prices during the quarter are also indicative of positive economic momentum in the U.S.. U.S. stocks reached record highs, as investors anticipate another strong earnings season. The Dow Jones Industrial Average (DJIA), Nasdaq compositeover time, wider spreads could permit it to increase its premium rates on new business, and the S&P 500 Index all set records highs during the quarter, with the DJIA recently touching 23,000 for the first time, and corporate earnings for the S&P S&P 500 Index remaining strong for three quarters in a row.
Average municipalhigher interest rates remained relatively low by historical standards, but above the lows experienced in 2016, when 30-year AAA MMD rates were at times below 2%. Since July 2016, the 30-year AAA MMD rate increased from a low of 1.95% to as high as 3.06% on May 2, 2017, still low by historical standards. Since then, that MMD rate has declined to 2.84% as of September 29, 2017.
Financial Performance of Assured Guaranty
Financial Results
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
Operating income (non-GAAP)(1) | 156 |
| | 497 |
| | 570 |
| | 756 |
|
Gain (loss) related to the effect of consolidating FG VIEs (FG VIE consolidation) included in operating income | (1 | ) | | (11 | ) | | 9 |
| | (4 | ) |
| | | | | | | |
Net income (loss) per diluted share | $ | 1.72 |
| | $ | 3.60 |
| | $ | 5.48 |
| | $ | 5.06 |
|
Operating income per share (non-GAAP)(1) | 1.29 |
| | 3.74 |
| | 4.62 |
| | 5.61 |
|
Gain (loss) related to FG VIE consolidation included in operating income per share | (0.01 | ) | | (0.09 | ) | | 0.08 |
| | (0.03 | ) |
| | | | | | | |
Diluted shares | 120.7 |
| | 132.8 |
| | 123.5 |
| | 134.9 |
|
| | | | | | | |
Gross written premiums (GWP) | $ | 45 |
| | $ | 16 |
| | $ | 235 |
| | $ | 71 |
|
Present value of new business production (PVP)(1) | 43 |
| | 50 |
| | 212 |
| | 129 |
|
Gross par written | 3,417 |
| | 4,687 |
| | 13,248 |
| | 12,211 |
|
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Amount | | Per Share | | Amount | | Per Share |
| (in millions, except per share amounts) |
Shareholders' equity | $ | 6,878 |
| | $ | 58.32 |
| | $ | 6,504 |
| | $ | 50.82 |
|
Non-GAAP operating shareholders' equity(1) | 6,590 |
| | 55.87 |
| | 6,386 |
| | 49.89 |
|
Non-GAAP adjusted book value(1) | 8,820 |
| | 74.78 |
| | 8,506 |
| | 66.46 |
|
Gain (loss) related to FG VIE consolidation included in non-GAAP operating shareholders' equity | 3 |
| | 0.01 |
| | (7 | ) | | (0.06 | ) |
Gain (loss) related to FG VIE consolidation included in non-GAAP adjusted book value | (13 | ) | | (0.11 | ) | | (24 | ) | | (0.18 | ) |
Common shares outstanding (2) | 117.9 |
| | | | 128.0 |
| | |
____________________ | |
(1) | Please refer to “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP) and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available. Please note that the Company changed its definition of Operating Income (non-GAAP), Non-GAAP Operating Shareholders' Equity and Non-GAAP Adjusted Book Value starting in fourth quarter 2016 in response to new non-GAAP guidance issued by the SEC in 2016. Please refer to “—Non-GAAP Financial Measures” for additional details. |
| |
(2) | Please refer to "Key Business Strategies – Capital Management" below for information on common share repurchases. |
Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses: changes in credit spreads of insured credit derivative obligations, changes in fair value of assets and liabilities of financial guaranty variable interest entities (FG VIEs) and committed capital securities (CCS), changes in the Company's own credit spreads, and changes in risk-free rates used to discount expected losses. Changes in credit spreads generally have the most significant effect on the fair value of credit derivatives and FG VIE assets and liabilities. In addition to non-economic factors, other factors such as: changes in expected losses,may also increase the amount the Company can earn on its largely fixed-maturity securities.
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 timing of refunding transactions and terminations, realized gains and losses onleading to an increase in home prices as demand outpaces supply. The increase in housing prices may benefit distressed residential mortgage-backed securities (RMBS) the investment portfolio (including other-than-temporary impairments), the effects of large settlements and transactions, acquisitions, and the effects of the Company's various loss mitigation strategies, among others, may also have a significant effect on reported net income or loss in a given reporting period.
Third Quarter 2017
Net income for Third Quarter 2017 was $208 million compared with $479 million in the three-month period ended September 30, 2016 (Third Quarter 2016). Net income in both Third Quarter 2017 and Third Quarter 2016 included significant gains attributable to our strategic initiatives. Third Quarter 2017 includes pretax commutation gains of $255 million relatedCompany insures. According to the reassumptionNational Association of previously ceded contracts (recordedRealtors reported that existing home sales declined 15.4% in other income). Third Quarter 2016 includedSeptember 2023 from one year ago. The median existing-home price for all housing types in September 2023 was $394,300, a pretax gaindecrease of $259 million related to the acquisition of CIFG Holding Inc. (together with its subsidiaries CIFGH) (CIFG Acquisition). Excluding these gains, net income decreased due mainly to increased loss and adjustment expenses (LAE) attributable to U.S. public finance losses and lower net earned premiums3.9% from refundings and terminations.June 2023 ($410,200).
The Company reported operating income (non-GAAP) of $156 million in Third Quarter 2017, compared with $497 million in Third Quarter 2016. The variances in operating income (non-GAAP) are attributable to the same items described for net income.
Nine Months 2017
Net income for the nine-month period ended September 30, 2017 (Nine Months 2017) was $678 million compared with $684 million for the nine-month period ended September 30, 2016 (Nine Months 2016). Net income in both Nine Months 2017 and Nine Months 2016 also included significant gains attributable to our strategic initiatives. Nine Months 2017 includes pretax commutation gains of $328 million and a pretax gain of $58 million on the acquisition of MBIA UK Insurance Limited (MBIA UK) (MBIA UK Acquisition). Nine Months 2016 includes pretax gains of $259 million on the CIFG Acquisition. Excluding these gains, net income decreased due mainly to increased loss and adjustment expenses (LAE) attributable to U.S. public finance losses and lower net earned premiums from refundings and terminations.
The Company reported operating income (non-GAAP) of $570 million in Nine Months 2017, compared with $756 million in Nine Months 2016. The variances in operating income (non-GAAP) are attributable to the same items described for net income.
Shareholders' equity increased since December 31, 2016 due primarily to positive net income (including the effect of MBIA UK Acquisition) and higher net unrealized gains on available for sale investment securities recorded in accumulated other comprehensive income (AOCI), partially offset by share repurchases and dividends. Non-GAAP operating shareholders' equity and non-GAAP adjusted book value also increased since December 31, 2016 due primarily to the MBIA UK Acquisition, new business production and commutations, offset in part by loss development, share repurchases and dividends. Shareholders' equity per share, non-GAAP operating shareholders' equity per share and non-GAAP adjusted book value per share benefited from the repurchase program that has been in place since the beginning of 2013.
Key Business Strategies
The Company continually evaluates its business strategies. Currently, the Companystrategies and is currently pursuing the followingkey business strategies each described in more detail below:three areas: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.
NewInsurance
The Company seeks to grow the insurance business through new business production, acquisitions of 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.
Capital management
Alternative strategies Growth of the Insured Portfolio
The Company seeks to create value, includinggrow its financial guaranty insurance portfolio through acquisitions, investmentsnew business production in each of its markets: public finance (including infrastructure) and commutations
Loss mitigation
New Business Production
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.
On the other hand, the persistently The low interest rate environment hasand tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance and, aftercompared to the levels before the financial crisis. After the onset of the COVID-19 pandemic in early 2020, credit spreads initially widened as a numberresult of years in whichmarket concerns about the Company was essentiallyimpact of the only financial guarantor, there is now one other financial guarantor active in one of its markets.
U.S. Municipal Market Data and Penetration Rates (1)
BasedCOVID-19 pandemic on Sale Date
|
| | | | | | | | | | | |
| Nine Months 2017 | | Nine Months 2016 | | Year Ended December 31, 2016 |
| (dollars in billions, except number of issues and percent) |
Par: | | | | | |
New municipal bonds issued | $ | 271.6 |
| | $ | 323.3 |
| | $ | 423.7 |
|
Total insured | $ | 16.8 |
| | $ | 18.5 |
| | $ | 25.3 |
|
Insured by Assured Guaranty | $ | 9.8 |
| | $ | 10.1 |
| | $ | 14.2 |
|
Number of issues: | | | | | |
New municipal bonds issued | 7,583 |
| | 9,489 |
| | 12,271 |
|
Total insured | 1,242 |
| | 1,404 |
| | 1,889 |
|
Insured by Assured Guaranty | 634 |
| | 672 |
| | 904 |
|
Market penetration based on: | | | | | |
Par | 6.2 | % | | 5.7 | % | | 6.0 | % |
Number of issues | 16.4 | % | | 14.8 | % | | 15.4 | % |
Single A par sold | 26.9 | % | | 23.1 | % | | 22.6 | % |
Single A transactions sold | 59.5 | % | | 55.1 | % | | 55.8 | % |
$25 million and under par sold | 20.0 | % | | 17.1 | % | | 17.8 | % |
$25 million and under transactions sold | 19.0 | % | | 16.9 | % | | 17.5 | % |
____________________(1) Source: Thomson Reuters.
Gross Written Premiums and
New Business Production
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
GWP | | | | | | | |
Public Finance—U.S. | $ | 37 |
| | $ | 24 |
| | $ | 132 |
| | $ | 72 |
|
Public Finance—non-U.S. | 8 |
| | (9 | ) | | 92 |
| | 6 |
|
Structured Finance—U.S. | 1 |
| | 1 |
| | 3 |
| | (5 | ) |
Structured Finance—non-U.S. | (1 | ) | | 0 |
| | 8 |
| | (2 | ) |
Total GWP | $ | 45 |
| | $ | 16 |
| | $ | 235 |
| | $ | 71 |
|
| | | | | | | |
PVP (1): | | | | | | | |
Public Finance—U.S. | $ | 39 |
| | $ | 25 |
| | $ | 137 |
| | $ | 89 |
|
Public Finance—non-U.S. | 4 |
| | 2 |
| | 58 |
| | 16 |
|
Structured Finance—U.S. (2) | 0 |
| | 23 |
| | 5 |
| | 24 |
|
Structured Finance—non-U.S. (3) | — |
| | — |
| | 12 |
| | — |
|
Total PVP | $ | 43 |
| | $ | 50 |
| | $ | 212 |
| | $ | 129 |
|
Gross Par Written (1): | | | | | | | |
Public Finance—U.S. | $ | 3,328 |
| | $ | 3,459 |
| | $ | 11,590 |
| | $ | 10,574 |
|
Public Finance—non-U.S. | 89 |
| | 164 |
| | 1,260 |
| | 570 |
|
Structured Finance—U.S. (2) | — |
| | 1,064 |
| | 243 |
| | 1,067 |
|
Structured Finance—non-U.S. (3) | — |
| | — |
| | 155 |
| | — |
|
Total gross par written | $ | 3,417 |
| | $ | 4,687 |
| | $ | 13,248 |
| | $ | 12,211 |
|
____________________
| |
(1) | PVP and Gross Par Written in the table above are based on "close date," when the transaction settles. See “– Non-GAAP Financial Measures – PVP or Present Value of New Business Production.” |
(2) Includes capital relief triple-X excess of loss life reinsurance transactions written in 2017 and 2016.
(3) Relates to reinsurance of aircraft residual value insurance (RVI) policies.
GWP include amounts collected upfront on new business written, the present value of future premiums on newsome municipal credits, thereby improving demand for financial guaranty business written (discounted at risk free rates), as well asinsurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that, over time, wider credit spreads may improve demand for bond insurance.
In certain segments of the effects of changes ininfrastructure and structured finance markets, the estimated lives of transactions in the inforce book of financial guaranty business.
Third Quarter 2017
In Third Quarter 2017, U.S. public finance GWP increased to $37 million from $24 million in Third Quarter 2016, due primarily to increased PVP. The increase in non-U.S. public finance GWP was due to higher new business production in Third Quarter 2017 than Third Quarter 2016 and changes in estimated lives in Third Quarter 2016 resulting in negative GWP.
U.S. public finance PVP increased in Third Quarter 2017 compared with the comparable prior-year period due to higher par written in the secondary market. Assured Guaranty's secondary market PVP increased by more than four times compared to with Third Quarter 2016. Assured Guaranty once again guaranteed the majority of insured par issued while maintaining an A- average rating on new business written.
Outside the U.S., the Company generated $4 million of public finance PVP in Third Quarter 2017. The two transactions written in Third Quarter 2017 were secondary market guaranties of regulated utilities.
The Company believes its financial guaranty product is competitive with other financing options inoptions. For example, certain segmentsinvestors may receive advantageous capital requirement treatment with the addition of the infrastructure market. Future business activity will be influenced by the typically long lead times for these types of transactions.
Structured finance transactions tend to have long lead times and may vary from period to period. In general, the Company expects that structured finance opportunities will increase in the future as the global economy recovers, interest rates rise, more issuers return to the capital markets for financings and institutional investors again utilize financial guaranties.Company’s guaranty. The Company considers its involvement in both infrastructure and structured finance and international infrastructure transactions to be beneficial because such transactions diversify both the Company'sCompany’s business opportunities and its risk profile beyond U.S. public finance. U.S. structured finance PVP in Third Quarter 2016 primarily comprised a structured capital relief Triple-X excessThe timing of loss life reinsurance transaction.
Nine Months 2017
GWP increased in Nine Months 2017 compared to Nine Months 2016 due to increased new business production in global public finance. the 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 2023 | | Nine Months 2022 | | Year Ended December 31, 2022 |
| (dollars in billions, except number of issues and percentages) |
Par: | | | | | |
New municipal bonds issued | $ | 266.2 | | | $ | 292.2 | | | $ | 359.7 | |
Total insured | $ | 22.6 | | | $ | 22.9 | | | $ | 28.8 | |
Insured by Assured Guaranty | $ | 14.1 | | | $ | 12.9 | | | $ | 17.0 | |
Number of issues: | | | | | |
New municipal bonds issued | 5,393 | | | 6,420 | | | 7,902 | |
Total insured | 1,000 | | | 1,146 | | | 1,420 | |
Insured by Assured Guaranty | 467 | | | 529 | | | 648 | |
Bond insurance market penetration based on: | | | | | |
Par | 8.5 | % | | 7.8 | % | | 8.0 | % |
Number of issues | 18.5 | % | | 17.9 | % | | 18.0 | % |
Single A par sold | 34.3 | % | | 29.9 | % | | 30.2 | % |
Single A transactions sold | 61.4 | % | | 58.8 | % | | 59.0 | % |
$25 million and under par sold | 24.1 | % | | 21.6 | % | | 21.9 | % |
$25 million and under transactions sold | 22.7 | % | | 21.0 | % | | 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 PVP increased in Nine Months 2017 compared with the comparable prior year period duebusiness.
The Company also considers opportunities to higher par written in both the primary and secondary market, while maintaining an A- average rating onacquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business written. Outside the U.S.,or their insured portfolios, generally through reinsurance. These transactions enable the Company generated $58 millionto improve its future earnings and deploy excess capital.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies.
In the public finance PVP, compared with $16 million in Nine Months 2016. PVP generated outsidearea, the U.S. in Nine Months 2017 was derived from three university housing transactions, one hospital transaction, a senior liquidity guarantee providedCompany believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a European infrastructure refinancing, and several secondary market regulated utility transactions. For Nine Months 2016, non-U.S.solution, result in more favorable outcomes in distressed public finance PVPsituations 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, the Company 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 was primarily derived from secondary market financial guarantees written on utility bonds and additional future premiumsa 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) related to the restructuringCompany’s exposure to all defaulting Puerto Rico credits except Puerto Rico Electric Power Authority (PREPA) (2022 Puerto Rico Resolutions) as discussed in Item 1, Financial Statements, Note 3, Outstanding Exposure—Exposure to Puerto Rico.
As a result of the 2022 Puerto Rico Resolutions, 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. The Company believes the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts. In connection with the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, new general 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) associated with its direct exposures. The Company has sold some of the New Recovery Bonds and CVIs it had received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico 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 for several years has 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 below-investment-grade (BIG) obligations, that it has insured and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The fair value of Loss Mitigation Securities as of September 30, 2023 (excluding the value of the Company’s insurance) was $448 million, with a par of $745 million.
In some instances, the terms of the Company’s policy give it the option to pay principal on an existing insured obligation.accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The non-U.S. structured finance PVPCompany 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
Until July 1, 2023, the Company pursued its asset management strategy through AssuredIM. With the consummation of the Sound Point Transaction and AHP Transaction, effective as of July 1, 2023, the Company participates in Nine Months 2017 relatedthe asset management business through its ownership interest in Sound Point, and will no longer directly manage investments for third parties.
The Company’s ownership interest in Sound Point furthers its strategy of participating in a fee-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 (excluding AUM relating to AHP).
The Company also expects its relationship with Sound Point to enhance its alternative investment opportunities. Upon closing of the reinsuranceSound 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. See Note 1, Business and Basis of aircraft RVI policies.Presentation, for a description of the Sound Point Transaction. Of the $1.5 billion, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AG Asset Strategies LLC (AGAS), are authorized to invest up to $750 million plus previously distributed gains of $132 million for a total of $882 million as of September 30, 2023. As of September 30, 2023, AGAS commitments to funds managed by Sound Point, AHP, and, prior to July 1, 2023, AssuredIM (Sound Point and AHP funds, some of which were formerly known as AssuredIM funds) were $703 million.
Capital Management
In recent years, the The Company has developed strategies to efficiently manage capital within the Assured Guaranty group more efficiently.group.
From 2013 through November 2, 2017,7, 2023, the Company has repurchased 79.9143 million common shares for approximately $2,166 million, excluding commissions. The$4.8 billion, representing approximately 74% of the total shares outstanding at the beginning of the repurchase program in 2013. On November 1, 2023, the AGL Board of Directors (the Board) authorized on November 1, 2017,the repurchase of an additional $300 million of share repurchases. Ascommon shares. Under this and previous authorizations, as of November 2, 2017, $3987, 2023, the Company was authorized to purchase $372 million remains available under the Company's share repurchase authorizations. The Company expects the repurchases toof its common shares. Shares may be maderepurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including free funds available at the parent company, other potential uses for such funds, market conditions, the Company'sCompany’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time. Ittime and it does not have an expiration date. Please refer to Part I,See Item 1, Financial Statements, Note 17, Shareholders'14, Shareholders’ Equity, for additional information about the Company'sCompany’s repurchases of its common shares.
Summary of Share Repurchases
| | | | | | | | | | | | | | | | | |
| Amount | | Number of Shares | | Average price per share |
| (in millions, except per share data) |
2013 - 2022 | $ | 4,661 | | | 140.875 | | | $ | 33.09 | |
2023 (First Quarter) | 2 | | | 0.036 | | | 62.23 | |
2023 (Second Quarter) | 24 | | | 0.454 | | | 53.08 | |
2023 (Third Quarter) | 64 | | | 1.066 | | | 59.67 | |
2023 (through November 7) | 42 | | | 0.683 | | | 61.17 | |
Cumulative repurchases since the beginning of 2013 | $ | 4,793 | | | 143.114 | | | 33.49 | |
|
| | | | | | | | | | |
| Amount | | Number of Shares | | Average price per share |
| (in millions, except per share data) |
2013 | $ | 264 |
| | 12.51 |
| | $ | 21.12 |
|
2014 | 590 |
| | 24.41 |
| | 24.17 |
|
2015 | 555 |
| | 21.00 |
| | 26.43 |
|
2016 | 306 |
| | 10.72 |
| | 28.53 |
|
2017 (January 1 - March 31) | 216 |
| | 5.43 |
| | 39.83 |
|
2017 (April 1 - June 30) | 135 |
| | 3.46 |
| | 39.05 |
|
2017 (July 1 - September 30) | 80 |
| | 1.85 |
| | 43.29 |
|
2017 (through November 2) | 20 |
| | 0.53 |
| | 37.48 |
|
Cumulative repurchases since the beginning of 2013 | $ | 2,166 |
| | 79.91 |
| | $ | 27.11 |
|
Accretive EffectAs of Cumulative Repurchases (1)
|
| | | | | | | | | | | |
| Third Quarter 2017 | | Nine Months 2017 | | As of September 30, 2017 |
| (per share) |
Net income | $ | 0.61 |
| | $ | 1.88 |
| | |
Operating income (non-GAAP) | 0.44 |
| | 1.56 |
| | |
Shareholders' equity | | | | | $ | 12.46 |
|
Non-GAAP operating shareholders' equity | | | | | 11.48 |
|
Non-GAAP adjusted book value | | | | | 19.01 |
|
_________________
| |
(1) | Cumulative repurchases since the beginning of 2013. |
In December 2016, Assured Guaranty Municipal Corp. (AGM) repurchased $300 million of its common stock from its parent, Assured Guaranty Municipal Holdings Inc. (AGMH). Subsequently, AGMH distributedSeptember 30, 2023, the proceeds as dividends to its immediate parent, Assured Guaranty US Holdings Inc. (AGUS), and in 2017, AGUS began using these proceeds to pay dividends to AGL. AGL has used these funds predominantly to repurchase its publicly traded common shares. On September 25, 2017, Municipal Assurance Corp. (MAC) redeemed 64,322 of its shares from Municipal Assurance Holdings Inc. (MAC Holdings), its direct parent, for approximately $104 million in cash and $146 million in marketable securities. MAC Holdings then distributed such assets to its shareholders, AGM and Assured Guaranty Corp. (AGC), in proportion to their respective 61% and 39% ownership interests, such that AGM received approximately $152 million ($6 million in cash and $146 million in securities) and AGC received approximately $98 million (all in cash). Please refer to Part I, Item 1, Financial Statements, Note 11, Insurance Company Regulatory Requirements, for information about dividend capacityestimated accretive effect of the Company's insurance companies.cumulative repurchases of common shares since the beginning of 2013 was approximately: $40.71 per share in shareholders’ equity attributable to AGL, $46.65 per share in adjusted operating shareholders’ equity and $81.29 per share in adjusted book value.
The Company also considers the appropriate mix of debt and equity in its capital structure,structure. In 2023, the Company issued $350 million in 6.125% Senior Notes due in 2028, and may repurchase someused the proceeds primarily to redeem $330 million of its5% Senior Notes due in 2024. In 2021, the Company also redeemed $600 million in long-dated high coupon debt using proceeds from timethe issuance of $900 million in shorter-dated, lower coupon debt. Proceeds from the debt issuances that were not used to time. For example, in Nine Monthsredeem debt were used for general corporate purposes, including share repurchases. Since the second quarter of 2017, AGUS has also purchased $28$154 million in principal of AGMH'sAGMH’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 order
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 reduce leverage,readers of this Quarterly Report. For a more detailed description of events, trends and possibly rating agencyuncertainties, as well as the capital, charges,liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, has mutually agreedthis Quarterly Report should be read in its entirety and in addition to the Company’s 2022 Annual Report on Form 10-K.
The primary drivers of volatility in the Company’s net income include: loss and loss adjustment expense (LAE changes in fair value of credit derivatives, FG VIEs, CIVs and committed capital securities (CCS), as well as 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 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 |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions, except per share amounts) |
GAAP | | | | | | | |
Net income (loss) attributable to AGL | $ | 157 | | | $ | 11 | | | $ | 363 | | | $ | 30 | |
Net income (loss) attributable to AGL per diluted share | $ | 2.60 | | | $ | 0.18 | | | $ | 5.99 | | | $ | 0.46 | |
Weighted average diluted shares | 59.6 | | | 62.9 | | | 60.0 | | | 65.1 | |
| | | | | | | |
Non-GAAP | | | | | | | |
Adjusted operating income (loss) (1) | $ | 206 | | | $ | 133 | | | $ | 310 | | | $ | 253 | |
Adjusted operating income per diluted share | $ | 3.42 | | | $ | 2.11 | | | $ | 5.12 | | | $ | 3.88 | |
Weighted average diluted shares | 59.6 | | | 62.9 | | | 60.0 | | | 65.1 | |
| | | | | | | |
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (8) | | | $ | 7 | | | $ | (30) | | | $ | 7 | |
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.13) | | | $ | 0.12 | | | $ | (0.49) | | | $ | 0.11 | |
| | | | | | | |
Components of total adjusted operating income (loss) | | | | | | | |
Insurance segment | $ | 59 | | | $ | 159 | | | $ | 282 | | | $ | 347 | |
Asset Management segment | — | | | (3) | | | (3) | | | (3) | |
Corporate division | 155 | | | (30) | | | 61 | | | (98) | |
Other (2) | (8) | | | 7 | | | (30) | | | 7 | |
Adjusted operating income (loss) | $ | 206 | | | $ | 133 | | | $ | 310 | | | $ | 253 | |
| | | | | | | |
Insurance Segment | | | | | | | |
Gross written premiums (GWP) | $ | 40 | | | $ | 94 | | | $ | 221 | | | $ | 229 | |
Present value of new business production (PVP) (1) | 46 | | | 95 | | | 249 | | | 240 | |
Gross par written | 5,948 | | | 3,846 | | | 20,285 | | | 15,012 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| Amount | | Per Share | | Amount | | Per Share |
| (in millions, except per share amounts) |
Shareholders’ equity attributable to AGL | $ | 5,252 | | | $ | 90.84 | | | $ | 5,064 | | | $ | 85.80 | |
Adjusted operating shareholders' equity (1) | 5,735 | | | 99.18 | | | 5,543 | | | 93.92 | |
Adjusted book value (1) | 8,559 | | | 148.03 | | | 8,379 | | | 141.98 | |
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity | 4 | | | 0.06 | | | 17 | | | 0.28 | |
Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value | (2) | | | (0.03) | | | 11 | | | 0.19 | |
Common shares outstanding (3) | 57.8 | | | | | 59.0 | | | |
____________________
(1) See “— Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with beneficiariesaccounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to terminate selected financial guaranty insurancethe most directly comparable GAAP measure, if available, and credit derivative contracts. In particular,for additional details.
(2) Relates to the Company has targeted investment grade securitieseffect of consolidating FG VIEs and CIVs.
(3) See “— Overview — Key Business Strategies — Capital Management” above for which claims are not expected but which carry a disproportionately large rating agency capital charge. The Company terminated investment grade financial guaranty and credit default swap (CDS) contracts with net parinformation on common share repurchases.
Condensed Consolidated Results of Operations
Condensed Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Revenues: | | | | | | | |
Net earned premiums | $ | 95 | | | $ | 89 | | | $ | 261 | | | $ | 385 | |
Net investment income | 100 | | | 67 | | | 270 | | | 191 | |
Asset management fees | — | | | 16 | | | 53 | | | 71 | |
Net realized investment gains (losses) | (9) | | | (14) | | | (20) | | | (39) | |
Fair value gains (losses) on credit derivatives | 9 | | | (48) | | | 115 | | | (42) | |
Fair value gains (losses) on CCS | (20) | | | 1 | | | (35) | | | 12 | |
Fair value gains (losses) on FG VIEs | 6 | | | 11 | | | (2) | | | 27 | |
Fair value gains (losses) on CIVs | (4) | | | 8 | | | 60 | | | 25 | |
Foreign exchange gains (losses) on remeasurement | (39) | | | (80) | | | 9 | | | (181) | |
Fair value gains (losses) on trading securities | 4 | | | (8) | | | 42 | | | (30) | |
Gain on sale of asset management subsidiaries | 255 | | | — | | | 255 | | | — | |
Other income (loss) | 6 | | | (1) | | | 38 | | | 12 | |
Total revenues | 403 | | | 41 | | | 1,046 | | | 431 | |
Expenses: | | | | | | | |
Loss and LAE (benefit) | 100 | | | (75) | | | 159 | | | (29) | |
Interest expense | 24 | | | 20 | | | 67 | | | 60 | |
Amortization of deferred acquisition cost (DAC) | 4 | | | 4 | | | 10 | | | 11 | |
Employee compensation and benefit expenses | 47 | | | 57 | | | 199 | | | 189 | |
Other operating expenses | 44 | | | 37 | | | 170 | | | 120 | |
Total expenses | 219 | | | 43 | | | 605 | | | 351 | |
Income (loss) before income taxes and equity in earnings (losses) of investees | 184 | | | (2) | | | 441 | | | 80 | |
Equity in earnings (losses) of investees | 18 | | | (20) | | | 25 | | | (31) | |
Income (loss) before income taxes | 202 | | | (22) | | | 466 | | | 49 | |
Less: Provision (benefit) for income taxes | 43 | | | (27) | | | 84 | | | (6) | |
Net income (loss) | 159 | | | 5 | | | 382 | | | 55 | |
Less: Noncontrolling interests | 2 | | | (6) | | | 19 | | | 25 | |
Net income (loss) attributable to Assured Guaranty Ltd. | $ | 157 | | | $ | 11 | | | $ | 363 | | | $ | 30 | |
| | | | | | | |
Effective tax rate | 21.4 | % | | 123.5 | % | | 18.1 | % | | (12.1) | % |
Third Quarter 2016. There were no investment grade financial guaranty or CDS terminations in2023 Compared with Third Quarter 2017. 2022
The Company terminatedincrease in net income attributable to AGL in third quarter 2023 compared with the three-month period ended September 30, 2022 (third quarter 2022) was primarily due to:
•the gain associated with the Sound Point Transaction and AHP Transaction, net of transaction expenses, of $241 million (pre-tax),
•fair value gains on credit derivatives in third quarter 2023, compared with losses in third quarter 2022,
•lower foreign exchange losses on remeasurement, and
•higher income from the fixed-maturity and alternative investment grade financial guarantyportfolio.
These increases were offset in part by losses and CDS contractsLAE in third quarter 2023 compared with net par of $298 million and $5.8 billiona benefit in third quarter 2022.
Nine Months 2017 and2023 Compared with Nine Months 2016, respectively. Please refer2022
Net income attributable to Part I,AGL for the six-month period ended September 30, 2023 (nine months 2023) was higher compared with the nine-month period ended September 30, 2022 (nine months 2022) primarily due to:
•the gain associated with the Sound Point Transaction and AHP Transaction, net of transaction expenses, of $215 million (pre-tax),
•foreign exchange gains on remeasurement in nine months 2023, compared with losses in nine months 2022,
•fair value gains on credit derivatives in nine months 2023, compared with losses in nine months 2022, and
•higher income from the fixed-maturity and alternative investment portfolio.
These increases were offset in part by:
•losses and LAE in nine months 2023 compared with a benefit in nine months 2022,
•lower net earned premiums in nine months 2023 compared with nine months 2022 which benefited from premium accelerations related to the 2022 Puerto Rico Resolutions, and
•higher operating expenses in nine months 2023 primarily due to $46 million in expenses associated with the Sound Point Transaction and 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. See Item 1,1. Financial Statements, Note 6, Contract Accounted12, Income Taxes.
Adjusted Operating Income
Adjusted operating income in third quarter 2023 was $206 million, compared with $133 million in third quarter 2022. The increase was primarily due to the gain associated with the Sound Point Transaction and AHP Transaction, offset in part by higher loss expense. Adjusted operating income in nine months 2023 was $310 million, compared with $253 million in nine months 2022. The increase was primarily due to the gain associated with the Sound Point Transaction and AHP Transaction, offset in part by higher loss expense and lower net earned premiums in nine months 2023, compared with nine months 2022 which included premium accelerations of $104 million related to the 2022 Puerto Rico Resolutions. See “— Results of Operations — Reconciliation to GAAP” for as Insurance and Note 8, Contract Accounted for as Credit Derivatives, for additional information on the effectreconciliation of credit derivative terminations on the consolidated statements of operations.
Alternative Strategies
The Company considers alternative strategies in order to create long-term shareholder value. For example, the Company considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, or by commuting business that it had previously ceded. These transactions enable the Company to improve its future earnings and deploy some of its excess capital. In 2016, the Company established an alternative investments group to focus on deploying a portion of the Company's excess capital to pursue acquisitions and develop new business opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its core competencies.
MBIA UK Insurance Limited.On January 10, 2017 (the MBIA UK Acquisition Date), AGC completed its acquisition of MBIA UK. Please refer to Part I, Item I, Financial Statements, Note 2, Acquisitions, for additional information. In Nine Months 2017, the acquisition contributed net income of approximately $1.04 per share including the bargain purchase gain, gain on settlement of pre-existing relationships, realized gain on Zohar II Notes, and activity since the MBIA UK Acquisition Date. The effect on(loss) attributable to AGL to adjusted operating income (loss).
Book Value and Adjusted Book Value
Shareholders’ equity attributable to AGL as of September 30, 2023 increased compared with December 31, 2022, due to net income, which was approximately $0.64 perpartially offset by dividends, share in Nine Months 2017. Shareholders'repurchases, and unrealized losses on investments. Adjusted operating shareholders’ equity and non-GAAPadjusted book value increased primarily due to operating income components of $310 million offset in part by dividends and share repurchases of $141 million, and in the case of adjusted book value, the increase was also primarily due to gross written premiums of $221 million, which was partially offset by economic loss development of $147 million. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity benefited by $0.65 per share and non-GAAP adjusted book value benefitedvalue.
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 $2.52 per share asincreasing 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 MBIA UK Acquisition Date.
MBIA UK changed its name to Assured Guaranty (London) Ltd. and re-registered as a public limited company to become Assured Guaranty (London) plc (AGLN). Assured Guaranty currently maintains AGLN as a stand-alone entity, but is actively working to combine AGLN with its other affiliated European insurance companies. Aspremium on an initial step, on June 26, 2017, AGM purchased from its affiliate AGC, allinstallment basis over the term of the shares of AGC’s European subsidiaries, and then immediately contributed these European subsidiaries to AGM’s wholly owned subsidiary, Assured Guaranty (Europe) plc (AGE). Whileexposure. 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.
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 recent increases in interest rates since 2022, the pace of credit spread widening was more modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat compared to 2021 when interest rates were lower. Over time, higher interest rates also increase the amount the Company can earn on its European subsidiaries have receivedlargely 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 regulatory approvals, the combination is subjectRussian 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 further regulatoryreduce western economic ties to Russia and court approvals. As a result,to reshape global economic and political ties more generally, and the Company cannot predict whether, or when, such combination will be completed.
CIFG Holding Inc. On July 1, 2016, AGC acquired all of the issuedpotential effects of the conflict on the world or on the Company.
The Company’s surveillance and outstanding capital stock of CIFGH, for $450.6treasury 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 $249 million in cash that contributed $2.23 per share to shareholders' equity, $2.23 per share to non-GAAP operating shareholders' equity and $3.85 per share to non-GAAP adjusted book value at the date of acquisition. Please refer to Part II, Item 8, "Financial Statements and Supplementary Data", Note 2, Acquisitions, of the Company's 2016 Annual Report on Form 10-K, for additional information.
Alternative Investments. The alternative investments group has been investigating a number of new business opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its core competencies, including, among others, both controlling and non-controlling investments in investment managers. In February 2017 the Company agreed to purchase up to $100 million of limited partnership interests in a fund that invests in the equity of private equity managers.
Separately, in September, 2017, the Company acquired a minority interest in Wasmer, Schroeder & Company LLC, an independent investment advisory firm specializing in separately managed accounts (SMAs).
The Company continues to investigate additional opportunities.
Commutations. During the first quarter of 2017, the Company entered into a commutation agreement to reassume the entire portfolio previously ceded to one of its unaffiliated reinsurers, consisting predominantly (over 97%) of U.S. public finance and international public and project finance exposures. During Third Quarter 2017, the Company entered into two commutation agreements. In one case, it reassumed the entire portfolio previously ceded to one of its unaffiliated reinsurers under quota share reinsurance, consisting predominantly of U.S. public finance and international public and project finance exposures. In the other case it reassumed a portion of the portfolio previously ceded to one of its other unaffiliated reinsurers. These commutations resulted in gains of $255 million and $328 million (recorded in other income) for Third Quarter 2017 and Nine Months 2017, respectively, and additional net unearned premium reserve of $62 million and $80 million for such periods, respectively. The Company may in the future enter into new commutation agreements reassuming portions of its remaining ceded business.
Loss Mitigation
In an effort to avoid or reduce potential losses in its insurance portfolios, the Company employs a number of strategies.
In the public finance area, the Company believes that 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, have resulted in more favorable outcomes in distressed public finance situations than would have been the case without its participation, as illustrated, for example, by the Company's role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises. Currently, for example, the Company is actively working to mitigate potential losses in connection with the obligations it insures of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights, and it has initiated several legal actions to enforce its rights in Puerto Rico. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, please refer to Part I, Item 1, Financial Statements, Note 4, Outstanding Exposure.
The Company is currently working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans and so improve the performance of the related RMBS.
The Company also continues to purchase attractively priced obligations, including below-investment-grade (BIG) obligations, that it has insured and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses (loss mitigation securities). The fair value of assets purchased for loss mitigation purposespar outstanding as of September 30, 2023, comprising $208 million net par exposure to the sovereign debt of Poland and $41 million net par exposure to a toll road in Hungary. The Company rates all such exposure investment grade.
2017 (excludingMiddle East Conflict
In light of recent events in the valueMiddle East, the Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, for exposures to the Middle East. After review, the Company’s surveillance and treasury functions have identified no material direct exposure to such area. The Company’s direct insurance exposure to the Middle East is generally is limited to approximately $49 million in net par outstanding as of September 30, 2023, comprised of funded commitments to subscription finance facilities; however, such exposure may increase to a total of approximately $94 million to the extent all unfunded commitments under the facilities are ultimately funded. The Company rates all such insurance exposure investment grade.
Income Taxes
The U.S. Internal Revenue Service and Department of the Company's insurance) was $1,042 million, withTreasury 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 par of $1,661 million (including bonds relatedmaterial impact to FG VIEs of $44 million in fair valuethe Company’s business operation or its shareholders and $229 million in par).
In some instances, the terms of the Company's policy gives it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses.
In an effort to recover losses the Company experienced in its insured U.S. RMBS portfolio,is continuing to evaluate the Company also continues to pursue providersproposed regulations. See Note 12, Income Taxes.
Other Events
The Company continues to monitor developments related to the referendum held in the U.K. on June 23, 2016, in which a majority voted to exit the EU, known as "Brexit", and the U.K.’s service of formal notice on March 29, 2017 to the European Council of its wish to withdraw under Article 50 of the Treaty on EU. The Company may take action in anticipation of or in reaction to Brexit-related developments, especially those related to financial services regulation. The Company cannot predict the direction Brexit-related developments will take nor the impact of those developments on the economies of the markets the Company serves.
Results of Operations
Estimates and Assumptions
Critical Accounting Estimates
The Company’spreparation 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 include amounts that are determined usingstatements.
Critical estimates and assumptions. Theassumptions 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 amounts realized could ultimatelyresults will conform to estimates and assumptions and that reported results of operations will not be materially different from the amounts currently provided for in the Company’s consolidated financial statements. Management believes the most significant items requiring inherently subjective and complex estimates are expected losses, fair value estimates, other-than-temporary impairment, deferred income taxes, and premium revenue recognition. The following discussion of the results of operations includes information regarding thefuture to reflect changes in these estimates and assumptions used for these items and should be read in conjunction with the notesfrom time to the Company’s consolidated financial statements.time.
An understanding of the Company’sThe accounting policies isthat the Company believes are most dependent on the application of critical importance to understanding its consolidated financial statements.judgment, estimates and assumptions are listed below. See Part II, Item 8. “Financial8, Financial Statements and Supplementary Data”Data, Note 1, Business and Basis of Presentation, of the Company's 2016Company’s 2022 Annual Report on Form 10-K, for a discussion of 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 analyses.
•Expected loss estimation process,to be paid (recovered);
•Fair value of certain assets and liabilities, primarily:
▪Investments
▪Assets and liabilities of CIVs
▪Assets and liabilities of FG VIEs
▪Credit derivatives;
•Credit impairment of financial instruments;
•Other-than-temporary-impairment of equity method investments;
•Revenue recognition;
•Income tax assets and liabilities, including the fair value methodologies.recoverability of deferred tax assets (liabilities).
Results of Operations by Segment
The Company carries a significant amountanalyzes the operating performance of its assets and a portion of its liabilities at fair value, the majority of which are measured at fair value on a recurring basis. Level 3 assets, consisting primarily of FG VIE assets, credit derivative assets and investments, represented approximately 16% and 19% of the total assets that are measured at fair value on a recurring basiseach segment using each segment’s adjusted operating income as of September 30, 2017 and December 31, 2016, respectively. All of the Company's liabilities that are measured at fair value are Level 3. Please refer to Part I,described in Item 1, Financial Statements, Note 7, Fair Value Measurement, for additional information about assets and liabilities classified as Level 3.2, Segment Information.
Insurance Segment Results
Insurance Segment Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
Segment revenues | | | | | | | |
Net earned premiums and credit derivative revenues | $ | 99 | | | $ | 92 | | | $ | 271 | | | $ | 397 | |
Net investment income | 101 | | | 69 | | | 273 | | | 198 | |
Fair value gains (losses) on trading securities | 4 | | | (8) | | | 42 | | | (30) | |
Foreign exchange gains (losses) on remeasurement and other income (loss) | 4 | | | (6) | | | 36 | | | (1) | |
Total segment revenues | 208 | | | 147 | | | 622 | | | 564 | |
Segment expenses | | | | | | | |
Loss expense (benefit) | 101 | | | (75) | | | 154 | | | (32) | |
Interest expense | — | | | — | | | — | | | 1 | |
Amortization of DAC | 4 | | | 4 | | | 10 | | | 11 | |
Employee compensation and benefit expenses | 37 | | | 34 | | | 112 | | | 107 | |
Other operating expenses | 23 | | | 21 | | | 78 | | | 60 | |
Total segment expenses | 165 | | | (16) | | | 354 | | | 147 | |
Equity in earnings (losses) of investees | 25 | | | (11) | | | 60 | | | (46) | |
Segment adjusted operating income (loss) before income taxes | 68 | | | 152 | | | 328 | | | 371 | |
Less: Provision (benefit) for income taxes | 9 | | | (7) | | | 46 | | | 24 | |
Segment adjusted operating income (loss) | $ | 59 | | | $ | 159 | | | $ | 282 | | | $ | 347 | |
Consolidated Results of Operations
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 |
| 2016 |
| (in millions) |
Revenues: | | | | | | | |
Net earned premiums | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
Net investment income | 99 |
| | 94 |
| | 322 |
| | 291 |
|
Net realized investment gains (losses) | 7 |
| | (2 | ) | | 54 |
| | (5 | ) |
Net change in fair value of credit derivatives: | | | | | | | |
Realized gains (losses) and other settlements | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
Net change in fair value of credit derivatives | 58 |
| | 21 |
| | 106 |
| | 24 |
|
Fair value gains (losses) on CCS | (4 | ) | | (23 | ) | | (4 | ) | | (50 | ) |
Fair value gains (losses) on FG VIEs | 3 |
| | (11 | ) | | 25 |
| | 11 |
|
Bargain purchase gain and settlement of pre-existing relationships | — |
| | 259 |
| | 58 |
| | 259 |
|
Other income (loss) | 274 |
| | (3 | ) | | 385 |
| | 49 |
|
Total revenues | 623 |
| | 566 |
| | 1,458 |
| | 1,207 |
|
Expenses: | | | | | | | |
Loss and LAE | 223 |
| | (9 | ) | | 354 |
| | 183 |
|
Amortization of deferred acquisition costs | 5 |
| | 4 |
| | 13 |
| | 13 |
|
Interest expense | 24 |
| | 26 |
| | 73 |
| | 77 |
|
Other operating expenses | 58 |
| | 65 |
| | 183 |
| | 188 |
|
Total expenses | 310 |
| | 86 |
| | 623 |
| | 461 |
|
Income (loss) before provision for income taxes | 313 |
| | 480 |
| | 835 |
| | 746 |
|
Provision (benefit) for income taxes | 105 |
| | 1 |
| | 157 |
| | 62 |
|
Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
Net Earned Premiums and Credit Derivative Revenues
Premiums are earned and recognized over the contractual lives, or in the case of insured obligations backed by homogeneous pools of insured obligations,assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums are expected to decrease each year unless replaced by a higher amount of new business, reassumptions of previously ceded business or books of business acquired in a business combination. Please refer to Part I,combinations. See Item 1, Financial Statements, Note 6,5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information and the expected timing of future premium earnings.information.
Net Earned Premiums
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 |
| 2016 |
| (in millions) |
Financial guaranty insurance: | | | | | | | |
Public finance | | | | | | | |
Scheduled net earned premiums and accretion | $ | 76 |
| | $ | 80 |
| | $ | 240 |
| | $ | 222 |
|
Accelerations: | | | | | | | |
Refundings | 84 |
| | 105 |
| | 189 |
| | 267 |
|
Terminations | — |
| | 21 |
| | 1 |
| | 21 |
|
Total accelerations | 84 |
| | 126 |
| | 190 |
| | 288 |
|
Total Public finance | 160 |
| | 206 |
| | 430 |
| | 510 |
|
Structured finance(1) | | | | | | | |
Scheduled net earned premiums and accretion | 23 |
| | 25 |
| | 67 |
| | 74 |
|
Terminations | 3 |
| | — |
| | 14 |
| | 44 |
|
Total structured finance | 26 |
| | 25 |
| | 81 |
| | 118 |
|
Other | 0 |
| | — |
| | 1 |
| | 0 |
|
Total net earned premiums | $ | 186 |
| | $ | 231 |
| | $ | 512 |
| | $ | 628 |
|
____________________
| |
(1) | Excludes $3 million and $4 million for Third Quarter 2017 and 2016, respectively, and $11 million and $12 million for Nine Months 2017 and 2016, respectively, related to consolidated FG VIEs. |
Net earned premiums decreased in Third Quarter 2017 compared with Third Quarter 2016 due primarily to lower accelerations. Net earned premiums decreased in Nine Months 2017 compared with Nine Months 2016 due primarily to lower accelerations, offset in part by higher scheduled net earned premiums related to recent acquisitions. At September 30, 2017, $3.5 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts. The MBIA UK Acquisition increased deferred premium revenue by $383 million at the date of the acquisition. The CIFG Acquisition increased deferred premium revenue by $296 million.
The change in net earned premiums due to accelerations isare attributable to changes in the expected lives of insured obligations driven by (a)by: (i) refundings of insured obligationsobligations; or (b)(ii) terminations of insured obligations either through negotiated agreements or the exercise of ourthe Company’s contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market and have been at historically high levels in recent years due primarily to the low interest rate environment, which has allowed manywhen municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates.rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When such issuers pay down insured obligations, prior to their originally scheduled maturities, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue remaining.revenue. The amortization of 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 issuersbeneficiaries resulting in the extinguishment of the Company’s insurance obligation with respect to the insured obligations.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, such that the Company acceleratesacceleration of the recognition of the associated unearned premiums.deferred premium revenue and the reduction of any remaining premiums receivable.
Insurance Segment
Net Investment IncomeEarned Premiums and Credit Derivative Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Net earned premiums: | | | | | | | |
Financial guaranty insurance: | | | | | | | |
Public finance | | | | | | | |
Scheduled net earned premiums (1) | $ | 65 | | | $ | 62 | | | $ | 188 | | | $ | 196 | |
Accelerations: | | | | | | | |
Refundings | 14 | | | 12 | | | 26 | | | 145 | |
| | | | | | | |
Total accelerations | 14 | | | 12 | | | 26 | | | 145 | |
Total public finance | 79 | | | 74 | | | 214 | | | 341 | |
Structured finance scheduled net earned premiums (1) | 16 | | | 15 | | | 47 | | | 44 | |
Specialty insurance and reinsurance | 1 | | | 1 | | | 3 | | | 3 | |
Total net earned premiums | 96 | | | 90 | | | 264 | | | 388 | |
| | | | | | | |
Credit derivative revenues: | | | | | | | |
Scheduled net earned premiums | 2 | | | 2 | | | 6 | | | 7 | |
Accelerations | 1 | | | — | | | 1 | | | 2 | |
Total credit derivative revenues | 3 | | | 2 | | | 7 | | | 9 | |
Total net earned premiums and credit derivative revenues | $ | 99 | | | $ | 92 | | | $ | 271 | | | $ | 397 | |
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues increased in third quarter 2023 compared with third quarter 2022 primarily due to higher refundings in third quarter 2023 and updates to debt service assumptions in third quarter 2022. Net earned premiums and credit derivative revenues decreased in nine months 2023 compared with nine months 2022 primarily due to refundings of $104 million related to the resolution of PRCCDA, PRIFA and GO/PBA exposures discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of September 30, 2023, $3.6 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.
New Business Production
Gross Written Premiums and
New Business Production
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
GWP (1) | | | | | | | |
Public finance—U.S. | $ | 29 | | | $ | 54 | | | $ | 129 | | | $ | 160 | |
Public finance—non-U.S. | (5) | | | 44 | | | 40 | | | 66 | |
Structured finance—U.S. | 15 | | | (2) | | | 48 | | | 4 | |
Structured finance—non-U.S. | 1 | | | (2) | | | 4 | | | (1) | |
Total GWP | $ | 40 | | | $ | 94 | | | $ | 221 | | | $ | 229 | |
PVP (1): | | | | | | | |
Public finance—U.S. | $ | 30 | | | $ | 57 | | | $ | 129 | | | $ | 163 | |
Public finance—non-U.S. | 2 | | | 37 | | | 38 | | | 67 | |
Structured finance—U.S. | 12 | | | 1 | | | 42 | | | 3 | |
Structured finance—non-U.S. (2) | 2 | | | — | | | 40 | | | 7 | |
Total PVP | $ | 46 | | | $ | 95 | | | $ | 249 | | | $ | 240 | |
Gross Par Written (1): | | | | | | | |
Public finance—U.S. | $ | 5,098 | | | $ | 3,622 | | | $ | 15,752 | | | $ | 13,982 | |
Public finance—non-U.S. | 61 | | | 194 | | | 670 | | | 624 | |
Structured finance—U.S. | 267 | | | 30 | | | 1,101 | | | 106 | |
Structured finance—non-U.S. (2) | 522 | | | — | | | 2,762 | | | 300 | |
Total gross par written | $ | 5,948 | | | $ | 3,846 | | | $ | 20,285 | | | $ | 15,012 | |
____________________
(1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “— Non-GAAP Financial Measures — PVP or Present Value of New Business Production.” GWP may be negative due to changes in debt service assumptions.
(2) Nine 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.
Third Quarter 2023
U.S. public finance GWP and PVP in third quarter 2023 were lower than the comparable GWP and PVP in third quarter 2022, due to a large transportation revenue transaction in third quarter 2022 that did not recur in third quarter 2023, and higher credit quality new business that carry lower premium rates in third quarter 2023, compared with third quarter 2022. The Company’s direct par written represented 61% of the total U.S. municipal market insured issuance in third quarter 2023, compared with 56% in third quarter 2022, and the Company’s penetration of all municipal issuance was 4.6% in third quarter 2023 compared with 3.2% in third quarter 2022.
Structured finance GWP and PVP in third quarter 2023 primarily includes an insurance securitization.
Nine Months 2023
U.S. public finance GWP and PVP in nine months 2023 were lower than the comparable GWP and PVP in nine months 2022 primarily due to fewer secondary market transactions in nine months 2023, compared with nine months 2022. The Company’s direct par written represented 62% of the total U.S. municipal market insured issuance in nine months 2023, compared with 56% in nine months 2022, and the Company’s penetration of all municipal issuance was 5.3% in nine months 2023 compared with 4.4% in nine months 2022.
In nine months 2023, non-U.S. public finance GWP and PVP were lower than GWP and PVP in nine months 2022 due to a large amount of secondary market transactions in nine months 2022. In nine 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 nine months 2023, structured finance GWP and PVP were $52 million and $82 million, respectively, compared with GWP and PVP of $3 million and $10 million, respectively, in nine months 2022. Structured finance GWP and PVP in nine 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 invested assetsavailable-for-sale fixed-maturity securities and short-term investments and the size of thesuch portfolio. The investment yield on fixed-maturity securities is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets.securities in this portfolio.
Net Investment Income (1)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 condensed consolidated statements on operations. The fair value of such instruments as of September 30, 2023 was $350 million.
Equity method investments in the Insurance segment include investments that the U.S. Insurance Subsidiaries make in certain alternative investments, primarily Sound Point and AHP funds. 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 these funds and the Company’s share of earnings of its other investees.
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Income from fixed-maturity securities managed by third parties | $ | 74 |
| | $ | 75 |
| | $ | 224 |
| | $ | 231 |
|
Income from internally managed securities: | | | | | | | |
Fixed maturities | 27 |
| | 19 |
| | 100 |
| | 58 |
|
Other | 1 |
| | 2 |
| | 5 |
| | 8 |
|
Gross investment income | 102 |
| | 96 |
| | 329 |
| | 297 |
|
Investment expenses | (3 | ) | | (2 | ) | | (7 | ) | | (6 | ) |
Net investment income | $ | 99 |
| | $ | 94 |
| | $ | 322 |
| | $ | 291 |
|
Insurance SegmentIncome from Investments
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Net investment income | | | | | | | |
Fixed-maturity securities, available-for-sale: | | | | | | | |
Externally managed (1) | $ | 51 | | | $ | 49 | | | $ | 156 | | | $ | 147 | |
Loss Mitigation Securities | 24 | | | 10 | | | 48 | | | 27 | |
Puerto Rico, New Recovery Bonds | 1 | | | 1 | | | 5 | | | 5 | |
Other (2) | 5 | | | 4 | | | 12 | | | 11 | |
Short-term investments | 19 | | | 4 | | | 47 | | | 5 | |
Intercompany loans | 2 | | | 2 | | | 7 | | | 7 | |
Other investment assets | — | | | 1 | | | 2 | | | 1 | |
Investment income | 102 | | | 71 | | | 277 | | | 203 | |
Investment expenses | (1) | | | (2) | | | (4) | | | (5) | |
Net investment income | $ | 101 | | | $ | 69 | | | $ | 273 | | | $ | 198 | |
| | | | | | | |
Fair value gains (losses) on trading securities | $ | 4 | | | $ | (8) | | | $ | 42 | | | $ | (30) | |
| | | | | | | |
Equity in earnings (losses) of investees | | | | | | | |
Asset managers (3) | $ | — | | | $ | — | | | $ | — | | | $ | — | |
CLOs | 7 | | | 6 | | | 23 | | | (10) | |
Asset-based | — | | | — | | | 3 | | | 7 | |
Healthcare | 12 | | | 3 | | | 21 | | | (6) | |
Other | 6 | | | (20) | | | 13 | | | (37) | |
Equity in earnings (losses) of investees | $ | 25 | | | $ | (11) | | | $ | 60 | | | $ | (46) | |
____________________
| |
(1) | Net investment income excludes $2 million and $1 million for Third Quarter 2017 and 2016, respectively, and $4 million and $8 million for Nine Months 2017 and 2016, respectively, related to securities in the investment portfolio owned by AGC and AGM that were issued by consolidated FG VIEs. |
(1) 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) The Company acquired its investment in Sound Point on July 1, 2023 and reports its equity in earnings on this investment on a one quarter lag.
Net investment income for Third Quarter 2017third quarter 2023 increased compared to Third Quarter 2016third quarter 2022 primarily due primarily to higher income from internally managed securities. The higher income is due primarily to improved underlying cash flowloss mitigation securities and the early payoff of certain investments.
increase in short-term rates and higher average short-term balances. Net investment income for Nine Months 2017nine months 2023 increased compared to Nine Months 2016nine months 2022, primarily due primarily to the accretion on the Zohar II 2005-1 (the Zohar II Notes) (which was used as consideration for the purchase of MBIA UK) prior to the MBIA UK Acquisition Dateincrease in short-term rates and also due to improved underlying cash flowhigher average short-term balances, and the early payoff of certain investments.
loss mitigation securities. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.59%4.04% as of September 30, 20172023 and 3.57%3.01% as of September 30, 2016, respectively. Excluding the internally managed portfolio, pre-tax book yield was 3.12% as of September 30, 20172022.
Foreign Exchange Gains (Losses) on Remeasurement and Other Income (Loss)
The gain in “foreign exchange gains (losses) on remeasurement and other income (loss)” in nine months 2023 compared with 3.32% as of September 30, 2016. The decline in yield for the externally managed portfolionine months 2022 was primarily a result of lower yielding assets related to the MBIA UK investment portfolio.
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Gross realized gains on available-for-sale securities | $ | 23 |
| | $ | 4 |
| | $ | 92 |
| | $ | 24 |
|
Gross realized losses on available-for-sale securities | (3 | ) | | (1 | ) | | (9 | ) | | (3 | ) |
Net realized gains (losses) on other invested assets | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Other-than-temporary impairment | (13 | ) | | (5 | ) | | (29 | ) | | (26 | ) |
Net realized investment gains (losses) | $ | 7 |
| | $ | (2 | ) | | $ | 54 |
| | $ | (5 | ) |
Realized gains in Third Quarter 2017 comprise primarily the gain on sale of investments from the internally managed portfolio. In addition, realized gains in Nine Months 2017 include the gain on sale of the Zohar II Notes exchanged in the MBIA UK Acquisition. Realized gains in Nine Months 2016 were due primarily to sales of securities in order to fund the CIFG Acquisition. Other-than-temporary-impairments in all periods presented were primarily attributable to securities purchased for loss mitigation purposes.
Bargain Purchase Gainthe reversal of a previously recorded litigation accrual of $20 million in nine months 2023, and Settlement of Pre-existing Relationships
In connection with the MBIA UK Acquisition in Nine Months 2017, the Company recognized a $56 million bargain purchase gain and a $2 millionforeign exchange gain on settlementremeasurement of pre-existing relationships. Please refer to Part I,$1 million in nine months 2023, compared with a loss of $7 million in nine months 2022. See Item 1, Financial Statements, Note 2, Acquisitions,13, Commitments and Contingencies, for additional information.
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFGH, the parent of financial guaranty insurer CIFG Assurance North America, Inc. (CIFGNA), and on July 5, 2016, merged CIFGNA with and into AGC, with AGC as the surviving company. In connection with the acquisition, in 2016, the Company recognized a $357 million bargain purchase gain and a $98 million loss on settlement of pre-existing relationships.
Other Income (Loss)
Other income (loss) comprises recurring items such as foreign exchange remeasurement gains and losses, ancillary fees on financial guaranty policies such as commitment and consent, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as commutation gains on re-assumptions of previously ceded business, loss mitigation recoveries and certain non-recurring items.
Other Income (Loss)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Foreign exchange gain (loss) on remeasurement of premium receivable and loss reserves | $ | 3 |
| | $ | (2 | ) | | $ | 17 |
| | $ | (21 | ) |
Commutation gains | 255 |
| | 8 |
| | 328 |
| | 8 |
|
Loss on extinguishment of debt | (2 | ) | | — |
| | (9 | ) | | — |
|
Other | 18 |
| | (9 | ) | | 49 |
| | 62 |
|
Total other income (loss) | $ | 274 |
| | $ | (3 | ) | | $ | 385 |
| | $ | 49 |
|
In Third Quarter 2017 and Nine Months 2017, other income comprises primarily commutation gains on reassumptions of previously ceded business. In Nine Months 2017, the loss on extinguishment of debt was related to AGUS' purchase of $28 million principal amount of AGMH's outstanding Junior Subordinated Debentures. The loss represents the difference between the amount paid to purchase AGMH's debt and the carrying value of the debt, which includes the remaining unamortized fair value adjustments that were recorded upon the Company's acquisition of AGMH in 2009. Foreign exchange gains in Nine Months 2017 and foreign exchange loss in Nine Months 2016 were due primarily to changes in the exchange rate of the British pound sterling. In Nine Months 2016, other income also included a benefit due to loss mitigation recoveries.
Economic Loss Development
The insured portfolio includes policies accounted for under three separateseveral different accounting models depending on the characteristics of the contract and the Company’s control rights. Please referFor a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Part I,II, Item 1,8, Financial Statements and Supplementary Data, Note 5,4, Expected Loss to be Paid for a discussion(Recovered), of the assumptions and methodologies used in calculating the expected loss to be paidCompany’s 2022 Annual Report on Form 10-K. The GAAP accounting policies for all contracts. For a discussion of the loss estimation process, approach to projecting losses and the measurement and recognition accounting policies under GAAP for each type of contract seeare described in the followingnotes listed below in Part II, Item 8, "FinancialFinancial Statements and Supplementary Data"Data, of the Company's 2016Company’s 2022 Annual Report on Form 10-K:
•Note 5 for expected loss to be paid,contracts accounted for as insurance;
•Note 6 for contracts accounted for as insurance,credit derivatives;
•Note 78 for FG VIEs; and
•Note 9 for fair value methodologies for credit derivatives and FG VIEVIEs’ assets and liabilities,liabilities.
Note 8 for contracts accounted for as credit derivatives, and
Note 9 for consolidated FG VIEs.
The discussion of losses that follows encompasses losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. In order to effectivelyefficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. That is, management monitors and assigns ratings and calculatesThe discussion of losses that follows encompasses expected losses on all contracts in the same manner for all its exposures. Management also considers contract specific characteristics that affect the estimatesinsured portfolio regardless of expected loss.
The surveillance process for identifying transactions with expected losses is described in the notes to the consolidated financial statements. More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly.
accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists primarily of the present value of future: expected claim and LAE payments,payments; expected recoveries from issuers or excess spread and other collateral in the transaction structures,spread; cessions to reinsurers, andreinsurers; expected recoveries forrecoveries/payables stemming from breaches of R&Wrepresentation and warranties (R&W); and the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.
Current risk freerisk-free rates are used to discount expected losses at the end of each reporting period and thereforeperiod. Therefore, changes in such rates from period to period affect the expected loss estimates reported. Assumptions used in the determination of the net expected loss to be paid such as delinquency, severity, and discount rates and expected time frames to recovery in the mortgage market were consistent by sector regardless of the accounting model used. The primary drivers of economic loss development are discussed below. Changes in risk 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 weighted average discount rates used to discount expected losses (recoveries) were 4.80% and 4.08% as of September 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 | | Third Quarter | | Nine Months |
Accounting Model | | September 30, 2023 | | December 31, 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
Insurance | | $ | 252 | | | $ | 205 | | | $ | 92 | | | $ | (67) | | | $ | 160 | | | $ | (137) | |
FG VIEs | | 235 | | (1) | 314 | | (1) | (6) | | | (6) | | | (15) | | | (16) | |
Credit derivatives | | 3 | | | 3 | | | 1 | | | 1 | | | 2 | | | 5 | |
Total | | $ | 490 | | | $ | 522 | | | $ | 87 | | | $ | (72) | | | $ | 147 | | | $ | (148) | |
| | | | | | | | | | | | |
Net exposure rated BIG | | $ | 5,258 | | | $ | 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
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2023 |
Sector | | Net Expected Loss to be Paid (Recovered) as of June 30, 2023 | | Net Economic Loss Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2023 |
| | (in millions) |
Public finance: | | | | | | | | |
U.S. public finance | | $ | 433 | | | $ | 135 | | | $ | (169) | | | $ | 399 | |
Non-U.S. public finance | | 10 | | | (1) | | | — | | | 9 | |
Public finance | | 443 | | | 134 | | | (169) | | | 408 | |
Structured finance: | | | | | | | | |
U.S. RMBS | | 73 | | | (48) | | | 13 | | | 38 | |
Other structured finance | | 44 | | | 1 | | | (1) | | | 44 | |
Structured finance | | 117 | | | (47) | | | 12 | | | 82 | |
Total | | $ | 560 | | | $ | 87 | | | $ | (157) | | | $ | 490 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2022 |
Sector | | Net Expected Loss to be Paid (Recovered) as of June 30, 2022 | | Net 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months 2023 |
Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2022 | | Net Economic Loss Development (Benefit) | | Net (Paid) Recovered Losses (1) | | Net Expected Loss to be Paid (Recovered) as of September 30, 2023 |
| | (in millions) |
Public finance: | | | | | | | | |
U.S. public finance | | $ | 403 | | | $ | 193 | | | $ | (197) | | | $ | 399 | |
Non-U.S. public finance | | 9 | | | — | | | — | | | 9 | |
Public finance | | 412 | | | 193 | | | (197) | | | 408 | |
Structured finance: | | | | | | | | |
U.S. RMBS | | 66 | | | (52) | | | 24 | | | 38 | |
Other structured finance | | 44 | | | 6 | | | (6) | | | 44 | |
Structured finance | | 110 | | | (46) | | | 18 | | | 82 | |
Total | | $ | 522 | | | $ | 147 | | | $ | (179) | | | $ | 490 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months 2022 |
Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 | | Net 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 | | $ | 197 | | | $ | (16) | | | $ | 445 | | | $ | 626 | |
Non-U.S. public finance | | 12 | | | (6) | | | — | | | 6 | |
Public finance | | 209 | | | (22) | | | 445 | | | 632 | |
Structured finance: | | | | | | | | |
U.S. RMBS | | 150 | | | (127) | | | 29 | | | 52 | |
Other structured finance | | 52 | | | 1 | | | (10) | | | 43 | |
Structured finance | | 202 | | | (126) | | | 19 | | | 95 | |
Total | | $ | 411 | | | $ | (148) | | | $ | 464 | | | $ | 727 | |
____________________
(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.”
Third Quarter 2023 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in third quarter 2023 of $135 million was primarily attributable to PREPA.
U.S. RMBS: The economic benefit attributable to U.S. RMBS of $48 million was primarily attributable to a $37 million benefit related to higher recoveries for secured second lien charged-off loans, an $11 million benefit related to changes in discount rates, and a $6 million benefit related to higher assumed recoveries for deferred principal in first lien transactions, partially offset by losses related to lower excess spread.
See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.
Third Quarter 2022 Net Economic Loss Development
Public Finance: The economic loss development on U.S. exposures in third quarter 2022 was $24 million, and was primarily attributable to healthcare and Puerto Rico exposures, partially offset by the effect of changes 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 2022 Puerto Rico Resolutions.
U.S. RMBS: The economic benefit attributable to U.S. RMBS was $95 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, partially offset by losses of $10 million related to lower excess spread.
Nine Months 2023Net Economic Loss Development
Public Finance: The economic loss development on U.S. public finance exposures in nine months 2023 was $193 million, which was primarily attributable to PREPA and healthcare exposures, partially offset by higher projected recoveries in other municipal exposures.
U.S. RMBS: The net benefit attributable to U.S. RMBS was $52 million and was mainly attributable to a $50 million benefit related to higher recoveries for secured second lien charged-off loans, an $11 million benefit related to improved performance in certain transactions, a $9 million benefit related to changes in discount rates, and a $6 million benefit related to higher assumed recoveries for deferred principal in first lien transactions. These benefits were partially offset by a $18 million loss development related to the return of certain funds previously received and $6 million related to lower excess spread.
Nine Months 2022 Net 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 million benefit related to changes in discount rates, a $43 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 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 million benefit related to lower severity assumptions, partially offset by losses of $79 million related to lower excess spread.
Insurance Segment Loss Expense
The primary differences between net economic loss development and lossthe amount reported as “loss and LAE are that the amount reported(benefit)” in the consolidated statements of operations:
operations are that loss and LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty insurance contracts,
contracts; (ii) eliminates loss and LAE related to FG VIEsVIEs; and
(iii) does not include estimated losses on credit derivatives.
Loss Insurance segment loss expense includes loss and LAE reported in operating income (non-GAAP) (i.e. operating loss and LAE) includes losses on financial guaranty insurance contracts (other than those eliminated dueand losses on credit derivatives, without giving effect to eliminations related to the consolidation of FG VIEs), and credit derivatives.VIEs.
For financial guaranty insurance contracts, theeach transaction’s expected loss and LAE reported into be expensed is compared with the consolidated statements of operations is generally recorded only when expected losses exceed deferred premium revenue.revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combinationcombinations or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances because of the purchase accounting fair value adjustments made at acquisition.balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to thesethose policies. See "Loss and LAE (Financial Guaranty Insurance Contracts)" below.
Net Expected Loss to be Paid
|
| | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| (in millions) |
Public finance | $ | 1,093 |
| | $ | 904 |
|
Structured finance | | | |
U.S. RMBS | 176 |
| | 206 |
|
Other structured finance | 23 |
| | 88 |
|
Structured finance | 199 |
| | 294 |
|
Total | $ | 1,292 |
| | $ | 1,198 |
|
Economic Loss Development (Benefit) (1)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Public finance | $ | 229 |
| | $ | 8 |
| | $ | 427 |
| | $ | 216 |
|
Structured finance: | | | | | | | |
U.S. RMBS | (19 | ) | | (27 | ) | | (70 | ) | | (139 | ) |
Other structured finance | (6 | ) | | (25 | ) | | (59 | ) | | (40 | ) |
Structured finance | (25 | ) | | (52 | ) | | (129 | ) | | (179 | ) |
Total | $ | 204 |
| | $ | (44 | ) | | $ | 298 |
| | $ | 37 |
|
____________________
| |
(1) | Economic loss development includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. |
Third Quarter 2017 Net Economic Loss Development
The total economic loss development of $204 million in Third Quarter 2017 was primarily related to the public finance sector, offset in part by improvements in the structured finance sector. The risk-free rates for U.S. dollar denominated obligations used to discount expected losses ranged from 0.0% to 2.94% with a weighted average of 2.27% as of September 30, 2017 and 0.0% to 2.83% with a weighted average of 2.32% as of June 30, 2017. The effect of changes in the risk-free rates used to discount expected losses was a benefit of $6 million in Third Quarter 2017.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated BIG by the Company was $7.3 billion as of September 30, 2017 compared with $7.1 billion as of June 30, 2017. The Company projects that its total net expected loss across its troubled U.S. public finance credits as of September 30, 2017 will be $1,046 million, compared with $1,044 million as of June 30, 2017. Economic loss development in Third Quarter 2017 was $229 million, which was primarily attributable to Puerto Rico. See "Insured Portfolio-Exposure to Puerto Rico" below for details about significant developments that have taken place in Puerto Rico.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $19 million and was mainly related to improvement in the underlying collateral performance of home equity lines of credit mortgages and improvements in
observed liquidation rates. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid for additional information.
Other Structured Finance Economic Loss Development: The net benefit attributable to structured finance (excluding U.S. RMBS) was $6 million, due primarily to decreased future loss expectations on certain transactions reinsured by the Company. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid for additional information.
Third Quarter 2016 Net Economic Loss Development
Total economic loss of $44 million in Third Quarter 2016 was generated mainly by the structured finance sector. The risk-free rates for U.S. dollar denominated obligations used to discount expected losses ranged from 0.0% to 2.42% with a weighted average of 1.80% as of September 30, 2016 and 0.0% to 2.46% with a weighted average of 1.59% as of June 30, 2016. The effect of the change in the risk-free rates used to discount expected losses was a benefit of $29 million in Third Quarter 2016.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated BIG by the Company was $7.6 billion as of September 30, 2016 compared with $8.3 billion as of June 30, 2016. The Company projected that its total net expected loss across its troubled U.S. public finance credits as of September 30, 2016 would be $816 million, compared with $963 million as of June 30, 2016. Economic loss development in Third Quarter 2016 was $9 million, which was primarily attributable to Puerto Rico exposures.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $27 million due mainly to underlying collateral improvement on certain subprime transactions and an increase in the expected recovery rate on certain second lien transactions.
Other Structured Finance Economic Loss Development: The net benefit attributable to structured finance (excluding U.S. RMBS) was $25 million, due primarily to a benefit from the purchase of a portion of an insured obligation as part of a loss mitigation strategy.
Nine Months 2017 Net Economic Loss Development
Total economic loss development of $298 million in Nine Months 2017 was generated mainly by the U.S. public finance sector, partially offset by a net benefit in the structured finance sector. Economic loss development in the public finance sector in Nine Months 2017 was $427 million, which was primarily attributable to exposures to Puerto Rico. This was partially offset by $129 million benefit in structured finance due to lower re-default assumptions on first and second lien modified loans, and a benefit from a litigation settlement related to two triple-X transactions. The effect of the change in the risk-free rates used to discount expected losses was a loss of $28 million in Nine Months 2017.
Nine Months 2016 Net Economic Loss Development
Total economic loss development of $37 million in Nine Months 2016 was generated mainly by the U.S. public finance sector on Puerto Rico exposures, partially offset by a net benefit in the structured finance sector. Economic loss development in the public finance sector in Nine Months 2016 was $216 million, which was primarily attributable to Puerto Rico exposures. This was partially offset by a $179 million benefit due to: the acceleration of claim payments as a means of mitigating future losses on certain Alt-A transactions and transaction performance improvement in U.S. RMBS, improved performance of various other structured finance credits and changes in interest rates. The effect of the change in the risk-free rates used to discount expected losses was a loss of $79 million in Nine Months 2016.
Loss and LAE (Financial Guaranty Insurance Contracts)
The amount of loss and LAE recognized in the consolidated statements of operations for financial guaranty contracts accounted for as insurance is dependent on the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. For these transactions, each transaction’s expected loss to be expensed, net of estimated recoveries, is compared with the deferred premium revenue of that transaction. Generally, when the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in the consolidated statements of operations for the amount of such excess.
While expected loss to be paid (recovered) is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it
presents the Company’s projection of loss and LAEnet expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income in the consolidated statements of operations for financial guaranty insurance policies. Expected
The amount of Insurance segment loss to be paid for FG VIEs pursuant to AGC’sexpense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and AGM’s financial guaranty policies is calculatedthe deferred premium revenue amortization in a manner consistent with financial guaranty insurance contracts, but eliminated in consolidation under GAAP.
given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense (benefit).
Insurance Segment
Loss Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
U.S. public finance | $ | 138 | | | $ | 4 | | | $ | 184 | | | $ | 70 | |
| | | | | | | |
Structured finance: | | | | | | | |
U.S. RMBS | (38) | | | (82) | | | (35) | | | (104) | |
Other structured finance | 1 | | | 3 | | | 5 | | | 2 | |
Structured finance | (37) | | | (79) | | | (30) | | | (102) | |
Total Insurance segment loss expense (benefit) | $ | 101 | | | $ | (75) | | | $ | 154 | | | $ | (32) | |
The difference between public finance loss expense and economic benefit in nine 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 recordedexpense that had not previously been reported in the consolidated statementsstatement of operations. Amounts presented areoperations, and corresponding net of reinsurance.
Loss and LAE Reported
earned premiums were recognized for the remaining deferred premium revenue on the Consolidated Statements of Operations
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Public finance | $ | 233 |
| | $ | 20 |
| | $ | 421 |
| | $ | 232 |
|
Structured finance: | | | | | | | |
U.S. RMBS | (4 | ) | | (2 | ) | | (14 | ) | | (3 | ) |
Other structured finance | (5 | ) | | (27 | ) | | (48 | ) | | (42 | ) |
Structured finance | (9 | ) | | (29 | ) | | (62 | ) | | (45 | ) |
Total insurance contracts before FG VIE consolidation | 224 |
| | (9 | ) | | 359 |
| | 187 |
|
Elimination of losses attributable to FG VIEs | (1 | ) | | 0 |
| | (5 | ) | | (4 | ) |
Total loss and LAE (1) | $ | 223 |
| | $ | (9 | ) | | $ | 354 |
| | $ | 183 |
|
____________________
| |
(1) | Excludes credit derivative loss of $1 million and benefit $8 million for Third Quarter 2017 and Third Quarter 2016 and credit derivative benefit of $25 million and $25 million for Nine Months 2017 and Nine Months 2016. |
Loss and LAE in Third Quarter 2017 was mainly driven by an increase in loss reserves on certainextinguished Puerto Rico exposures. Loss and LAE benefit in Third Quarter 2016 was mainly driven by a decrease in loss reserves in the structured finance sector. The non-U.S. RMBS structured finance sector benefited from the purchase of a portion of an insured obligation as part of a loss mitigation strategy.
Loss and LAE in Nine Months 2017 was mainly driven by higher loss reserves on certain Puerto Rico exposures, partially offset by a benefit from a litigation settlement related to two triple-X transactions. Loss and LAE in Nine Months 2016 was mainly driven by higher loss reserves on certain Puerto Rico exposures partially offset by a benefit from the non-U.S. RMBS structured finance transaction loss mitigation strategy described above, and commutations of certain assumed student loan exposures.
For financial guaranty contracts accounted for as insurance, the amounts reported in the GAAP financial statements may only reflect a portion of the current period’s economic loss development and may also include a portion of prior-period economic loss development. The difference between economic loss development on financial guaranty insurance contracts and loss and LAE recognized in the consolidated statements of operations relates to the effect of taking deferred premium revenue into account for loss and LAE, which is not considered in economic loss development.
For additional information on schedule of the expected timing of net expected losses to be expensed please refer to Part I,see Item 1, Financial Statements, Note 6,5, Contracts Accounted for as Insurance.
Employee Compensation and Benefit Expenses and Other Operating Expenses
The increase in nine months 2023 compared with nine 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) (10/20/23) | | A1 (stable) (3/18/22) | | — |
AGC | AA (stable) (7/13/23) | | AA+ (stable) (10/20/23) | | (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) (10/20/23) | | A1 (stable) (3/18/22) | | — |
Assured Guaranty (Europe) SA (AGE) | AA (stable) (7/13/23) | | AA+ (stable) (10/20/23) | | — | | — |
____________________
(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
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Segment revenues | | | | | | | |
Management fees | $ | — | | | $ | 18 | | | $ | 35 | | | $ | 66 | |
Performance fees | — | | | 2 | | | 29 | | | 20 | |
Foreign exchange gains (losses) on remeasurement and other income (loss) | — | | | 1 | | | 7 | | | 2 | |
Total segment revenues | — | | | 21 | | | 71 | | | 88 | |
Segment expenses | | | | | | | |
Interest expense | — | | | — | | | 1 | | | — | |
Employee compensation and benefit expenses | — | | | 16 | | | 59 | | | 62 | |
Other operating expenses | — | | | 8 | | | 15 | | | 29 | |
Total segment expenses | — | | | 24 | | | 75 | | | 91 | |
Segment adjusted operating income (loss) before income taxes | — | | | (3) | | | (4) | | | (3) | |
Less: Provision (benefit) for income taxes | — | | | — | | | (1) | | | — | |
Segment adjusted operating income (loss) | $ | — | | | $ | (3) | | | $ | (3) | | | $ | (3) | |
In the first half of 2023, prior to the Sound Point Transaction and the AHP Transaction, the Company owned and consolidated AssuredIM and reported asset management fees (primarily from CLOs and opportunity funds) in revenues. Since July 1, 2023, the Company reports its ownership interest in Sound Point through equity in earnings of investees (on a one quarter lag).
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. 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. AHP will continue to manage the healthcare funds. In the second quarter of 2023, (i) the management of approximately $159 million 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. Effective with the Sound Point Transaction and the AHP Transaction, the Company no longer has any AUM. See Note 1, Business and Basis of Presentation.
Corporate Division Results
Corporate Division Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Revenues | | | | | | | |
Gain on sale of asset management subsidiaries | $ | 255 | | | $ | — | | | $ | 255 | | | $ | — | |
Other | 4 | | | 1 | | | 8 | | | 3 | |
Total revenues | 259 | | | 1 | | | 263 | | | 3 | |
Expenses | | | | | | | |
Interest expense | 26 | | | 22 | | | 73 | | | 66 | |
Employee compensation and benefit expenses | 10 | | | 7 | | | 28 | | | 20 | |
Other operating expenses | 21 | | | 5 | | | 64 | | | 18 | |
Total expenses | 57 | | | 34 | | | 165 | | | 104 | |
Equity in earnings (losses) of investees | — | | | — | | | — | | | — | |
Adjusted operating income (loss) before income taxes | 202 | | | (33) | | | 98 | | | (101) | |
Less: Provision (benefit) for income taxes | 47 | | | (3) | | | 37 | | | (3) | |
Adjusted operating income (loss) | $ | 155 | | | $ | (30) | | | $ | 61 | | | $ | (98) | |
Gain on sale of asset management subsidiaries relates to the Sound Point Transaction and AHP Transaction. See Item 1. Financial Statements, Note 1, Business and Basis of Presentation.
Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries. On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS used the proceeds of this issuance to redeem $330 million of 5% Senior Notes due 2024. Third quarter 2023 and nine months 2023 interest expense was higher than the comparable periods in 2022 due to additional interest expense on the 6.125% Senior Notes and higher interest on the variable rate AGMH Series A Enhanced Junior debentures. See Item 1. Financial Statements, Note 11, Long-Term Debt.
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 third quarter 2023 and nine months 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction, and for nine months 2023 a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $14 million for third quarter 2023 and $40 million for nine months 2023, consisting primarily of $25 million advisory and consent fees and $8 million legal fees.
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 (a) collateralized financing entities, CLO warehouses until July 1, 2023, and (b) Sound Point and AHP 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 (prior to July 1, 2023); (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. As a result of the Sound Point Transaction and AHP Transaction, the Company deconsolidated CIV assets of $4.7 billion and CIV liabilities of $4.4 billion. The Company recognized a loss on deconsolidation of $16 million, which is reported in “fair value gains (losses) on CIVs”. See Item. 1, Financial Statements, Note 1, Business and Basis of Presentation and Note 8, Financial Guaranty Insurance Losses.Variable Interest Entities and Consolidated Investment Vehicles, for additional information.
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 |
| 2023 | | 2022 | | 2023 | | 2022 |
Effect on Financial Statement Line Item | (in millions) |
Fair value gains (losses) on FG VIEs (1) | $ | 6 | | | $ | 11 | | | $ | (2) | | | $ | 27 | |
Fair value gains (losses) on CIVs | (4) | | | 8 | | | 60 | | | 25 | |
Equity in earnings (losses) of investees (2) | (7) | | | (9) | | | (35) | | | 15 | |
Other (3) | (3) | | | (8) | | | (42) | | | (32) | |
Effect on income before tax | (8) | | | 2 | | | (19) | | | 35 | |
Less: Tax provision (benefit) | (2) | | | 1 | | | (8) | | | 3 | |
Effect on net income (loss) | (6) | | | 1 | | | (11) | | | 32 | |
Less: Effect on noncontrolling interests (4) | 2 | | | (6) | | | 19 | | | 25 | |
Effect on net income (loss) attributable to AGL | $ | (8) | | | $ | 7 | | | $ | (30) | | | $ | 7 | |
| | | | | | | |
By Type of VIE | | | | | | | |
FG VIEs | $ | 2 | | | $ | 6 | | | $ | (13) | | | $ | 9 | |
CIVs | (10) | | | 1 | | | (17) | | | (2) | |
Effect on net income (loss) attributable to AGL | $ | (8) | | | $ | 7 | | | $ | (30) | | | $ | 7 | |
____________________
(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 certain alternative investments, primarily Sound Point and AHP 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 funds managed by Sound Point and prior to July 1, 2023, 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 |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Net income (loss) attributable to AGL | $ | 157 | | | $ | 11 | | | $ | 363 | | | $ | 30 | |
Less pre-tax adjustments: | | | | | | | |
Realized gains (losses) on investments | (9) | | | (14) | | | (20) | | | (39) | |
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 6 | | | (49) | | | 109 | | | (46) | |
Fair value gains (losses) on CCS | (20) | | | 1 | | | (35) | | | 12 | |
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (37) | | | (78) | | | 9 | | | (180) | |
Total pre-tax adjustments | (60) | | | (140) | | | 63 | | | (253) | |
Less tax effect on pre-tax adjustments | 11 | | | 18 | | | (10) | | | 30 | |
Adjusted operating income (loss) | $ | 206 | | | $ | 133 | | | $ | 310 | | | $ | 253 | |
| | | | | | | |
Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(2), $1, $(8) and $3) included in adjusted operating income | $ | (8) | | | $ | 7 | | | $ | (30) | | | $ | 7 | |
Net ChangeRealized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Gross realized gains on sales of available-for-sale securities | $ | 2 | | | $ | — | | | $ | 21 | | | $ | — | |
Gross realized losses on sales of available-for-sale securities | (1) | | | (10) | | | (16) | | | (33) | |
Net foreign currency gains (losses) | (1) | | | — | | | (1) | | | (3) | |
Change in allowance for credit losses and intent to sell | (8) | | | (4) | | | (23) | | | (13) | |
Other net realized gains (losses) | (1) | | | — | | | (1) | | | 10 | |
Net realized investment gains (losses) | $ | (9) | | | $ | (14) | | | $ | (20) | | | $ | (39) | |
Gross realized gains and losses on sales in all periods primarily relate to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.
Non-Credit Impairment-Related Unrealized Fair Value ofGains (Losses) on Credit Derivatives
Changes in the fair value of credit derivatives occur primarily because of changes in interest rates,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, and the issuing company's own credit rating and credit spreads,interest rates and other market factors. With volatility continuingThe components of changes in the market, unrealized gains (losses) onfair value of credit derivatives may fluctuate significantlyrelated to credit derivative revenues and changes in future periods.
Except for net estimated credit impairments (i.e., net expected payments), thelosses 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 reducereverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Changes in expected losses in respect of contracts accounted for asUnrealized gains (losses) on credit derivatives are includedmay fluctuate significantly in future periods. Except for underlying credit impairment, which is recognized as loss expense in the discussionInsurance 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 “Economic Loss Development” above.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 these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGCAGC. Due to the relatively low volume and AGM.characteristics of credit default swaps (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 the CompanyAGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.
The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy.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 over the past several yearssince 2009 and, as of September 30, 2017,2023, 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. Please refer to Part I,See Item 1, Financial Statements, Note 7,9, Fair Value Measurement, for additional information.
Net Change in Fair Value of Credit Derivative Gain (Loss)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Realized gains on credit derivatives | $ | 4 |
| | $ | 11 |
| | $ | 15 |
| | $ | 39 |
|
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (5 | ) | | 4 |
| | 4 |
| | 8 |
|
Realized gains (losses) and other settlements(1) | (1 | ) | | 15 |
| | 19 |
| | 47 |
|
Net unrealized gains (losses): | | | | | | | |
Pooled corporate obligations | 35 |
| | 3 |
| | 41 |
| | (37 | ) |
U.S. RMBS | 11 |
| | (12 | ) | | 24 |
| | 0 |
|
Pooled infrastructure | (1 | ) | | 4 |
| | 4 |
| | 10 |
|
Infrastructure finance | 0 |
| | 1 |
| | 2 |
| | 0 |
|
Other | 14 |
| | 10 |
| | 16 |
| | 4 |
|
Net unrealized gains (losses) | 59 |
| | 6 |
| | 87 |
| | (23 | ) |
Net change in fair value of credit derivatives | $ | 58 |
| | $ | 21 |
| | $ | 106 |
| | $ | 24 |
|
____________________
| |
(1) | Includes realized gains and losses due to terminations and settlements of CDS contracts. |
Terminations and Settlements
of Direct Credit Derivative Contracts
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Net par of terminated credit derivative contracts | $ | 40 |
| | $ | 1,071 |
| | $ | 273 |
| | $ | 3,507 |
|
Realized gains on credit derivatives | 0 |
| | 3 |
| | 0 |
| | 11 |
|
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements | (3 | ) | | — |
| | (15 | ) | | — |
|
Net unrealized gains (losses) on credit derivatives | 8 |
| | 11 |
| | 24 |
| | 81 |
|
During Third Quarter 2017,quarter 2023 non-credit impairment unrealized fair value gains were generated primarily as a result of CDS terminations in the Other sector, run-off of net par outstanding, and tighter implied netgenerally lower collateral asset spreads. The tighter implied net spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM, which management refers to as the CDS spread on AGC and AGM, increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Nine Months 2017,months 2023 non-credit impairment unrealized fair value gains on credit derivatives were generated primarily as a result of CDS terminations, run-offgenerally lower collateral asset spreads and a widening of net par outstanding, and tighter implied netAGC spreads. The tighter implied spreads were primarily a result of price improvements on the underlying collateral of the Company’s CDS and the increased cost to buy protection in AGC’s and AGM’s name as the market cost of AGC’s and AGM’s credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM increased, the implied net spreads that the Company would expect to receive on these transactions decreased.
During Third Quarter 2016,quarter 2022 non-credit impairment unrealized fair value gainslosses were generated primarily as a result of CDS terminations in the pooled corporatewider asset spreads and other sectors and price improvements on the underlying collaterala tightening of the Company’s CDS. This was the primary driver of the unrealized fair value gains in the pooled corporate CLO, and other sectors. The unrealized fair value gains were partially offset by unrealized losses resulting from wider implied net spreads across all sectors. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased significantly during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.
Duringspreads. Nine Months 2016,months 2022 non-credit impairment unrealized fair value losses on credit derivatives were generated primarily in the trust preferred sector, due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year and five year CDS spread, as the market cost of AGC’s and AGM’s credit protection decreased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased. The unrealized fair value losses were partially offset by unrealized fair value gains which resulted from the terminations of several CDS transactions during the period. The majority of the CDS transactions were terminated as a result of settlement agreements with the relevant CDS counterparties.wider asset spreads, partially offset by a widening of AGC spreads and changes in discount rates.
CDSSensitivity to Changes in Credit Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
|
| | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of June 30, 2017 | | As of December 31, 2016 | | As of September 30, 2016 | | As of June 30, 2016 | | As of December 31, 2015 |
Five-year CDS spread: | | | | | | | | | | | |
AGC | 190 |
| | 136 |
| | 158 |
| | 170 |
| | 265 |
| | 376 |
|
AGM | 190 |
| | 140 |
| | 158 |
| | 170 |
| | 265 |
| | 366 |
|
One-year CDS spread | | | | | | | | | | | |
AGC | 81 |
| | 15 |
| | 35 |
| | 31 |
| | 45 |
| | 139 |
|
AGM | 81 |
| | 15 |
| | 29 |
| | 31 |
| | 47 |
| | 131 |
|
Effect of Changes inThe following table summarizes the Company’s Credit Spread on
Net Unrealized Gains (Losses) on Credit Derivatives
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Change in unrealized gains (losses) of credit derivatives: | | | | | | | |
Before considering implication of the Company’s credit spreads | $ | 38 |
| | $ | 44 |
| | $ | 75 |
| | $ | 85 |
|
Resulting from change in the Company’s credit spreads | 21 |
| | (38 | ) | | 12 |
| | (108 | ) |
After considering implication of the Company’s credit spreads | $ | 59 |
| | $ | 6 |
| | $ | 87 |
| | $ | (23 | ) |
Management believes that the trading level of AGC’s and AGM’s credit spreads over the past several years has been due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets. Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security markets relative to pre-financial crisis levels. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high-yield collateralized debt obligations (CDO), trust preferred securities CDOs, and collateralized loan obligation (CLO) markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.
Financial Guaranty Variable Interest Entities
As of September 30, 2017 and December 31, 2016, the Company consolidated 31 and 32 VIEs, respectively. The table below presents the effects on reported GAAP income resulting from consolidating these FG VIEs and eliminating their related insurance and investment amounts. The consolidation of FG VIEs has an effect on net income and shareholders' equity due to:
changes in fair value gains (losses) on FG VIE assets and liabilities,
the eliminations of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse, and
the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE debt.
Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. Please refer to Part I, Item 1, Financial Statements, Note 9, Consolidated Variable Interest Entities, for additional information.
Effect of Consolidating FG VIEs on Net Income (Loss)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Fair value gains (losses) on FG VIEs | $ | 3 |
| | $ | (11 | ) | | $ | 25 |
| | $ | 11 |
|
Elimination of insurance and investment balances | (4 | ) | | (6 | ) | | (10 | ) | | (16 | ) |
Effect on income before tax | (1 | ) | | (17 | ) | | 15 |
| | (5 | ) |
Less: tax provision (benefit) | 0 |
| | (6 | ) | | 5 |
| | (2 | ) |
Effect on net income (loss) | $ | (1 | ) | | $ | (11 | ) | | $ | 10 |
| | $ | (3 | ) |
Fair value gains (losses) on FG VIEs represent the netestimated change in fair value on the consolidated FG VIEs’ assets and liabilities. During Third Quarter 2017 and Nine Months 2017, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $3 million and $25 million, respectively. During Third Quarter 2017, the primary driverbalance of the gain was price depreciation on the FG VIE recourse liabilities during the quarter resulting from the Company'sCompany’s credit risk. During the Nine Months 2017, the primary driver of the gain is price appreciation on the FG VIE assets resulting from improvementsderivative positions assuming an immediate shift in the underlying collateral.
During Third Quarter 2016,net spreads assumed by the Company recorded a pre-taxCompany. The net fair value loss on consolidated FG VIEsspread is affected by the spread of $11 million and during Nine Months 2016, the Company recorded a gain of $11 million. The primary drivers of the loss during Third Quarter 2016 were the net mark-to-market losses due to price depreciation on the FG VIE assets, resulting from declines in value in the underlying collateral and the price appreciationcredit spreads on AGC.
Effect of Changes in Credit Spread
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 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 | | $ | (112) | | | $ | (63) | | | $ | (233) | | | $ | (71) | |
Base Scenario | | (49) | | | — | | | (162) | | | — | |
Decrease of 25 bps | | (33) | | | 16 | | | (99) | | | 63 | |
All transactions priced at floor | | (19) | | | 30 | | | (27) | | | 135 | |
____________________
(1)Includes the FG VIE recourse liabilities during the quarter, resulting from the Company's credit risk. The primary drivereffects of the Nine Months 2016 gain in fair value of FG VIEs assets and liabilities was net mark-to-market gains due to price appreciationspreads on the FG VIE assets during the nine months period resulting from improvements inboth the underlying collateral.asset classes and the Company’s own credit spread.
Fair Value Gains (Losses) on CCS
The decrease fair Fair value losses on CCS in third quarter 2023 and nine months 2023 were primarily due to a tightening in market spreads. Fair value gains on CCS in third quarter 2022 and nine 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's CCS for Third Quarter 2017Company records the present value of future installment premiums, and Nine Months 2017 comparedare mainly due to changes in the exchange rate of the pound sterling and, to a lesser extent, the euro relative to the prior year comparable periods was a resultU.S. dollar. Approximately 70% and 74% of improvementsgross premiums receivable, net of commissions payable as of September 30, 2023 and December 31, 2022, respectively, are denominated in observed market pricescurrencies other than the U.S. dollar, primarily the pound sterling and euro. Premiums on securities referencingEuropean 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 Company.
Other Operating Expenses
Other operating expenses in Third Quarter 2017 decreased by $7 million due primarily to lower acquisition related expenses and higher rent expense and accelerated amortization of leasehold improvements in 2016foreign exchange rates as a result of the Company's move of its New York offices. Other operating expenses in Nine Months 2017 decreased by $5 million compared to Nine Months 2016 due primarily to lower rent and depreciation expense, offset in part by higher compensation expense.balance sheet dates.
Provision for Income Tax
Provision for Income Taxes and Effective TaxForeign Exchange Rates
U.S. Dollar Per Foreign Currency
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 | | As of September 30, 2022 | | As of December 31, 2021 |
Pound sterling | $1.220 | | $1.208 | | $1.117 | | $1.353 |
Euro | $1.057 | | $1.071 | | $0.980 | | $1.137 |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (dollars in millions) |
Total provision (benefit) for income taxes | $ | 105 |
| | $ | 1 |
| | $ | 157 |
| | $ | 62 |
|
Effective tax rate | 33.6 | % | | 0.3 | % | | 18.8 | % | | 8.3 | % |
The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the U.K. blended marginal corporate tax rate of 19.25% unless taxed as a U.S. controlled foreign corporation, and no taxes for the Company’s Bermuda subsidiaries, which consist of Assured Guaranty Re Ltd. (AG Re), Assured Guaranty Re Overseas Ltd. (AGRO), and Cedar Personnel Ltd., unless subject to U.S tax by election or as a U.S. controlled foreign corporation. AGE the
Company’s U.K. subsidiary, had previously elected under U.S. Internal Revenue Code Section 953(d) to be taxed as a U.S. company. In January 2017, AGE filed a request with the U.S. Internal Revenue Service (IRS) to revoke the election, which was approved in May 2017. As a result of the revocation of the Section 953(d) election, AGE will no longer be liable to pay future U.S. taxes beginning in 2017.
In April 2017, the Company received a final letter from the IRS to close the audit for the period of 2009 - 2012, with no additional findings or changes, and as a result the Company released previously recorded uncertain tax position reserves and accrued interest of approximately $37 million in the second quarter of 2017. The Company’s overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. In each of the periods presented, the portion of taxable income from each jurisdiction varied. For Third Quarter 2017 and Nine Months 2017, the non-taxable book to tax differences were mostly consistent compared with the prior period, with the exception of the benefit on bargain purchase gains from the MBIA UK Acquisition and the CIFG Acquisition in January 2017 and July 2016, respectively.
Non-GAAP Financial Measures
To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, theThe Company discloses bothboth: (i) financial measures determined in accordance with GAAPGAAP; 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 Assured Guaranty.the Company.
By disclosing non-GAAP financial measures, theThe Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally. Assured Guaranty believes its presentation of non-GAAP financial measures along with the effect on those measures of consolidating FG VIEs (FG VIE consolidation), provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.
GAAP requires the Company to consolidate certain variable interest entities (VIEs) that have issued debt obligations insured bywhere it is deemed to be the Company. However,primary beneficiary which include:
•FG VIEs, which the Company does not own such VIEs and where its exposure is limited to its obligation under itsthe financial guaranty insurance contract. Therefore, thecontract, and
•CIVs in which certain subsidiaries invest.
The Company had previously removeddiscloses the effect of FG VIE and CIV consolidation that is embedded in its calculation of itseach non-GAAP financial measures. However, since fourth quarter 2016, basedmeasure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the SEC's May 2016 complianceCompany of each of the consolidated FG VIEs and disclosure interpretations,CIVs is reflected primarily in the results of the Insurance segment.
Management of the Company no longer removes the effect of FG VIE consolidation from its publicly disclosed non-GAAP financial measures. This change affects the Company's calculation of operating income (non-GAAP), operating ROE, non-GAAP operating shareholders’ equity and non-GAAP adjusted book value. Wherever possible, the Company has separately disclosed the effect of FG VIE consolidation. The prior-year quarterly non-GAAP financial measures have been updated to reflect the revised calculation.
Management and theAGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses these core financial measures in its decision makingdecision-making process for and in its calculation of certain components of management compensation.
Many investors, analysts and The financial news reporters use non-GAAPmeasures that the Company uses to help determine compensation are: (1) adjusted operating shareholders’ equity,income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; 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 measuremeasures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. ManyManagement also believes that many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.
Many investors, analysts and financial news reporters also use non-GAAP adjusted book value,operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate AGL’s share price and as the basisCompany’s capital adequacy.
Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation, enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.
The core financial measures that the Company uses to help determine compensation are: (1) non-GAAP operating income, adjusted to remove the effect of FG VIE consolidation, (2) non-GAAP operating shareholders' equity, adjusted to
remove the effect of FG VIE consolidation, (3) growth in non-GAAP adjusted book value per share, adjusted to remove the effect of FG VIE consolidation, and (4) PVP.
The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. ATo the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.
Adjusted Operating Income (non-GAAP)
Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the underwritingoperating results and financial condition of the Company and presents the results of operations of the Company excluding the fair value adjustments on credit derivatives and CCS that are not expected to result in economic gain or loss, as well as other adjustments described below. Management adjustsCompany. Adjusted operating income further by removing FG VIE consolidation to arrive at its core operating income measure. Operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:
| |
1) | Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.
2) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss. |
| |
2) | Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company's credit spreads, and other market factors and are not expected to result in an economic gain or loss.
|
| |
3) | 3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt and other market factors and are not expected to result in an economic gain or loss. |
| |
4) | Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves.4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize. |
| |
5) | 5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. |
See “— Results of Operations — Reconciliation to GAAP” for a reconciliation of Net Income (Loss)net income (loss) attributable to AGL to adjusted operating income (loss).
to Operating Income (non-GAAP)
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Net income (loss) | $ | 208 |
| | $ | 479 |
| | $ | 678 |
| | $ | 684 |
|
Less pre-tax adjustments: | | | | | | | |
Realized gains (losses) on investments | 7 |
| | (2 | ) | | 54 |
| | (6 | ) |
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | 55 |
| | (4 | ) | | 60 |
| | (32 | ) |
Fair value gains (losses) on CCS | (4 | ) | | (23 | ) | | (4 | ) | | (50 | ) |
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | 18 |
| | (2 | ) | | 49 |
| | (21 | ) |
Total pre-tax adjustments | 76 |
| | (31 | ) | | 159 |
| | (109 | ) |
Less tax effect on pre-tax adjustments | (24 | ) | | 13 |
| | (51 | ) | | 37 |
|
Operating income (non-GAAP) | $ | 156 |
| | $ | 497 |
| | $ | 570 |
| | $ | 756 |
|
| | | | | | | |
Gain (loss) related to FG VIE consolidation (net of tax provision (benefit) of $(1), $(6), $5 and $(2)) included in operating income | $ | (1 | ) | | $ | (11 | ) | | $ | 9 |
| | $ | (4 | ) |
Non-GAAPAdjusted Operating Shareholders’ Equity and Non-GAAP Adjusted Book Value
Management believes that non-GAAPadjusted operating shareholders’ equity is a useful measure because it presents the equity of the Company excludingexcludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss, along with other adjustments described below. Management adjusts non-GAAP operating shareholders’ equity further by removing FG VIE consolidation to arrive at its core operating shareholders' equity and core adjusted book value.loss.
Non-GAAP operating shareholders’ equity is the basis of the calculation of non-GAAP adjusted book value (see below). Non-GAAP Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:
| |
1) | Elimination of non-credit-impairment1) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. |
| |
2) | 2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. |
| |
3) | Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss.
|
3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore would not recognize an economic gain or loss.
4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
Management uses non-GAAP adjusted book value, further adjusted forto remove the effect of FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in non-GAAP adjustedAdjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that non-GAAP adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company’s in-force premiums and revenues net of expected losses. Non-GAAP adjustedAdjusted book value is non-GAAPadjusted operating shareholders’ equity, as defined above, further adjusted for the following:
| |
1) | 1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods. |
| |
2) | Addition of the net present value of estimated net future revenue on non-financial guaranty contracts.2) Addition of the net present value of estimated net future revenue. See below. |
| |
3) | Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the expected future net earned premiums, net of expected losses to be expensed, which are not reflected in GAAP equity.
|
3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.
4) Elimination of the tax asset or liabilityeffects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
The unearned premiums and revenues included in non-GAAP adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current non-GAAP adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
Reconciliation of Shareholders’ Equity Attributable to AGL
to Non-GAAPAdjusted Operating Shareholders’ Equity and Adjusted Book Value
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| After-Tax | | Per Share | | After-Tax | | Per Share |
| (dollars in millions, except share amounts) |
Shareholders’ equity attributable to AGL | $ | 5,252 | | | $ | 90.84 | | | $ | 5,064 | | | $ | 85.80 | |
Less pre-tax adjustments: | | | | | | | |
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 38 | | | 0.66 | | | (71) | | | (1.21) | |
Fair value gains (losses) on CCS | 12 | | | 0.21 | | | 47 | | | 0.80 | |
Unrealized gain (loss) on investment portfolio | (609) | | | (10.52) | | | (523) | | | (8.86) | |
Less taxes | 76 | | | 1.31 | | | 68 | | | 1.15 | |
Adjusted operating shareholders’ equity | 5,735 | | | 99.18 | | | 5,543 | | | 93.92 | |
Pre-tax adjustments: | | | | | | | |
Less: Deferred acquisition costs | 158 | | | 2.73 | | | 147 | | | 2.48 | |
Plus: Net present value of estimated net future revenue | 190 | | | 3.28 | | | 157 | | | 2.66 | |
Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed | 3,404 | | | 58.88 | | | 3,428 | | | 58.10 | |
Plus taxes | (612) | | | (10.58) | | | (602) | | | (10.22) | |
Adjusted book value | $ | 8,559 | | | $ | 148.03 | | | 8,379 | | | 141.98 | |
| | | | | | | |
Gain (loss) related to FG VIE and CIV consolidation included in: | | | | | | | |
Adjusted operating shareholders’ equity (net of tax provision (benefit) of $1 and $4) | $ | 4 | | | $ | 0.06 | | | $ | 17 | | | $ | 0.28 | |
Adjusted book value (net of tax provision (benefit) of $(1) and $3) | (2) | | | (0.03) | | | 11 | | | 0.19 | |
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| After-Tax | | Per Share | | After-Tax | | Per Share |
| (dollars in millions, except per share amounts) |
Shareholders’ equity | $ | 6,878 |
| | $ | 58.32 |
| | $ | 6,504 |
| | $ | 50.82 |
|
Less pre-tax adjustments: | | | | | | | |
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (129 | ) | | (1.09 | ) | | (189 | ) | | (1.48 | ) |
Fair value gains (losses) on CCS | 58 |
| | 0.49 |
| | 62 |
| | 0.48 |
|
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | 506 |
| | 4.29 |
| | 316 |
| | 2.47 |
|
Less taxes | (147 | ) | | (1.24 | ) | | (71 | ) | | (0.54 | ) |
Non-GAAP operating shareholders’ equity | 6,590 |
| | 55.87 |
| | 6,386 |
| | 49.89 |
|
Pre-tax adjustments: | | | | | |
| | |
|
Less: Deferred acquisition costs | 106 |
| | 0.89 |
| | 106 |
| | 0.83 |
|
Plus: Net present value of estimated net future revenue | 144 |
| | 1.22 |
| | 136 |
| | 1.07 |
|
Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed | 3,091 |
| | 26.21 |
| | 2,922 |
| | 22.83 |
|
Plus taxes | (899 | ) | | (7.63 | ) | | (832 | ) | | (6.50 | ) |
Non-GAAP adjusted book value | $ | 8,820 |
| | $ | 74.78 |
| | $ | 8,506 |
| | $ | 66.46 |
|
| | | | | | | |
Gain (loss) related to FG VIE consolidation included in non-GAAP operating shareholders' equity (net of tax (provision) benefit of $(1) and $4) | $ | 3 |
| | $ | 0.01 |
| | (7 | ) | | (0.06 | ) |
| | | | | | | |
Gain (loss) related to FG VIE consolidation included in non-GAAP adjusted book value (net of tax benefit of $7 and $12) | $ | (13 | ) | | $ | (0.11 | ) | | (24 | ) | | (0.18 | ) |
Net Present Value of Estimated Net Future Revenue
Management believes that this amount is a useful measure because it enables an evaluation of the present value of estimated net future estimated revenue for non-financial guaranty insurance contracts. There is no corresponding GAAP financial measure. This amount represents the net present value of estimated future revenue from the Company’s non-financial guarantythese contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes, for contracts without expected economic losses, and istaxes.
Future installment premiums are discounted at 6%. Estimated netthe approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure.
PVP or Present Value of New Business Production
Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production forin the CompanyInsurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as premium supplements and additional installment premiumpremiums and fees on existing contracts as to which(which may result from supplements or fees or from the issuer has the right to call thenot calling an insured obligation but has not exercised such right, whether in insurance or credit derivative contractthe Company projected would be called), regardless of form, which management believes GAAP gross written premiums and the netchanges in fair value of credit derivative premiums received and receivable portion of net realized gains and other settlements on credit derivatives (Credit Derivative Realized Gains (Losses)) do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums.
Future installment premiums are discounted in each case, at 6%.the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as Loss Mitigation Securities. The
discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk freerisk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of
the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction.
Actual future earned or writteninstallment premiums and Credit Derivative Realized Gains (Losses) may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.
Reconciliation of GWP to PVP
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter 2023 | | Third Quarter 2022 |
| Public Finance | | Structured Finance | | | | Public Finance | | Structured Finance | | |
| U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total | | U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total |
| (in millions) |
GWP | $ | 29 | | | $ | (5) | | | $ | 15 | | | $ | 1 | | | $ | 40 | | | $ | 54 | | | $ | 44 | | | $ | (2) | | | $ | (2) | | | $ | 94 | |
Less: Installment GWP and other GAAP adjustments (1) | 6 | | | (5) | | | 15 | | | 1 | | | 17 | | | — | | | 44 | | | (3) | | | (2) | | | 39 | |
Upfront GWP | 23 | | | — | | | — | | | — | | | 23 | | | 54 | | | — | | | 1 | | | — | | | 55 | |
Plus: Installment premiums and other (2) | 7 | | | 2 | | | 12 | | | 2 | | | 23 | | | 3 | | | 37 | | | — | | | — | | | 40 | |
PVP | $ | 30 | | | $ | 2 | | | $ | 12 | | | $ | 2 | | | $ | 46 | | | $ | 57 | | | $ | 37 | | | $ | 1 | | | $ | — | | | $ | 95 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter 2017 | | Third Quarter 2016 |
| Public Finance | | Structured Finance | | | | Public Finance | | Structured Finance | | |
| U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total | | U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total |
| (in millions) |
GWP | $ | 37 |
| | $ | 8 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 45 |
| | $ | 24 |
| | $ | (9 | ) | | $ | 1 |
| | $ | 0 |
| | $ | 16 |
|
Less: Installment GWP and other GAAP adjustments(1) | 2 |
| | 8 |
| | 1 |
| | (1 | ) | | 10 |
| | (1 | ) | | (9 | ) | | 1 |
| | 0 |
| | (9 | ) |
Upfront GWP | 35 |
| | — |
| | — |
| | — |
| | 35 |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
Plus: Installment premium PVP | 4 |
| | 4 |
| | 0 |
| | — |
| | 8 |
| | 0 |
| | 2 |
| | 23 |
| | — |
| | 25 |
|
PVP | $ | 39 |
| | $ | 4 |
| | $ | 0 |
| | $ | — |
| | $ | 43 |
| | $ | 25 |
| | $ | 2 |
| | $ | 23 |
| | $ | — |
| | $ | 50 |
|
| | | Nine Months 2017 | | Nine Months 2016 | | Nine Months 2023 | | Nine 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 | $ | 132 |
| | $ | 92 |
| | $ | 3 |
| | $ | 8 |
| | $ | 235 |
| | $ | 72 |
| | $ | 6 |
| | $ | (5 | ) | | $ | (2 | ) | | $ | 71 |
| GWP | $ | 129 | | | $ | 40 | | | $ | 48 | | | $ | 4 | | | $ | 221 | | | $ | 160 | | | $ | 66 | | | $ | 4 | | | $ | (1) | | | $ | 229 | |
Less: Installment GWP and other GAAP adjustments(1) | (1 | ) | | 90 |
| | 3 |
| | (2 | ) | | 90 |
| | (17 | ) | | 6 |
| | (5 | ) | | (2 | ) | | (18 | ) | |
Less: Installment GWP and other GAAP adjustments (1) | | Less: Installment GWP and other GAAP adjustments (1) | 55 | | | 37 | | | 48 | | | 4 | | | 144 | | | — | | | 66 | | | 1 | | | (1) | | | 66 | |
Upfront GWP | 133 |
| | 2 |
| | — |
| | 10 |
| | 145 |
| | 89 |
| | — |
| | 0 |
| | — |
| | 89 |
| Upfront GWP | 74 | | | 3 | | | — | | | — | | | 77 | | | 160 | | | — | | | 3 | | | — | | | 163 | |
Plus: Installment premium PVP | 4 |
| | 56 |
| | 5 |
| | 2 |
| | 67 |
| | 0 |
| | 16 |
| | 24 |
| | — |
| | 40 |
| |
Plus: Installment premiums and other (2) | | Plus: Installment premiums and other (2) | 55 | | | 35 | | | 42 | | | 40 | | | 172 | | | 3 | | | 67 | | | — | | | 7 | | | 77 | |
PVP | $ | 137 |
| | $ | 58 |
| | $ | 5 |
| | $ | 12 |
| | $ | 212 |
| | $ | 89 |
| | $ | 16 |
| | $ | 24 |
| | $ | — |
| | $ | 129 |
| PVP | $ | 129 | | | $ | 38 | | | $ | 42 | | | $ | 40 | | | $ | 249 | | | $ | 163 | | | $ | 67 | | | $ | 3 | | | $ | 7 | | | $ | 240 | |
___________________
| |
(1) | (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 any cancellations of assumed reinsurance contracts, 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. Nine months 2023 and 2022 also include the present value of future premiums and fees associated with other guaranties written by the Company that, under GAAP, are accounted for under Accounting Standards Codification (ASC) 460, Guarantees.
Insured Portfolio
Financial Guaranty Exposure
The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.
The following table presents the financial guaranty portfolio by asset classsector, net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or FG VIE consolidation). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated) from par and principal or interest (debt service) outstanding, which amounts are included in the investment portfolio, because it manages such securities as investments and not insurance exposure. As of September 30, 2017 and December 31, 2016, the Company excluded $2.0 billion and $2.1 billion, respectively, of net par related to loss mitigation securities (which are mostly BIG), and other loss mitigation strategies.
Financial Guaranty Portfolio
Net Par Outstanding and Average Internal Rating by Sector
| | | | | | | | | | | | | | | | | | |
| | As of September 30, 2023 | | | | As of December 31, 2022 |
| | | | | | | | |
Sector | | (dollars in millions) |
Public finance: | | | | | | | | |
U.S. public finance: | | | | | | | | |
General obligation | | $ | 73,322 | | | | | $ | 71,868 | | | |
Tax backed | | 32,982 | | | | | 33,752 | | | |
Municipal utilities | | 28,541 | | | | | 26,436 | | | |
Transportation | | 20,602 | | | | | 19,688 | | | |
Healthcare | | 11,842 | | | | | 11,304 | | | |
Infrastructure finance | | 8,808 | | | | | 6,955 | | | |
Higher education | | 7,256 | | | | | 7,137 | | | |
Housing revenue | | 1,141 | | | | | 959 | | | |
Investor-owned utilities | | 329 | | | | | 332 | | | |
Renewable energy | | 171 | | | | | 180 | | | |
Other public finance | | 979 | | | | | 1,025 | | | |
Total U.S. public finance | | 185,973 | | | | | 179,636 | | | |
Non-U.S public finance: | | | | | | | | |
Regulated utilities | | 19,207 | | | | | 17,855 | | | |
Infrastructure finance | | 14,031 | | | | | 13,915 | | | |
Sovereign and sub-sovereign | | 9,403 | | | | | 9,526 | | | |
Renewable energy | | 2,021 | | | | | 2,086 | | | |
Pooled infrastructure | | 1,086 | | | | | 1,081 | | | |
Total non-U.S. public finance | | 45,748 | | | | | 44,463 | | | |
Total public finance | | 231,721 | | | | | 224,099 | | | |
Structured finance: | | | | | | | | |
U.S. structured finance: | | | | | | | | |
Life insurance transactions | | 4,663 | | | | | 3,879 | | | |
RMBS | | 1,817 | | | | | 1,956 | | | |
Pooled corporate obligations | | 595 | | | | | 625 | | | |
Financial products | | 447 | | | | | 453 | | | |
Consumer receivables | | 342 | | | | | 437 | | | |
Other structured finance | | 1,111 | | | | | 878 | | | |
Total U.S. structured finance | | 8,975 | | | | | 8,228 | | | |
Non-U.S. structured finance: | | | | | | | | |
Pooled corporate obligations | | 339 | | | | | 344 | | | |
RMBS | | 248 | | | | | 263 | | | |
Other structured finance | | 550 | | | | | 324 | | | |
Total non-U.S. structured finance | | 1,137 | | | | | 931 | | | |
Total structured finance | | 10,112 | | | | | 9,159 | | | |
Total net par outstanding | | $ | 241,833 | | | | | $ | 233,258 | | | |
|
| | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
Sector | | Net Par Outstanding | | Avg. Rating | | Net Par Outstanding | | Avg. Rating |
| | (dollars in millions) |
Public finance: | | | | | | |
| | |
U.S.: | | | | | | |
| | |
General obligation | | $ | 93,904 |
| | A- | | $ | 107,717 |
| | A |
Tax backed | | 45,795 |
| | A- | | 49,931 |
| | A- |
Municipal utilities | | 33,883 |
| | A- | | 37,603 |
| | A |
Transportation | | 17,876 |
| | A- | | 19,403 |
| | A- |
Healthcare | | 9,856 |
| | A | | 11,238 |
| | A |
Higher education | | 8,911 |
| | A | | 10,085 |
| | A |
Infrastructure finance | | 4,185 |
| | BBB+ | | 3,769 |
| | BBB+ |
Housing | | 1,221 |
| | A- | | 1,559 |
| | A- |
Investor-owned utilities | | 587 |
| | BBB+ | | 697 |
| | BBB+ |
Other public finance—U.S. | | 1,998 |
| | A | | 2,796 |
| | A |
Total public finance—U.S. | | 218,216 |
| | A- | | 244,798 |
| | A |
Non-U.S.: | | | | | | |
| | |
Infrastructure finance | | 18,803 |
| | BBB | | 10,731 |
| | BBB |
Regulated utilities | | 15,847 |
| | BBB+ | | 9,263 |
| | BBB+ |
Pooled infrastructure | | 1,553 |
| | AAA | | 1,513 |
| | AAA |
Other public finance | | 6,524 |
| | A | | 4,874 |
| | A |
Total public finance—non-U.S. | | 42,727 |
| | BBB+ | | 26,381 |
| | BBB+ |
Total public finance | | 260,943 |
| | A- | | 271,179 |
| | A- |
Structured finance: | | | | | | |
| | |
U.S.: | | | | | | |
| | |
RMBS | | 5,064 |
| | BBB- | | 5,637 |
| | BBB- |
Insurance securitizations | | 2,308 |
| | AA- | | 2,308 |
| | A+ |
Pooled corporate obligations | | 2,042 |
| | AA- | | 10,050 |
| | AAA |
Consumer receivables | | 1,630 |
| | A- | | 1,652 |
| | BBB+ |
Financial products | | 1,432 |
| | AA- | | 1,540 |
| | AA- |
Commercial receivables | | 162 |
| | BBB | | 230 |
| | BBB- |
Other structured finance—U.S. | | 504 |
| | A+ | | 640 |
| | AA- |
Total structured finance—U.S. | | 13,142 |
| | A- | | 22,057 |
| | A+ |
Non-U.S.: | | | | | | |
| | |
RMBS | | 639 |
| | A- | | 604 |
| | A- |
Pooled corporate obligations | | 371 |
| | AA- | | 1,535 |
| | AA |
Commercial receivables | | 309 |
| | A | | 356 |
| | BBB+ |
Other structured finance | | 363 |
| | A | | 587 |
| | AA |
Total structured finance—non-U.S. | | 1,682 |
| | A | | 3,082 |
| | AA- |
Total structured finance | | 14,824 |
| | A- | | 25,139 |
| | AA- |
Total net par outstanding | | $ | 275,767 |
| | A- | | $ | 296,318 |
| | A |
The following tables set forthSecond-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s netobligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty portfolio by internal rating.
Financial Guaranty Portfolio by Internal Rating
Asinsurer 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 September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Public Finance U.S. | | Public Finance Non-U.S. | | Structured Finance U.S | | Structured Finance Non-U.S | | Total |
Rating Category | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % |
| | (dollars in millions) |
AAA | | $ | 915 |
| | 0.4 | % | | $ | 2,523 |
| | 5.9 | % | | $ | 2,333 |
| | 17.8 | % | | $ | 419 |
| | 25.0 | % | | $ | 6,190 |
| | 2.2 | % |
AA | | 33,614 |
| | 15.4 |
| | 301 |
| | 0.7 |
| | 4,853 |
| | 36.9 |
| | 76 |
| | 4.5 |
| | 38,844 |
| | 14.1 |
|
A | | 124,332 |
| | 57.0 |
| | 13,657 |
| | 32.0 |
| | 1,778 |
| | 13.5 |
| | 268 |
| | 15.9 |
| | 140,035 |
| | 50.8 |
|
BBB | | 52,021 |
| | 23.8 |
| | 23,965 |
| | 56.1 |
| | 724 |
| | 5.5 |
| | 762 |
| | 45.3 |
| | 77,472 |
| | 28.1 |
|
BIG | | 7,334 |
| | 3.4 |
| | 2,281 |
| | 5.3 |
| | 3,454 |
| | 26.3 |
| | 157 |
| | 9.3 |
| | 13,226 |
| | 4.8 |
|
Total net par outstanding (1) | | $ | 218,216 |
| | 100.0 | % | | $ | 42,727 |
| | 100.0 | % | | $ | 13,142 |
| | 100.0 | % | | $ | 1,682 |
| | 100.0 | % | | $ | 275,767 |
| | 100.0 | % |
_____________________
| |
(1) | The September 30, 2017 amounts include $13.0 billion of net par from the MBIA UK Acquisition. Please refer to Part I, Item 1, Financial Statements, Note 13, Reinsurance2023 and Other Monoline Exposures, for the effect of commutations on net par outstanding. |
Financial Guaranty Portfolio by Internal Rating
As of December 31, 2016 2022 was $4.2 billion and $4.3 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were not investment grade was $16 million and $19 million as of September 30, 2023 and December 31, 2022, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Public Finance U.S. | | Public Finance Non-U.S. | | Structured Finance U.S | | Structured Finance Non-U.S | | Total |
Rating Category | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % | | Net Par Outstanding | | % |
| | (dollars in millions) |
AAA | | $ | 2,066 |
| | 0.8 | % | | $ | 2,221 |
| | 8.4 | % | | $ | 9,757 |
| | 44.2 | % | | $ | 1,447 |
| | 47.0 | % | | $ | 15,491 |
| | 5.2 | % |
AA | | 46,420 |
| | 19.0 |
| | 170 |
| | 0.6 |
| | 5,773 |
| | 26.2 |
| | 127 |
| | 4.1 |
| | 52,490 |
| | 17.7 |
|
A | | 133,829 |
| | 54.7 |
| | 6,270 |
| | 23.8 |
| | 1,589 |
| | 7.2 |
| | 456 |
| | 14.8 |
| | 142,144 |
| | 48.0 |
|
BBB | | 55,103 |
| | 22.5 |
| | 16,378 |
| | 62.1 |
| | 879 |
| | 4.0 |
| | 759 |
| | 24.6 |
| | 73,119 |
| | 24.7 |
|
BIG | | 7,380 |
| | 3.0 |
| | 1,342 |
| | 5.1 |
| | 4,059 |
| | 18.4 |
| | 293 |
| | 9.5 |
| | 13,074 |
| | 4.4 |
|
Total net par outstanding | | $ | 244,798 |
| | 100.0 | % | | $ | 26,381 |
| | 100.0 | % | | $ | 22,057 |
| | 100.0 | % | | $ | 3,082 |
| | 100.0 | % | | $ | 296,318 |
| | 100.0 | % |
Exposure to Puerto Rico
The Company hashad insured exposure to general obligation 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 $5.0$1.1 billion net par outstanding as of September 30, 2017,2023, all of which arewas rated BIG. In recent years, Puerto Rico has experienced significant general fund budget deficits and a challenging economic environment. More recently, Hurricane Maria created additional challenges for Puerto Rico. Beginning on January 1, 2016, a number of Puerto Rico creditsexposures have defaulted on bond payments, and the Company has now paid claims on mostall of its Puerto Rico credits as shown inexposures except the table "Puerto Rico Net Par Outstanding" below. Additional information about recent developments inMunicipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the individual credits insured byUniversity of Puerto Rico (U of PR).
The following tables present information in respect of the Company may be foundPuerto Rico exposures to supplement the disclosures and discussions provided in Part I, Item 1, Financial Statements, Note 4,3, Outstanding Exposure.
The Company groups its Puerto Rico exposure into three categories:
Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year. The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company. Prior to the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico asserting that Puerto Rico's attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief.
Other Public Corporations. The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.
Exposure to Puerto Rico (1)by Company
As of September 30, 20172023
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Par Outstanding | | |
| | AGM | | AGC | |
AG Re | | Eliminations (2) | | Total Net Par Outstanding (3) | | Gross Par Outstanding |
| | (in millions) |
Commonwealth Constitutionally Guaranteed | | | | | | | | | | | | |
Commonwealth of Puerto Rico - General Obligation Bonds (4) (5) | | $ | 670 |
| | $ | 343 |
| | $ | 407 |
| | $ | (1 | ) | | $ | 1,419 |
| | $ | 1,469 |
|
Puerto Rico Public Buildings Authority (PBA) (4) | | 9 |
| | 141 |
| | 0 |
| | (9 | ) | | 141 |
| | 146 |
|
Public Corporations - Certain Revenues Potentially Subject to Clawback | | | | | | | | | | | | |
Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) (4) (5) | | 252 |
| | 511 |
| | 204 |
| | (85 | ) | | 882 |
| | 913 |
|
PRHTA (Highway revenue) (4) (5) | | 358 |
| | 93 |
| | 44 |
| | — |
| | 495 |
| | 556 |
|
Puerto Rico Convention Center District Authority (PRCCDA) (4) | | — |
| | 152 |
| | — |
| | — |
| | 152 |
| | 152 |
|
Puerto Rico Infrastructure Financing Authority (PRIFA) (4) | | — |
| | 17 |
| | 1 |
| | — |
| | 18 |
| | 18 |
|
Other Public Corporations | | | | | | | | | | | | |
Puerto Rico Electric Power Authority (PREPA) (4) (5) | | 547 |
| | 73 |
| | 233 |
| | — |
| | 853 |
| | 870 |
|
Puerto Rico Aqueduct and Sewer Authority (PRASA) | | — |
| | 284 |
| | 89 |
| | — |
| | 373 |
| | 373 |
|
Municipal Finance Agency (MFA) | | 221 |
| | 54 |
| | 85 |
| | — |
| | 360 |
| | 416 |
|
Puerto Rico Sales Tax Financing Corporation (COFINA) (4) (5) | | 263 |
| | — |
| | 9 |
| | — |
| | 272 |
| | 272 |
|
University of Puerto Rico (U of PR) | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
|
Total exposure to Puerto Rico | | $ | 2,320 |
| | $ | 1,669 |
| | $ | 1,072 |
| | $ | (95 | ) | | $ | 4,966 |
| | $ | 5,186 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Par Outstanding | | |
| | AGM | | AGC | | AG Re | | Eliminations (1) | | Total Net Par Outstanding | | Gross Par Outstanding |
| | (in millions) |
Defaulted Puerto Rico Exposures | | | | | | | | | | | | |
PREPA | | $ | 377 | | | $ | 67 | | | $ | 180 | | | $ | — | | | $ | 624 | | | $ | 634 | |
Total Defaulted | | 377 | | | 67 | | | 180 | | | — | | | 624 | | | 634 | |
Resolved Puerto Rico Exposures | | | | | | | | | | | | |
PRHTA (Transportation revenue) (2) | | 14 | | | 157 | | | 87 | | | (14) | | | 244 | | | 244 | |
PRHTA (Highway revenue) (2) | | 109 | | | 11 | | | 8 | | | — | | | 128 | | | 128 | |
Total Resolved | | 123 | | | 168 | | | 95 | | | (14) | | | 372 | | | 372 | |
Other Puerto Rico Exposures | | | | | | | | | | | | |
MFA (3) | | 84 | | | 6 | | | 18 | | | — | | | 108 | | | 114 | |
PRASA and U of PR (3) | | — | | | 1 | | | — | | | — | | | 1 | | | 1 | |
Total Other | | 84 | | | 7 | | | 18 | | | — | | | 109 | | | 115 | |
Total exposure to Puerto Rico | | $ | 584 | | | $ | 242 | | | $ | 293 | | | $ | (14) | | | $ | 1,105 | | | $ | 1,121 | |
___________________
| |
(1) | The September 30, 2017 amounts include $389 million (which comprises $36 million of General Obligation Bonds, $134 million of PREPA, $144 million PRHTA (Highways revenue), and $75 million of MFA) related to 2017 commutations of previously ceded business. Please refer to Note 13, Reinsurance and Other Monoline Exposures, for more information. Please refer to Part I, Item 1, Financial Statements, Note 13, Reinsurance and Other Monoline Exposures, for more information. |
| |
(2) | (1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary. |
| |
(3) | Includes exposure to capital appreciation bonds with a current aggregate net par outstanding of $25 million and a fully accreted net par at maturity of $56 million. Of these amounts, current net par of $19 million and fully accreted net par at maturity of $50 million relate to the COFINA, current net par of $4 million and fully accreted net par at maturity of $4 million relate to the PRHTA, and current net par of $2 million and fully accreted net par at maturity of $2 million relate to the Commonwealth General Obligation Bonds. |
| |
(4) | As of the date of this filing, the Company has paid claims on these credits.
|
| |
(5) | As of the date of this filing, the seven-member federal financial oversight board established by PROMESA has certified a filing under Title III of PROMESA for these credits. |
(2) Resolved pursuant to the 2022 Puerto Rico Resolutions. Consideration received under the HTA Plan related to the remaining insured 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 table showstables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of interest and principaldebt service when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only pay the shortfall between the principal and interestdebt service due in any given period and the amount paid by the obligors.
Amortization Schedule
of Net Par Outstanding of Puerto Rico
As of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Scheduled Net Par Amortization |
| 2023 (4Q) | 2024 (1Q) | 2024 (2Q) | 2024 (3Q) | 2024 (4Q) | 2025 | 2026 | 2027 | 2028 - 2032 | 2033 - 2037 | 2038 - 2041 | Total |
| (in millions) |
Defaulted Puerto Rico Exposures | | | | | | | | | | | | |
PREPA | $ | — | | $ | — | | $ | — | | $ | 93 | | $ | — | | $ | 68 | | $ | 105 | | $ | 105 | | $ | 240 | | $ | 13 | | $ | — | | $ | 624 | |
Total Defaulted | — | | — | | — | | 93 | | — | | 68 | | 105 | | 105 | | 240 | | 13 | | — | | 624 | |
Resolved Puerto Rico Exposures | | | | | | | | | | | | |
PRHTA (Transportation revenue) | — | | — | | — | | — | | — | | — | | — | | — | | — | | 121 | | 123 | | 244 | |
PRHTA (Highway revenue) | — | | — | | — | | — | | — | | — | | — | | — | | 27 | | 101 | | — | | 128 | |
Total Resolved | — | | — | | — | | — | | — | | — | | — | | — | | 27 | | 222 | | 123 | | 372 | |
Other Puerto Rico Exposures | | | | | | | | | | | | |
MFA | — | | — | | — | | 16 | | — | | 16 | | 35 | | 15 | | 26 | | — | | — | | 108 | |
PRASA and U of PR | — | | — | | — | | 1 | | — | | — | | — | | — | | — | | — | | — | | 1 | |
Total Other Puerto Rico Exposures | — | | — | | — | | 17 | | — | | 16 | | 35 | | 15 | | 26 | | — | | — | | 109 | |
| | | | | | | | | | | | |
Total | $ | — | | $ | — | | $ | — | | $ | 110 | | $ | — | | $ | 84 | | $ | 140 | | $ | 120 | | $ | 293 | | $ | 235 | | $ | 123 | | $ | 1,105 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Scheduled Net Par Amortization |
| 2017 (4Q) | 2018 (1Q) | 2018 (2Q) | 2018 (3Q) | 2018 (4Q) | 2019 | 2020 | 2021 | 2022 - 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 - 2047 | Total |
| (in millions) |
Commonwealth Constitutionally Guaranteed | | | | | | | | | | | | | | |
Commonwealth of Puerto Rico - General Obligation Bonds | $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 78 |
| $ | 0 |
| $ | 87 |
| $ | 141 |
| $ | 15 |
| $ | 226 |
| $ | 278 |
| $ | 489 |
| $ | 105 |
| $ | — |
| $ | 1,419 |
|
PBA | — |
| — |
| — |
| — |
| — |
| 3 |
| 5 |
| 13 |
| 24 |
| 42 |
| 54 |
| — |
| — |
| 141 |
|
Public Corporations - Certain Revenues Potentially Subject to Clawback | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
PRHTA (Transportation revenue) | 0 |
| 0 |
| 0 |
| 38 |
| — |
| 32 |
| 25 |
| 18 |
| 119 |
| 156 |
| 295 |
| 194 |
| 5 |
| 882 |
|
PRHTA (Highway revenue) | — |
| — |
| — |
| 20 |
| — |
| 21 |
| 22 |
| 35 |
| 106 |
| 73 |
| 218 |
| — |
| — |
| 495 |
|
PRCCDA | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 19 |
| 133 |
| — |
| — |
| 152 |
|
PRIFA | — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| — |
| 2 |
| — |
| — |
| 14 |
| — |
| 18 |
|
Other Public Corporations | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
PREPA | — |
| — |
| — |
| 5 |
| — |
| 26 |
| 48 |
| 28 |
| 390 |
| 330 |
| 26 |
| 0 |
| — |
| 853 |
|
PRASA | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 53 |
| 57 |
| — |
| 2 |
| 261 |
| 373 |
|
MFA | — |
| — |
| — |
| 57 |
| — |
| 55 |
| 45 |
| 40 |
| 130 |
| 33 |
| — |
| — |
| — |
| 360 |
|
COFINA | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (1 | ) | (1 | ) | (2 | ) | (5 | ) | (7 | ) | 34 |
| 102 |
| 152 |
| 272 |
|
U of PR | — |
| — |
| — |
| 0 |
| — |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1 |
| — |
| — |
| 1 |
|
Total | $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 200 |
| $ | 0 |
| $ | 223 |
| $ | 285 |
| $ | 147 |
| $ | 1,045 |
| $ | 981 |
| $ | 1,250 |
| $ | 417 |
| $ | 418 |
| $ | 4,966 |
|
Amortization Schedule
of Net Debt Service Outstanding of Puerto Rico
As of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Scheduled Net Debt Service Amortization |
| 2023 (4Q) | 2024 (1Q) | 2024 (2Q) | 2024 (3Q) | 2024 (4Q) | 2025 | 2026 | 2027 | 2028 - 2032 | 2033 - 2037 | 2038 - 2041 | Total |
| (in millions) |
Defaulted Puerto Rico Exposures | | | | | | | | | | | | |
PREPA | $ | 3 | | $ | 12 | | $ | 3 | | $ | 105 | | $ | 3 | | $ | 92 | | $ | 126 | | $ | 122 | | $ | 273 | | $ | 14 | | $ | — | | $ | 753 | |
Total Defaulted | 3 | | 12 | | 3 | | 105 | | 3 | | 92 | | 126 | | 122 | | 273 | | 14 | | — | | 753 | |
Resolved Puerto Rico Exposures | | | | | | | | | | | | |
PRHTA (Transportation revenue) | — | | 6 | | — | | 6 | | — | | 13 | | 13 | | 12 | | 65 | | 173 | | 140 | | 428 | |
PRHTA (Highway revenue) | — | | 3 | | — | | 3 | | — | | 7 | | 7 | | 7 | | 61 | | 115 | | — | | 203 | |
Total Resolved | — | | 9 | | — | | 9 | | — | | 20 | | 20 | | 19 | | 126 | | 288 | | 140 | | 631 | |
Other Puerto Rico Exposures | | | | | | | | | | | | |
MFA | — | | 3 | | — | | 19 | | — | | 20 | | 39 | | 17 | | 28 | | — | | — | | 126 | |
PRASA and U of PR | — | | — | | — | | 1 | | — | | — | | — | | — | | — | | — | | — | | 1 | |
Total Other Puerto Rico Exposures | — | | 3 | | — | | 20 | | — | | 20 | | 39 | | 17 | | 28 | | — | | — | | 127 | |
| | | | | | | | | | | | |
Total | $ | 3 | | $ | 24 | | $ | 3 | | $ | 134 | | $ | 3 | | $ | 132 | | $ | 185 | | $ | 158 | | $ | 427 | | $ | 302 | | $ | 140 | | $ | 1,511 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Scheduled Net Debt Service Amortization |
| 2017 (4Q) | 2018 (1Q) | 2018 (2Q) | 2018 (3Q) | 2018 (4Q) | 2019 | 2020 | 2021 | 2022 - 2026 | 2027 - 2031 | 2032 - 2036 | 2037 - 2041 | 2042 - 2047 | Total |
| (in millions) |
Commonwealth Constitutionally Guaranteed | | | | | | | | | | | | | | |
Commonwealth of Puerto Rico - General Obligation Bonds | $ | 0 |
| $ | 37 |
| $ | 0 |
| $ | 114 |
| $ | 0 |
| $ | 156 |
| $ | 206 |
| $ | 74 |
| $ | 494 |
| $ | 475 |
| $ | 595 |
| $ | 111 |
| $ | — |
| $ | 2,262 |
|
PBA | — |
| 4 |
| — |
| 4 |
| — |
| 10 |
| 12 |
| 20 |
| 54 |
| 58 |
| 62 |
| — |
| — |
| 224 |
|
Public Corporations - Certain Revenues Potentially Subject to Clawback | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
PRHTA (Transportation revenue) | 0 |
| 23 |
| 0 |
| 61 |
| — |
| 76 |
| 67 |
| 59 |
| 306 |
| 308 |
| 403 |
| 229 |
| 5 |
| 1,537 |
|
PRHTA (Highway revenue) | — |
| 13 |
| — |
| 33 |
| — |
| 47 |
| 46 |
| 58 |
| 198 |
| 147 |
| 253 |
| — |
| — |
| 795 |
|
PRCCDA | — |
| 3 |
| — |
| 3 |
| — |
| 7 |
| 7 |
| 7 |
| 35 |
| 50 |
| 152 |
| — |
| — |
| 264 |
|
PRIFA | — |
| 0 |
| — |
| 2 |
| — |
| 1 |
| 1 |
| 1 |
| 6 |
| 4 |
| 4 |
| 16 |
| — |
| 35 |
|
Other Public Corporations | | | | |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
PREPA | 3 |
| 18 |
| 3 |
| 22 |
| 3 |
| 65 |
| 87 |
| 63 |
| 528 |
| 380 |
| 29 |
| 0 |
| — |
| 1,201 |
|
PRASA | — |
| 10 |
| — |
| 10 |
| — |
| 19 |
| 19 |
| 19 |
| 147 |
| 129 |
| 68 |
| 70 |
| 327 |
| 818 |
|
MFA | — |
| 9 |
| — |
| 67 |
| — |
| 70 |
| 58 |
| 50 |
| 157 |
| 36 |
| — |
| — |
| — |
| 447 |
|
COFINA | 0 |
| 6 |
| 0 |
| 6 |
| 0 |
| 13 |
| 13 |
| 13 |
| 70 |
| 68 |
| 102 |
| 162 |
| 160 |
| 613 |
|
U of PR | — |
| 0 |
| — |
| 0 |
| — |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1 |
| — |
| — |
| 1 |
|
Total | $ | 3 |
| $ | 123 |
| $ | 3 |
| $ | 322 |
| $ | 3 |
| $ | 464 |
| $ | 516 |
| $ | 364 |
| $ | 1,995 |
| $ | 1,655 |
| $ | 1,669 |
| $ | 588 |
| $ | 492 |
| $ | 8,197 |
|
Financial Guaranty Exposure to Residential Mortgage-Backed SecuritiesU.S. RMBS
The tables below providefollowing table presents information on the risk ratings and certain other risk characteristicsin respect of the Company’s financial guaranty insurance, FG VIEU.S. RMBS exposures to supplement the disclosures and credit derivative RMBS exposures. As of September 30, 2017,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 2%0.8% of the total net par outstanding, and BIG U.S. RMBS represent 22%18.5% of total BIG net par outstanding. Please refer to Part I, Item 1, Financial Statements, Note 5, Expected Loss to be Paid, for a discussion of expected losses to be paid on U.S. RMBS exposures.
Distribution of U.S. RMBS by Rating and Type of Exposureoutstanding as of September 30, 20172023.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Ratings: | | Prime First Lien | | Alt-A First Lien | | Option ARMs | | Subprime First Lien | | Second Lien | | Total Net Par Outstanding |
| | (in millions) |
AAA | | $ | 5 |
| | $ | 153 |
| | $ | 26 |
| | $ | 1,325 |
| | $ | 0 |
| | $ | 1,509 |
|
AA | | 17 |
| | 217 |
| | 32 |
| | 246 |
| | — |
| | 512 |
|
A | | 10 |
| | — |
| | 0 |
| | 82 |
| | 0 |
| | 92 |
|
BBB | | 11 |
| | 0 |
| | — |
| | 69 |
| | 1 |
| | 81 |
|
BIG | | 115 |
| | 511 |
| | 63 |
| | 1,080 |
| | 1,100 |
| | 2,869 |
|
Total exposures | | $ | 157 |
| | $ | 881 |
| | $ | 121 |
| | $ | 2,803 |
| | $ | 1,101 |
| | $ | 5,064 |
|
Distribution of U.S. RMBS by Year Insured and Type of Exposure as of September 30, 20172023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year insured: | | Prime First Lien | | Alt-A First Lien | | Option ARMs | | Subprime First Lien | | Second Lien | | Total Net Par Outstanding |
| | (in millions) |
2004 and prior | | $ | 8 | | | $ | 7 | | | $ | — | | | $ | 311 | | | $ | 10 | | | $ | 336 | |
2005 | | 21 | | | 112 | | | 14 | | | 180 | | | 44 | | | 371 | |
2006 | | 22 | | | 23 | | | 1 | | | 38 | | | 96 | | | 180 | |
2007 | | — | | | 184 | | | 16 | | | 562 | | | 138 | | | 900 | |
2008 | | — | | | — | | | — | | | 30 | | | — | | | 30 | |
Total exposures | | $ | 51 | | | $ | 326 | | | $ | 31 | | | $ | 1,121 | | | $ | 288 | | | $ | 1,817 | |
| | | | | | | | | | | | |
Exposures rated BIG | | $ | 31 | | | $ | 195 | | | $ | 14 | | | $ | 610 | | | $ | 106 | | | $ | 956 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Year insured: | | Prime First Lien | | Alt-A First Lien | | Option ARMs | | Subprime First Lien | | Second Lien | | Total Net Par Outstanding |
| | (in millions) |
2004 and prior | | $ | 21 |
| | $ | 39 |
| | $ | 13 |
| | $ | 847 |
| | $ | 56 |
| | $ | 975 |
|
2005 | | 78 |
| | 312 |
| | 27 |
| | 158 |
| | 229 |
| | 804 |
|
2006 | | 59 |
| | 60 |
| | 21 |
| | 610 |
| | 318 |
| | 1,069 |
|
2007 | | — |
| | 471 |
| | 59 |
| | 1,116 |
| | 498 |
| | 2,144 |
|
2008 | | — |
| | — |
| | — |
| | 71 |
| | — |
| | 71 |
|
Total exposures | | $ | 157 |
| | $ | 881 |
| | $ | 121 |
| | $ | 2,803 |
| | $ | 1,101 |
| | $ | 5,064 |
|
Exposure to the U.S. Virgin Islands
The Company has $498 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rates $224 million BIG. The $274 million USVI net par the Company rates investment grade is comprised primarily of bonds secured by a lien on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum. The $224 million BIG USVI net par comprises (a) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.
Hurricane Irma caused significant damage in St. John and St. Thomas, while Hurricane Maria made landfall on St. Croix as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and substantial damage to St. Croix’s businesses and infrastructure, including the power grid. The USVI is benefiting from the federal response to this year’s hurricanes and has made its debt service payments to date.
Exposure to Selected European Countries
The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal, Spain and Turkey (collectively, the Selected European Countries). The Company’s direct economic exposure to the Selected European Countries, based on par, is shown in the following tables, both gross and net of ceded reinsurance.
Gross Direct Economic Exposure
to Selected European Countries(1)
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Hungary | | Italy | | Portugal | | Spain | | Turkey | | Total |
| (in millions) |
Sub-sovereign exposure(2) | $ | 214 |
| | $ | 1,217 |
| | $ | 76 |
| | $ | 474 |
| | $ | — |
| | $ | 1,981 |
|
Non-sovereign exposure(3) | 125 |
| | 465 |
| | — |
| | — |
| | 200 |
| | 790 |
|
Total | $ | 339 |
| | $ | 1,682 |
| | $ | 76 |
| | $ | 474 |
| | $ | 200 |
| | $ | 2,771 |
|
Total BIG | $ | 262 |
| | $ | — |
| | $ | 76 |
| | $ | 474 |
| | $ | — |
| | $ | 812 |
|
Net Direct Economic Exposure
to Selected European Countries(1)
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Hungary | | Italy | | Portugal | | Spain | | Turkey | | Total |
| (in millions) |
Sub-sovereign exposure(2) | $ | 214 |
| | $ | 1,034 |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 1,779 |
|
Non-sovereign exposure(3) | 125 |
| | 449 |
| | — |
| | — |
| | 200 |
| | 774 |
|
Total | $ | 339 |
| | $ | 1,483 |
| | $ | 75 |
| | $ | 456 |
| | $ | 200 |
| | $ | 2,553 |
|
Total BIG | $ | 262 |
| | $ | — |
| | $ | 75 |
| | $ | 456 |
| | $ | — |
| | $ | 793 |
|
____________________
| |
(1) | While exposures are shown in U.S. dollars, the obligations are in various currencies, primarily euros.
|
| |
(2) | Sub-sovereign exposure in Selected European Countries includes transactions backed by receivables from, or supported by, sub-sovereigns, which are governmental or government-backed entities other than the ultimate governing body of the country.
|
| |
(3) | Non-sovereign exposure in Selected European Countries includes debt of regulated utilities, RMBS and diversified payment rights (DPR) securitizations.
|
The $200 million net insured par exposure in Turkey is to DPR securitizations sponsored by a major Turkish bank. These DPR securitizations were established outside of Turkey and involve payment orders in U.S. dollars, pounds sterling and euros from persons outside of Turkey to beneficiaries in Turkey who are customers of the sponsoring bank. The sponsoring bank's correspondent banks have agreed to remit all such payments to a trustee-controlled account outside Turkey, where debt service payments for the DPR securitization are given priority over payments to the sponsoring bank.
The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $46 million to Selected European Countries in transactions with $0.7 billion of net par outstanding.
Non-Financial Guaranty Insurance
The Company provided capital relief triple-X excess of loss life reinsurance on approximately $540 million of exposure as of September 30, 2017 and $390 million as of December 31, 2016. The triple-X excess of loss life reinsurance exposure is expected to increase to approximately $1.2 billion prior to September 30, 2036.
In addition, the Company started providing reinsurance on aircraft RVI policies in the first quarter of 2017 and had net exposure of $116 million to such reinsurance as of September 30, 2017.
The capital relief triple-X excess of loss life reinsurance and aircraft residual value reinsurance are all rated investment grade internally. This non-financial guaranty exposure has a similar risk profile to the Company's other structured finance investment grade exposure written in financial guaranty form.
Monoline and Reinsurer Exposures
The Company has exposure to other monolines and reinsurers through reinsurance arrangements (both as a ceding company and as an assuming company) and in "second-to-pay" transactions. A number of the monolines and reinsurers to which the Company has exposure have experienced financial distress and, as a result, have been downgraded by the rating agencies. In addition, state insurance regulators have intervened with respect to some of these distressed insurers, in some instances limiting the amount of claim payments they are permitted to pay currently in cash.
Ceded par outstanding represents the portion of insured risk ceded to external reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily
liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table below are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves, all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers in the table below post collateral on terms negotiated with the Company. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of September 30, 2017 was approximately $123 million.
Assumed par outstanding represents the amount of par assumed by the Company from third party insurers and reinsurers, including other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.
In "second-to-pay" transactions, the Company provides insurance on an obligation that is already insured by another financial guarantor. In that case, if the underlying obligor and the financial guarantor both fail to pay an amount scheduled to be paid, the Company would be obligated to pay. The Company underwrites these transactions based on the underlying obligation, without regard to the financial guarantor. Please refer to Part I, Item 1, Financial Statements, Note 13, Reinsurance and Other Monoline Exposures, for additional information.
Reinsurance and Other Exposures to Monolines
|
| | | | | | | | | | | | |
| | Par Outstanding |
| | As of September 30, 2017 |
Reinsurer | | Ceded Par Outstanding (1) | | Assumed Par Outstanding | | Second-to- Pay Insured Par Outstanding (2) |
| | (in millions) |
Reinsurers rated investment grade: | | | | | | |
National Public Finance Guarantee Corporation | | $ | — |
| | $ | 3,245 |
| | $ | 2,730 |
|
Subtotal | | — |
| | 3,245 |
| | 2,730 |
|
Reinsurers rated BIG or not rated: | | | | | | |
American Overseas Reinsurance Company Limited (3) | | 2,445 |
| | — |
| | — |
|
Syncora Guarantee Inc. (3) | | 1,994 |
| | 674 |
| | 1,156 |
|
ACA Financial Guaranty Corp. | | 208 |
| | — |
| | 10 |
|
Ambac Assurance Corporation and Ambac Assurance UK Limited | | 112 |
| | 4,902 |
| | 1,927 |
|
MBIA Insurance Corporation | | — |
| | 137 |
| | 565 |
|
Financial Guaranty Insurance Company and FGIC UK Limited | | — |
| | 275 |
| | 821 |
|
Ambac Assurance Corp. Segregated Account | | — |
| | 567 |
| | 51 |
|
Subtotal | | 4,759 |
| | 6,555 |
| | 4,530 |
|
Other (3) | | 52 |
| | 111 |
| | 410 |
|
Total | | $ | 4,811 |
| | $ | 9,911 |
| | $ | 7,670 |
|
____________________
| |
(1) | Of the total ceded par to reinsurers rated BIG or not rated, $305 million is rated BIG. |
| |
(2) | The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG, and/or not rated, is $774 million. |
| |
(3) | The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of September 30, 2017 was approximately $123 million. |
Liquidity and Capital Resources
Liquidity Requirements and Sources
AGL and its U.S. Holding Company SubsidiariesCompanies
AGL directly owns (i) AG Re, an insurance company domiciled in Bermuda; and (ii) AGUS, a U.S. holding company with public debt outstanding. AGUS directly owns: (i) AGC, an insurance company domiciled in Maryland; and (ii) AGMH, a U.S. holding company with public debt outstanding. AGMH directly owns AGM, an insurance subsidiary domiciled in New York. AGUS and AGMH are collectively referred to as the U.S. Holding Companies.
Sources and Uses of Funds
The liquidity of AGL AGUS and AGMHits U.S. Holding Companies is largely dependent on dividends and other distributions from their operating subsidiaries (see — Insurance Subsidiaries — Distributions from Insurance Subsidiaries below for a description of dividend and other capital distribution restrictions) and their access to external financing. The operating liquidity requirements of these entities includeAGL and the payment of operating expenses,U.S. Holding Companies include:
•principal and interest on debt issued by AGUS and AGMH, and AGMH;
•dividends on AGL'sAGL’s common shares. shares; and
•the payment of operating expenses.
AGL and its holding company subsidiariesU.S. Holding Companies may also require liquidity to to:
•make periodic capital investments in their operating subsidiaries, subsidiaries;
•fund acquisitions of new businesses;
•purchase or redeem the Company’s outstanding Company debtdebt; or in the case of AGL, to
•repurchase itsAGL’s common shares pursuant to itsAGL’s share repurchase authorization.
In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one 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 “—Dividends From Subsidiaries” below Overview— Key Business Strategies, Capital Management” above for a discussioninformation on common share repurchases.
Long-Term Debt Obligations
The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the dividend restrictionsCompany’s Annual Report on Form 10-K for the year ended December 31, 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, 2023 | | As of December 31, 2022 |
| | | | | (in millions) |
| Effective Interest Rate | | Final Maturity | | Principal Amount |
AGUS - long-term debt | | | | | | | |
5% Senior Notes | 5.00% | | 2024 | | $ | — | | | $ | 330 | |
6.125% Senior Notes | 6.125% | | 2028 | | 350 | | | — | |
3.15% Senior Notes | 3.15% | | 2031 | | 500 | | | 500 | |
7% Senior Notes | 6.40% | | 2034 | | 200 | | | 200 | |
3.6% Senior Notes | 3.60% | | 2051 | | 400 | | | 400 | |
Series A Enhanced Junior Subordinated Debentures (1) | 3 month CME Term SOFR +2.64% | | 2066 | | 150 | | | 150 | |
AGUS long-term debt | | | | | 1,600 | | | 1,580 | |
AGUS - intercompany loans from: | | | | | | | |
AGC and AGM | 3.50% | | 2029 | | 250 | | | 250 | |
AGRO (2) | 5.00% | | 2028 | | 20 | | | 20 | |
AGUS intercompany loans | | | | | 270 | | | 270 | |
Total AGUS long-term debt and intercompany loans | | | | | 1,870 | | | 1,850 | |
AGMH | | | | | | | |
Junior Subordinated Debentures (3) | 6.40% | | 2066 | | 300 | | | 300 | |
Total AGMH long-term debt | | | | | 300 | | | 300 | |
AGMH’s long-term debt purchased by AGUS (4) | | | | | (154) | | | (154) | |
U.S. Holding Company long-term debt | | | | | $ | 2,016 | | | $ | 1,996 | |
____________________
(1) Until June 30, 2023, the Series A Enhanced Junior Subordinated Debentures paid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Three-Month Chicago Mercantile Exchange (CME) Term Secured Overnight Finance Rate (SOFR).
(2) In the second quarter of 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 CME Term SOFR plus 2.33%.
(4) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS redeemed $330 million of 5% Senior Notes due 2024. See Item 1. Financial Statements, Note 11, Long-Term Debt.
From time to time, AGL and its insurance companysubsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. The commitment under the revolving credit facility terminates on October 25, 2033 (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 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 2022 Annual Report on Form 10-K, Part II, Item 8. Financial Statements and Supplementary Data, Note 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 $1,450 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, 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Assets | | | |
Fixed-maturity securities (1) | $ | 20 | | | $ | 4 | |
Investment in Sound Point | — | | | 419 | |
Short-term investments, other invested assets and cash | 23 | | | 56 | |
Receivables from affiliates (2) | 69 | | | 95 | |
Receivable from U.S. Holding Companies | 70 | | | — | |
Other assets | 3 | | | 64 | |
Liabilities | | | |
Long-term debt | — | | | 1,693 | |
Loans payable to affiliates | — | | | 270 | |
Payable to affiliates (2) | 13 | | | 40 | |
Payable to AGL | — | | | 70 | |
Other liabilities | 6 | | | 123 | |
____________________
(1) As of September 30, 2023, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.2 years and 4.1 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
| | | | | | | | | | | |
| Nine Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Revenues | | | |
Gain on sale of asset management subsidiaries (1) | $ | — | | | $ | 258 | |
Other income | 1 | | | 6 | |
Expenses | | | |
Interest expense | — | | | 73 | |
Other expenses | 35 | | | 51 | |
Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (34) | | | 140 | |
Net income (loss) | (34) | | | 105 | |
____________________
(1) Excludes a $3 million write off of goodwill reported by a subsidiary of AGUS.
The following table presents significant cash flow items for AGL and the U.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities.
AGL and U.S. Holding Company SubsidiariesCompanies
SignificantSelected Cash Flow Items
| | | | | | | | | | | |
| Nine Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Dividends received from subsidiaries (1) | $ | 193 | | | $ | 153 | |
Interest paid | — | | | (55) | |
Investments in subsidiaries | — | | | (13) | |
Dividends paid to AGL | — | | | (140) | |
Dividends paid | (51) | | | — | |
Repurchases of common shares (2) | (90) | | | — | |
Issuance of long-term debt, net of issuance costs | — | | | 345 | |
Redemption of debt | — | | | (330) | |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Intercompany sources (uses): | | | | | | | |
Distributions to AGL from: | | | | | | | |
AG Re | $ | 45 |
| | $ | 35 |
| | $ | 125 |
| | $ | 85 |
|
AGUS | 70 |
| | 120 |
| | 390 |
| | 223 |
|
Distributions to AGUS from: | | | | | | | |
AGC | 15 |
| | 15 |
| | 66 |
| | 38 |
|
AGMH | 55 |
| | 55 |
| | 128 |
| | 158 |
|
Distributions from AGUS to: | | | | | | | |
AGMH | — |
| | — |
| | (25 | ) | | — |
|
Distributions to AGMH from: | | | | | | | |
AGM | 63 |
| | 65 |
| | 142 |
| | 192 |
|
External sources (uses): | | | | | | | |
Dividends paid to AGL shareholders | (17 | ) | | (17 | ) | | (53 | ) | | (52 | ) |
Repurchases of common shares(1) | (80 | ) | | (55 | ) | | (431 | ) | | (190 | ) |
Interest paid by AGMH and AGUS | (8 | ) | | (7 | ) | | (53 | ) | | (55 | ) |
Purchase of AGMH's debt by AGUS | (22 | ) | | — |
| | (27 | ) | | — |
|
____________________ | |
(1) | Please refer to Part I, Item 1, Financial Statements, Note 17, Shareholders' Equity, for additional information about share repurchases and authorizations. |
(1) AGL’s dividends include dividends from AGUS.
Distributions From Subsidiaries
The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance company subsidiaries as dividends or other distributions will be a major source of its liquidity. The insurance company subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. Dividend restrictions applicable to AGC, AGM, MAC and to AG Re, are described in Part I,(2) See Item 1, Financial Statements, Note 11, Insurance Company Regulatory Requirements.14, Shareholders’ Equity, for additional information about share repurchases and authorizations.
Dividend restrictions by insurance company subsidiary are as follows:
The maximum amount available during 2017 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $196 million. Of such $196 million, $54 million is available for distribution in the fourth quarter of 2017.
The maximum amount available during 2017 for AGC to distribute as ordinary dividends is approximately $107 million. Of such $107 million, approximately $41 million is available for distribution in the fourth quarter of 2017.
Through August 25, 2017, MAC paid $36 million in dividends based on dividend capacity at that point. After the $250 million share repurchase on September 25, 2017, MAC has no additional dividend capacity for the remainder of 2017.
Based on the applicable law and regulations, in 2017 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $128 million without the prior approval of the Bermuda Monetary Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $314 million as of September 30, 2017. Such dividend capacity is further limited by the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements. As of September 30, 2017, AG Re had unencumbered assets of approximately $572 million.
Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.
On June 30, 2016, MAC obtained approval from
For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the NYDFS to repay its $300 million surplus note to MAC Holdings and its $100 million surplus note (plus accrued interest) to AGM. Accordingly,Company’s Annual Report on June 30, 2016, MAC transferred cash and/or marketable securities to (i) MAC Holdings in an aggregate amount equal to $300 million, and (ii) AGM in an aggregate amount of $102.5 million. MAC Holdings, upon receipt of such $300 million from MAC, distributed cash and/or marketable securities in an aggregate amount of $300 million to its shareholders, AGM and AGC, in proportion to their respective 61% and 39% ownership interests such that AGM received $182 million and AGC received $118 million.Form 10-K for the year ended December 31, 2022.
On November 25, 2016, the New York Superintendent approved AGM's request to repurchase 125 of its shares of common stock from its direct parent, AGMH, for approximately $300 million. AGM implemented the stock redemption plan in December 2016. Each share repurchased by AGM was retired and ceased to be an authorized share. Pursuant to AGM's Amended and Restated Charter, the par value of AGM's remaining shares of common stock issued and outstanding increased automatically in order to maintain AGM's total paid-in capital at $15 million and its authorized capital at $20 million.
On August 17, 2017, the New York Superintendent approved MAC's request to repurchase 64,322 of its shares of
common stock from its direct parent, MAC Holdings, for approximately $250 million. MAC implemented the stock
redemption plan on September 25, 2017, transferring approximately $104 million in cash and $146 million in marketable
securities to MAC Holdings, which then distributed such assets to its shareholders, AGM and AGC, in proportion to their
respective 61% and 39% ownership interests, such that AGM received approximately $152 million ($6 million in cash and
$146 million in securities) and AGC received approximately $98 million (all in cash). Each share repurchased by MAC was
retired and ceased to be an authorized share. Pursuant to MAC's Amended and Restated Charter, the par value of MAC's
remaining shares of common stock issued and outstanding increased automatically in order to maintain MAC's total paid-in
capital at $15 million.
External FinancingLong-Term Debt Obligations
From time to time, AGLThe Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sourcesSupplementary Data, Note 12, Long-Term Debt and Credit Facilities, of financing may or may not be available to the Company,Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and if available, the cost of such financing may not be acceptable to the Company.— Guarantor and U.S. Holding Companies' Summarized Financial Information, below.
U.S. Holding Companies
Long-Term Debt and Intercompany Loans
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of September 30, 2023 | | As of December 31, 2022 |
| | | | | (in millions) |
| Effective Interest Rate | | Final Maturity | | Principal Amount |
AGUS - long-term debt | | | | | | | |
5% Senior Notes | 5.00% | | 2024 | | $ | — | | | $ | 330 | |
6.125% Senior Notes | 6.125% | | 2028 | | 350 | | | — | |
3.15% Senior Notes | 3.15% | | 2031 | | 500 | | | 500 | |
7% Senior Notes | 6.40% | | 2034 | | 200 | | | 200 | |
3.6% Senior Notes | 3.60% | | 2051 | | 400 | | | 400 | |
Series A Enhanced Junior Subordinated Debentures (1) | 3 month CME Term SOFR +2.64% | | 2066 | | 150 | | | 150 | |
AGUS long-term debt | | | | | 1,600 | | | 1,580 | |
AGUS - intercompany loans from: | | | | | | | |
AGC and AGM | 3.50% | | 2029 | | 250 | | | 250 | |
AGRO (2) | 5.00% | | 2028 | | 20 | | | 20 | |
AGUS intercompany loans | | | | | 270 | | | 270 | |
Total AGUS long-term debt and intercompany loans | | | | | 1,870 | | | 1,850 | |
AGMH | | | | | | | |
Junior Subordinated Debentures (3) | 6.40% | | 2066 | | 300 | | | 300 | |
Total AGMH long-term debt | | | | | 300 | | | 300 | |
AGMH’s long-term debt purchased by AGUS (4) | | | | | (154) | | | (154) | |
U.S. Holding Company long-term debt | | | | | $ | 2,016 | | | $ | 1,996 | |
____________________
(1) Until June 30, 2023, the Series A Enhanced Junior Subordinated Debentures paid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Three-Month Chicago Mercantile Exchange (CME) Term Secured Overnight Finance Rate (SOFR).
(2) In the second quarter of 2023, the final maturity of the AGRO loan was extended from 2023 to 2028 and Guaranteesthe 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 CME Term SOFR plus 2.33%.
(4) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS redeemed $330 million of 5% Senior Notes due 2024. See Item 1. Financial Statements, Note 11, Long-Term Debt.
From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. SuchThe commitment under the revolving credit facility terminates on October 25, 20182033 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable Federal short-term or mid-term interest rate as the case may be, as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts
of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility.
In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fundFor more information, see the acquisition of MAC. During 2016, AGUS repaid $20 million in outstanding principal as well as accruedCompany’s 2022 Annual Report on Form 10-K, Part II, Item 8. Financial Statements and unpaid interest,Supplementary Data, Note 12, Long-Term Debt and the parties agreed to extend the maturity date of the loan from May 2017 to November 2019. As of September 30, 2017, $70 million remained outstanding.Credit Facilities.
Furthermore, Guarantor and U.S. Holding Companies’ Summarized Financial Information
AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130$1,450 million aggregate principal amount of senior notes issued by AGUS and AGMH,the U.S. Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by AGUSthe U.S. Holding Companies, and AGMH,the intercompany loans. The following tables include summarized financial information for AGL and the U.S. Holding Companies, excluding their investments in each case, as describe under "Commitments and Contingencies -- Long-Term Debt Obligations" below.subsidiaries.
Cash and Investments | | | | | | | | | | | |
| As of September 30, 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Assets | | | |
Fixed-maturity securities (1) | $ | 20 | | | $ | 4 | |
Investment in Sound Point | — | | | 419 | |
Short-term investments, other invested assets and cash | 23 | | | 56 | |
Receivables from affiliates (2) | 69 | | | 95 | |
Receivable from U.S. Holding Companies | 70 | | | — | |
Other assets | 3 | | | 64 | |
Liabilities | | | |
Long-term debt | — | | | 1,693 | |
Loans payable to affiliates | — | | | 270 | |
Payable to affiliates (2) | 13 | | | 40 | |
Payable to AGL | — | | | 70 | |
Other liabilities | 6 | | | 123 | |
____________________
(1) As of September 30, 2017, AGL had $47 million in cash2023, weighted average durations of AGL’s and short-term investments. AGUS and AGMH had a total of $59 million in cash and short-term investments. In addition, the Company's U.S. holding companies have $80 million inHolding Companies’ fixed-maturity securities (excluding AGUS'AGUS’s investment in AGMH'sAGMH’s debt) were 9.2 years and 4.1 years, respectively.
(2) Represents receivable and payables with weighted average durationnon-guarantor subsidiaries.
| | | | | | | | | | | |
| Nine Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Revenues | | | |
Gain on sale of asset management subsidiaries (1) | $ | — | | | $ | 258 | |
Other income | 1 | | | 6 | |
Expenses | | | |
Interest expense | — | | | 73 | |
Other expenses | 35 | | | 51 | |
Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (34) | | | 140 | |
Net income (loss) | (34) | | | 105 | |
____________________
(1) Excludes a $3 million write off of 0.3 years.goodwill reported by a subsidiary of AGUS.
Insurance Company Subsidiaries
Liquidity of the insurance company subsidiaries is primarily used to pay for:
operating expenses,
claims on the insured portfolio,
posting of collateral in connection with credit derivatives and reinsurance transactions,
reinsurance premiums,
dividends to AGL, AGUS and/or AGMH, as applicable,
principal of and, where applicable, interest on surplus notes, and
capital investments in their own subsidiaries, where appropriate.
Management believes that its subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operatingThe following table presents significant cash flow including premium collectionsitems for AGL and coupon payments as well as scheduled maturitiesthe U.S. Holding Companies (other than investment income, operating expenses and paydownstaxes) related to distributions from their respective investment portfolios. The Company targets a balance of its most liquid assets including cashsubsidiaries and short-term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold temporarily impairedoutflows for debt securities until the date of anticipated recovery.
Beyond the next twelve months, the ability of the operating subsidiaries to declare and payservice, dividends may be influenced by a variety of factors, including market conditions, insurance regulations and rating agency capital requirements and general economic conditions.
Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option.capital management activities.
Payments made in settlement of the Company’s obligations arising from its insured portfolio may,AGL and often do, vary significantly from year-to-year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses.U.S. Holding Companies
Selected Cash Flow Items
Claims (Paid) Recovered
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) |
Public finance | $ | (222 | ) | | $ | (196 | ) | | $ | (251 | ) | | $ | (213 | ) |
Structured finance: | | | | | | | |
U.S. RMBS | 13 |
| | 5 |
| | 40 |
| | (100 | ) |
Other structured finance | 0 |
| | (23 | ) | | (14 | ) | | (47 | ) |
Structured finance | 13 |
| | (18 | ) | | 26 |
| | (147 | ) |
Claims (paid) recovered, net of reinsurance(1) | $ | (209 | ) | | $ | (214 | ) | | $ | (225 | ) | | $ | (360 | ) |
| | | | | | | | | | | |
| Nine Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Dividends received from subsidiaries (1) | $ | 193 | | | $ | 153 | |
Interest paid | — | | | (55) | |
Investments in subsidiaries | — | | | (13) | |
Dividends paid to AGL | — | | | (140) | |
Dividends paid | (51) | | | — | |
Repurchases of common shares (2) | (90) | | | — | |
Issuance of long-term debt, net of issuance costs | — | | | 345 | |
Redemption of debt | — | | | (330) | |
____________________
| |
(1) | Includes $3 million paid and $3 million paid for consolidated FG VIEs for Third Quarter 2017 and 2016, respectively, and $7 million paid and $9 million paid for consolidated FG VIEs for Nine Months 2017 and 2016, respectively. |
(1) AGL’s dividends include dividends from AGUS.
In addition, the Company has net par exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.0 billion, all of which are BIG. Puerto Rico has experienced significant general fund budget deficits in recent years. Beginning in 2016, the Commonwealth and certain related authorities and public corporations have defaulted on obligations to make payments on its debt. In addition to high debt levels, Puerto Rico faces a challenging economic environment. Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public corporations is set forth in Part I,(2) See Item 1, Financial Statements, Note 4, Outstanding Exposure.14, Shareholders’ Equity, for additional information about share repurchases and authorizations.
As of September 30, 2017, the Company had exposure of approximately $574 millionGenerally, dividends paid by a U.S. company to a long-term infrastructure project that was financed by bonds that mature prior to the expiration of the project concession. The Company expects the cash flows from the project to be sufficient to repay all of the debt over the life of the project concession, and also expects the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay claims when the debt matures from 2018 to 2022, and then recover from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such claim payments. However, the recovery of such amounts is uncertain and may take from 10 to 35 years, depending on the performance of the underlying collateral.
In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.
If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from amounts that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.
Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM andBermuda holding company are subject to early termination. However, early termination of a lease does not result30% withholding tax. After AGL became tax resident in a draw on the AGM policy ifU.K., it became subject to the tax-exempt entity makestax rules applicable to companies resident in the required termination payment. If allU.K., including the leases were to terminate earlybenefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the tax-exempt entities do not makeU.S. reduces or eliminates the required early termination payments, then AGM would be exposedU.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to possible liquidity claims on gross exposure of approximately $865 million as of September 30, 2017. To date, noneU.K. resident persons entitled to the benefits of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease defaulttreaty.
For more information, see also Part II, Item 8. Financial Statements and a claim on the AGM policy. At September 30, 2017, approximately $1.6 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have not resulted in any claims on AGM.
The termsSupplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivative Association, Inc. (ISDA) in order to provideAnnual Report on Form 10-K for payments on a scheduled "pay-as-you-go" basis and to replicate the terms of a traditional financial guaranty insurance policy. Some contracts the Company entered into as the credit protection seller, however, utilize standard ISDA settlement mechanics of cash settlement (i.e., a process to value the loss of market value of a reference obligation) or physical settlement (i.e., delivery of the reference obligation against payment of principal by the protection seller) in the event of a “credit event,” as defined in the relevant contract. Cash settlement or physical settlement generally requires the payment of a larger amount, prior to the maturity of the reference obligation, than would settlement on a “pay-as-you-go” basis.
The transaction documentation for $502 million of the CDS insured by AGC requires AGC to post collateral, in some cases subject to a cap, to secure its obligation to make payments under such contracts. As of September 30, 2017, AGC was posting $18 million of collateral to satisfy these requirements.
Consolidated Cash Flows
Consolidated Cash Flow Summary
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 |
| 2016 |
| (in millions) |
Net cash flows provided by (used in) operating activities before effects of FG VIE consolidation | $ | 150 |
| | $ | (153 | ) | | $ | 338 |
| | $ | (205 | ) |
Effect of FG VIE consolidation | 6 |
| | 11 |
| | 16 |
| | 16 |
|
Net cash flows provided by (used in) operating activities - reported | 156 |
| | (142 | ) | | 354 |
| | (189 | ) |
Net cash flows provided by (used in) investing activities before effects of FG VIE consolidation | (161 | ) | | (320 | ) | | 124 |
| | 382 |
|
Effect of FG VIE consolidation | 32 |
| | 25 |
| | 108 |
| | 551 |
|
Net cash flows provided by (used in) investing activities - reported | (129 | ) | | (295 | ) | | 232 |
| | 933 |
|
Net cash flows provided by (used in) financing activities before effects of FG VIE consolidation | (119 | ) | | (68 | ) | | (521 | ) | | (240 | ) |
Effect of FG VIE consolidation | (38 | ) | | (36 | ) | | (124 | ) | | (567 | ) |
Net cash flows provided by (used in) financing activities - reported (1) | (157 | ) | | (104 | ) | | (645 | ) | | (807 | ) |
Effect of exchange rate changes | 1 |
| | (1 | ) | | 4 |
| | (4 | ) |
Cash and restricted cash at beginning of period | 201 |
| | 641 |
| | 127 |
| | 166 |
|
Total cash and restricted cash at the end of the period | $ | 72 |
| | $ | 99 |
| | $ | 72 |
| | $ | 99 |
|
____________________
| |
(1) | Claims paid on consolidated FG VIEs are presented in the consolidated cash flow statements as a component of paydowns on FG VIE liabilities in financing activities as opposed to operating activities. |
Excluding net cash flows from consolidated FG VIEs, cash inflows from operating activities increased in Nine Months 2017 compared with Nine Months 2016 due primarily to lower net claim payments, commutation premiums received and higher premium collections on new business in 2017.
Investing activities were primarily net sales (purchases) of fixed-maturity and short-term investment securities. Investing cash flows in Nine Months 2017 and Nine Months 2016 include inflows of $117 million and $590 million from paydowns on FG VIE assets, respectively. The decrease in inflows from FG VIEs was due to the proceeds from a paydown of a large transaction in Nine Months 2016. In Nine Months 2017, cash acquired in the MBIA UK Acquisition was $95 million. Consideration paid for MBIA UK was in the form of Zohar II Notes. In Third Quarter 2016 the Company paid $435 million, net of cash acquired, to acquire CIFGH.
Financing activities consisted primarily of paydowns of FG VIE liabilities and share repurchases. Financing cash flows in Nine Months 2017 and Nine Months 2016 include outflows of $124 million and $567 million for FG VIEs, respectively. The decrease in outflows from FG VIEs was due to the paydown of a large transaction in Nine Months 2016. The remaining cash flows from financing activities relate mainly to share repurchases, which were $431 million and $190 million in Nine Months 2017 and Nine Months 2016, respectively.
From October 1, 2017 through November 2, 2017, the Company repurchased an additional $20 million of common shares. The Board of Directors authorized, on November 1, 2017, an additional $300 million of share repurchases As of November 2, 2017, the Company had remaining authorization to purchase common shares of $398 million. For more information about the Company's share repurchases and authorizations, please refer to Part I, Item 1, Financial Statements, Note 17, Shareholders' Equity.
Commitments and Contingencies
Leases
AGL and its subsidiaries lease office space and certain other items. Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed sinceyear ended December 31, 2016.2022.
Long-Term Debt Obligations
The Company has outstanding principal and interest paid on long-term debt were as follows:
Principal Outstanding
issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Interest Paid onSupplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and — Guarantor and U.S. Holding Companies' Summarized Financial Information, below.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Principal Amount | | Interest Paid |
| As of September 30, | | As of December 31, | | Third Quarter | | Nine Months |
| 2017 | | 2016 | | 2017 |
| 2016 | | 2017 | | 2016 |
| (in millions) |
AGUS | $ | 850 |
| | $ | 850 |
| | $ | 1 |
| | $ | — |
| | $ | 23 |
| | $ | 25 |
|
AGMH | 730 |
| | 730 |
| | 7 |
| | 7 |
| | 30 |
| | 30 |
|
AGM | 8 |
| | 9 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Purchased debt (1) | (28 | ) | | — |
| | 0 |
| | — |
| | 0 |
| | — |
|
Total | $ | 1,560 |
| | $ | 1,589 |
| | $ | 8 |
| | $ | 7 |
| | $ | 53 |
| | $ | 55 |
|
Long-Term Debt and Intercompany Loans
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of September 30, 2023 | | As of December 31, 2022 |
| | | | | (in millions) |
| Effective Interest Rate | | Final Maturity | | Principal Amount |
AGUS - long-term debt | | | | | | | |
5% Senior Notes | 5.00% | | 2024 | | $ | — | | | $ | 330 | |
6.125% Senior Notes | 6.125% | | 2028 | | 350 | | | — | |
3.15% Senior Notes | 3.15% | | 2031 | | 500 | | | 500 | |
7% Senior Notes | 6.40% | | 2034 | | 200 | | | 200 | |
3.6% Senior Notes | 3.60% | | 2051 | | 400 | | | 400 | |
Series A Enhanced Junior Subordinated Debentures (1) | 3 month CME Term SOFR +2.64% | | 2066 | | 150 | | | 150 | |
AGUS long-term debt | | | | | 1,600 | | | 1,580 | |
AGUS - intercompany loans from: | | | | | | | |
AGC and AGM | 3.50% | | 2029 | | 250 | | | 250 | |
AGRO (2) | 5.00% | | 2028 | | 20 | | | 20 | |
AGUS intercompany loans | | | | | 270 | | | 270 | |
Total AGUS long-term debt and intercompany loans | | | | | 1,870 | | | 1,850 | |
AGMH | | | | | | | |
Junior Subordinated Debentures (3) | 6.40% | | 2066 | | 300 | | | 300 | |
Total AGMH long-term debt | | | | | 300 | | | 300 | |
AGMH’s long-term debt purchased by AGUS (4) | | | | | (154) | | | (154) | |
U.S. Holding Company long-term debt | | | | | $ | 2,016 | | | $ | 1,996 | |
____________________
(1) In 2017, AGUS purchased $28 million principal amount of Junior Subordinated Debentures issued by AGMH.
Issued by AGUS:
7% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 for net proceeds of $197 million. AlthoughUntil June 30, 2023, the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge.
5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 for net proceeds of $495 million. The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of common shares of AGL.
Series A Enhanced Junior Subordinated Debentures. On December 20, 2006, AGUS issued $150 million of Debentures due 2066. The Debentures paid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Three-Month Chicago Mercantile Exchange (CME) Term Secured Overnight Finance Rate (SOFR).
(2) In the second quarter of 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 6.4% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month London Interbank Offered Rate (LIBOR) plus a margin equal to 2.38%5%. AGUS may select at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at
(3) If the then applicable rate. AGUS may not defer interest past the maturity date.
Issued by AGMH:
6 7/8% QUIBS. On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due December 15, 2101, which are callable without premium or penalty in whole or in part.
6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are callable without premium or penalty in whole or in part.
5.6% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part.
Junior Subordinated Debentures. On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.4%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at One-Month CME Term SOFR plus 2.33%.
(4) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.
On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS redeemed $330 million of 5% Senior Notes due 2024. See Item 1. Financial Statements, Note 11, Long-Term Debt.
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 floatingrevolving 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, 2033 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to one-month LIBOR plus 2.215% until repaid. AGMH may elect100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at one ormaturity. AGL must repay unpaid principal amounts
of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility.
For more times to deferinformation, see the Company’s 2022 Annual Report on Form 10-K, Part II, Item 8. Financial Statements and Supplementary Data, Note 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 $1,450 million aggregate principal amount of notes issued by the U.S. Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by the U.S. Holding Companies, and the intercompany loans. The following tables include summarized financial information for oneAGL and the U.S. Holding Companies, excluding their investments in subsidiaries.
| | | | | | | | | | | |
| As of September 30, 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Assets | | | |
Fixed-maturity securities (1) | $ | 20 | | | $ | 4 | |
Investment in Sound Point | — | | | 419 | |
Short-term investments, other invested assets and cash | 23 | | | 56 | |
Receivables from affiliates (2) | 69 | | | 95 | |
Receivable from U.S. Holding Companies | 70 | | | — | |
Other assets | 3 | | | 64 | |
Liabilities | | | |
Long-term debt | — | | | 1,693 | |
Loans payable to affiliates | — | | | 270 | |
Payable to affiliates (2) | 13 | | | 40 | |
Payable to AGL | — | | | 70 | |
Other liabilities | 6 | | | 123 | |
____________________
(1) As of September 30, 2023, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.2 years and 4.1 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
| | | | | | | | | | | |
| Nine Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Revenues | | | |
Gain on sale of asset management subsidiaries (1) | $ | — | | | $ | 258 | |
Other income | 1 | | | 6 | |
Expenses | | | |
Interest expense | — | | | 73 | |
Other expenses | 35 | | | 51 | |
Income (loss) before provision for income taxes and equity in earnings (losses) of investees | (34) | | | 140 | |
Net income (loss) | (34) | | | 105 | |
____________________
(1) Excludes a $3 million write off of goodwill reported by a subsidiary of AGUS.
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
Selected Cash Flow Items
| | | | | | | | | | | |
| Nine Months 2023 |
| AGL | | U.S. Holding Companies |
| (in millions) |
Dividends received from subsidiaries (1) | $ | 193 | | | $ | 153 | |
Interest paid | — | | | (55) | |
Investments in subsidiaries | — | | | (13) | |
Dividends paid to AGL | — | | | (140) | |
Dividends paid | (51) | | | — | |
Repurchases of common shares (2) | (90) | | | — | |
Issuance of long-term debt, net of issuance costs | — | | | 345 | |
Redemption of debt | — | | | (330) | |
____________________
(1) AGL’s dividends include dividends from AGUS.
(2) See Item 1, Financial Statements, Note 14, Shareholders’ Equity, for additional information about share repurchases and authorizations.
Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.
For more consecutiveinformation, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 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, 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 parent,
•reinsurance premiums,
•principal of, and interest periodson, surplus notes, where applicable, and
•capital investments in their own subsidiaries and in alternative investments, 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 to provide short-term liquidity for the payment of insurance claims it may make 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 September 30, 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, not exceed ten years. vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. For example, the Company made substantial claim payments in 2022 in connection with the resolution of certain Puerto Rico credits. The Company is continuing its efforts to resolve the one remaining unresolved Puerto Rico insured exposure that is in payment default, PREPA. The Company had $624 million net par outstanding to PREPA on September 30, 2023. As described in Item 1, Financial Statements, Note 3, Outstanding Exposure, in connection with the implementation of the GO/PBA Plan and the HTA Plan, certain insured bondholders elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and CVIs, as relevant, that constitute distributions under the GO/PBA Plan or HTA Plan. For those who made the election, distributions under the GO/PBA Plan and HTA Plan are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust, and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions under the GO/PBA Plan or HTA Plan, as applicable, are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest.
On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Company satisfied its obligations under such legacy insured bonds with respect to $108 million net par outstanding as of August 31, 2023, and the custodial trusts released to AGC and AGM New Recovery Bonds and/or CVIs with a fair value totaling $73 million as of August 31, 2023. Consequently, as of September 30, 2023, the Company had extinguished its exposure to Puerto Rico GO/PBA and had remaining net par outstanding for Puerto Rico HTA of $372 million, which consisted of bonds where the holders elected to receive custody receipts and exposures assumed from a third-party financial guarantor.
In connection with the completionacquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business (described below). In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.
If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this offering, AGMH entered into a replacement capital covenant forearly termination payment is funded from monies that were pre-funded and invested at the benefitclosing of personsthe leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that buy, hold or sell a specified seriesguaranteed the payment of AGMH long-term indebtedness ranking seniorthese unfunded strip coverage amounts to the debentures. Underlessor,
in the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or anyevent that a tax-exempt entity defaulted on its obligation to pay this portion of its subsidiariesearly termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.
Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $393 million as of September 30, 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 September 30, 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 beforeif the datereference obligation were restructured. Furthermore, some CDS documentation requires the Company to make a payment due to an event that is twenty yearsunrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the final repayment date, exceptmaturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis.
Distributions From Insurance Subsidiaries
The Company anticipates that, for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies’ liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Insurance Company Regulatory Requirements, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 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 2023 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is approximately $257 million. Approximately $157 million is available for distribution in the fourth quarter of 2023, of which $77 million was paid in October 2023
•The maximum amount available during 2023 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $102 million. Approximately $58 million is available for distribution in the fourth quarter of 2023, of which $16 million was paid in October 2023.
•Based on the applicable law and regulations, in 2023 AG Re (a subsidiary of AGL) paid dividends of $53 million in the first nine months 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 $209 million as of September 30, 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 $117 million as of September 30, 2023, and (ii) the amount of statutory surplus, which as of September 30, 2023 was a deficit of $41 million.
•Based on the applicable law and regulations, in 2023 AGRO (an indirect subsidiary of AG Re) has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $98 million as of September 30, 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
$364 million as of September 30, 2023, and (ii) the amount of statutory surplus, which as of September 30, 2023 was $259 million.
Distributions From Insurance Company Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Dividends paid by AGC to AGUS | $ | — | | | $ | 16 | | | $ | 44 | | | $ | 165 | |
Dividends paid by AGM to AGMH | 60 | | | 77 | | | 100 | | | 173 | |
Dividends paid by AG Re to AGL | 24 | | | — | | | 53 | | | — | |
Dividends from AGUK to AGM | — | | | — | | | 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 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Insurance Subsidiaries, of the Company’s Annual Report on Form 10-K for the year ended December 31, 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 (i) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (ii) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (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 extent that AGMH has received proceedsceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the assumed business (plus in certain cases, an additional required amount), after which the Assuming Subsidiary would be released from liability with respect to such business.
As of September 30, 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 sale of replacement capital securities. The proceeds from this offering were usedaggregate amounts those subsidiaries could be required to pay a dividend to the shareholders of AGMH.all such ceding companies would be approximately $264 million, including $237 million by AGC and $27 million by AG Re.
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. TheEach custodial trusts weretrust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company doesis not consider itself to be the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty'sGuaranty’s financial statements.
The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC'sAGC’s or AGM'sAGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase the AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.
Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. TheAs of July 2023, the annualized rate on the AGC CCS is one-month LIBORCME Term SOFR plus 250 basis points,261 bps, and the annualized rate on the AGM Committed Preferred Trust Securities (CPS) is one-month LIBORCME Term SOFR plus 200 basis points.211 bps.
Investment Portfolio
The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income.
The Company’s fixed-maturity securities and short-term investments had a duration Approximately 61% of 5.4 years as of September 30, 2017 and 5.3 years as of December 31, 2016. Generally,the total investment portfolio is managed by external parties. In accordance with the Company’s fixed-maturity securities are designated as available-for-sale. For more information about the Investment Portfolio and a detailed descriptioninvestment guidelines, each of the three external investment managers is required to maintain the Company’s valuation of investments please refer to Part I, Item 1, Financial Statements, Note 10, Investments and Cash.
Fixed-Maturity Securities and Short-Term Investments
by Security Type
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of December 31, 2016 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (in millions) |
Fixed-maturity securities: | |
| | |
| | |
| | |
|
Obligations of state and political subdivisions | $ | 5,445 |
| | $ | 5,705 |
| | $ | 5,269 |
| | $ | 5,432 |
|
U.S. government and agencies | 256 |
| | 270 |
| | 424 |
| | 440 |
|
Corporate securities | 1,932 |
| | 1,976 |
| | 1,612 |
| | 1,613 |
|
Mortgage-backed securities(1): | | | | | | | |
|
RMBS | 866 |
| | 881 |
| | 998 |
| | 987 |
|
Commercial mortgage-backed securities (CMBS) | 551 |
| | 562 |
| | 575 |
| | 583 |
|
Asset-backed securities | 682 |
| | 852 |
| | 835 |
| | 945 |
|
Foreign government securities | 313 |
| | 300 |
| | 261 |
| | 233 |
|
Total fixed-maturity securities | 10,045 |
| | 10,546 |
| | 9,974 |
| | 10,233 |
|
Short-term investments | 948 |
| | 949 |
| | 590 |
| | 590 |
|
Total fixed-maturity and short-term investments | $ | 10,993 |
| | $ | 11,495 |
| | $ | 10,564 |
| | $ | 10,823 |
|
____________________
| |
(1) | Government-agency obligations were approximately 39% of mortgage backed securities as of September 30, 2017 and 42% as of December 31, 2016, based on fair value. |
The following tables summarize, for all fixed-maturity securities in an unrealized loss position as of September 30, 2017 and December 31, 2016, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| (dollars in millions) |
Obligations of state and political subdivisions | $ | 445 |
| | $ | (10 | ) | | $ | 253 |
| | $ | (7 | ) | | $ | 698 |
| | $ | (17 | ) |
U.S. government and agencies | 114 |
| | 0 |
| | 4 |
| | 0 |
| | 118 |
| | 0 |
|
Corporate securities | 136 |
| | (1 | ) | | 252 |
| | (17 | ) | | 388 |
| | (18 | ) |
Mortgage-backed securities: | | | | | | | |
| | | | |
RMBS | 107 |
| | (1 | ) | | 170 |
| | (11 | ) | | 277 |
| | (12 | ) |
CMBS | 50 |
| | 0 |
| | 76 |
| | (4 | ) | | 126 |
| | (4 | ) |
Asset-backed securities | 66 |
| | 0 |
| | 3 |
| | 0 |
| | 69 |
| | 0 |
|
Foreign government securities | 35 |
| | (1 | ) | | 147 |
| | (18 | ) | | 182 |
| | (19 | ) |
Total | $ | 953 |
| | $ | (13 | ) | | $ | 905 |
| | $ | (57 | ) | | $ | 1,858 |
| | $ | (70 | ) |
Number of securities (1) | |
| | 292 |
| | |
| | 230 |
| | |
| | 513 |
|
Number of securities with other-than-temporary impairment | |
| | 9 |
| | |
| | 14 |
| | |
| | 23 |
|
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| (dollars in millions) |
Obligations of state and political subdivisions | $ | 1,110 |
| | $ | (38 | ) | | $ | 6 |
| | $ | (1 | ) | | $ | 1,116 |
| | $ | (39 | ) |
U.S. government and agencies | 87 |
| | (1 | ) | | — |
| | — |
| | 87 |
| | (1 | ) |
Corporate securities | 492 |
| | (11 | ) | | 118 |
| | (20 | ) | | 610 |
| | (31 | ) |
Mortgage-backed securities: | |
| | |
| | |
| | |
| |
|
| |
|
|
RMBS | 391 |
| | (23 | ) | | 94 |
| | (15 | ) | | 485 |
| | (38 | ) |
CMBS | 165 |
| | (5 | ) | | — |
| | — |
| | 165 |
| | (5 | ) |
Asset-backed securities | 36 |
| | 0 |
| | 0 |
| | 0 |
| | 36 |
| | 0 |
|
Foreign government securities | 44 |
| | (5 | ) | | 114 |
| | (27 | ) | | 158 |
| | (32 | ) |
Total | $ | 2,325 |
| | $ | (83 | ) | | $ | 332 |
| | $ | (63 | ) | | $ | 2,657 |
| | $ | (146 | ) |
Number of securities(1) | |
| | 622 |
| | |
| | 60 |
| | |
| | 676 |
|
Number of securities with other-than-temporary impairment | |
| | 8 |
| | |
| | 9 |
| | |
| | 17 |
|
___________________
| |
(1) | The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.
|
Of the securities in an unrealized loss position for 12 months or more as of September 30, 2017, 28 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2017 was $26 million. As of December 31, 2016, of the securities in an unrealized loss position for 12 months or more, 41 securities had unrealized losses greater than 10% of book valueinvestment portfolio with an unrealized lossoverall credit quality rated at a minimum of $59 million. The Company has determined that the unrealized losses recorded as of September 30, 2017 and December 31, 2016 were yield related and not the result of other-than-temporary-impairment.A+/A1/A+ by S&P/Moody’s/Fitch Inc., respectively.
Changes in interest rates affect the value of the Company’s fixed-maturity portfolio.securities. As interest rates fall, the fair value of fixed-maturity securities generally increases and, as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists primarily of high-quality,investment-grade, liquid instruments. Other invested assets include other alternative investments, 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 |
| September 30, 2023 | | December 31, 2022 |
| (in millions) |
Fixed-maturity securities, available-for-sale (1) | $ | 6,267 | | | $ | 7,119 | |
Fixed-maturity securities, trading (2) | 350 | | | 303 | |
Short-term investments | 1,426 | | | 810 | |
Other invested assets | 765 | | | 133 | |
Total | $ | 8,808 | | | $ | 8,365 | |
____________________
(1) As of September 30, 2023 and December 31, 2022, includes $78 million and $358 million, respectively, of New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.
(2) Represents CVIs received under the 2022 Puerto Rico Resolutions.
The Company’s available-for-sale fixed-maturity securities had a duration of 4.1 years and 4.4 years as of September 30, 2023 and December 31, 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 September 30, 20172023
| | | | | | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (in millions) |
Due within one year | $ | 248 | | | $ | 239 | |
Due after one year through five years | 1,526 | | | 1,406 | |
Due after five years through 10 years | 1,760 | | | 1,629 | |
Due after 10 years | 2,809 | | | 2,475 | |
Mortgage-backed securities: | | | |
RMBS | 430 | | | 330 | |
Commercial mortgage-backed securities | 198 | | | 188 | |
Total | $ | 6,971 | | | $ | 6,267 | |
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (in millions) |
Due within one year | $ | 249 |
| | $ | 250 |
|
Due after one year through five years | 1,518 |
| | 1,552 |
|
Due after five years through 10 years | 2,280 |
| | 2,365 |
|
Due after 10 years | 4,581 |
| | 4,936 |
|
Mortgage-backed securities: | |
| | |
|
RMBS | 866 |
| | 881 |
|
CMBS | 551 |
| | 562 |
|
Total | $ | 10,045 |
| | $ | 10,546 |
|
Available-for-Sale and Trading Fixed-Maturity Securities By Rating
The following table summarizes the ratings distributions of the Company’s investment portfolioavailable-for-sale fixed-maturity securities as of September 30, 20172023 and December 31, 2016.2022. Ratings generally reflect the lower of the Moody’s Investors Service, Inc. (Moody’s) and S&P classifications, except for bonds purchased for loss mitigation or other risk management strategies,(i) Loss Mitigation Securities, which use Assured Guaranty’s internal ratings classifications.classifications, or (ii) Puerto Rico securities received under the 2022 Puerto Rico Resolutions, which are not rated.
Distribution of
Available-for-Sale Fixed-Maturity Securities by Rating
| | | | | | | | As of |
Rating | | As of September 30, 2017 | | As of December 31, 2016 | Rating | | September 30, 2023 | | December 31, 2022 |
AAA | | 14.4 | % | | 11.6 | % | AAA | | 13.8 | % | | 14.2 | % |
AA | | 52.0 |
| | 54.8 |
| AA | | 38.4 | | | 37.1 | |
A | | 19.6 |
| | 17.9 |
| A | | 26.2 | | | 24.4 | |
BBB | | 3.0 |
| | 1.9 |
| BBB | | 11.6 | | | 11.0 | |
BIG(1) | | 10.5 |
| | 13.5 |
| |
BIG (1) | | BIG (1) | | 7.6 | | | 7.4 | |
Not rated(2) | | 0.5 |
| | 0.3 |
| | 2.4 | | | 5.9 | |
Total | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % |
____________________
| |
(1) | Comprised primarily of loss mitigation and other risk management assets. Please refer to Part I, Item I, Financial Statements, Note 10, Investments and Cash, for additional information. |
(1)Includes primarily Loss Mitigation Securities. See Item 1, Financial Statements, Note 7, Investments, for additional information.
(2)Primarily includes New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.
The Company also had $350 million and $303 million in trading fixed-maturity securities as of September 30, 2023 and December 31, 2022, respectively, representing CVIs received under the 2022 Puerto Rico Resolutions, which are not rated.
Other Investments
Other invested assets, which are generally less liquid than fixed-maturity securities primarily consist of the investment in Sound Point and fund investments across a variety of strategies.
The Insurance segment reports AGAS’ percentage ownership of Sound Point and AHP funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of September 30, 2023, three of the funds in which AGAS invests are consolidated and the remaining are accounted as equity method investments in the Company’s condensed consolidated financial statements. As of December 31, 2022, all of the funds in which AGAS directly invested were consolidated in the Company’s condensed consolidated financial statements. See — Commitments below.
Investment in Assets Managers and Alternative Investments by Strategy
As of September 30, 2023
| | | | | | | | | | | | | | | | | | | | |
| | Investments | | Eliminations | | Consolidated |
| | (in millions) |
Sound Point (1) | | $ | 419 | | | $ | — | | | $ | 419 | |
Alternative investments: | | | | | | |
CLOs (2) | | 246 | | | (184) | | | 62 | |
Asset-based | | 132 | | | (88) | | | 44 | |
Healthcare | | 103 | | | — | | | 103 | |
Other | | 149 | | | — | | | 149 | |
Total | | $ | 1,049 | | | $ | (272) | | | $ | 777 | |
____________________
(1) The investment in Sound Point is carried at the acquisition date fair value. On a one quarter lag, the acquisition date fair value will be adjusted for the Company’s interest in the earnings of Sound Point and amortization of intangible assets.
(2) Represents primarily investments in the equity of U.S. and European CLOs as well as the first loss equity of CLOs.
Alternative Investments by Strategy
As of December 31, 2022
| | | | | | | | | | | | | | | | | | | | |
| | Investments | | Eliminations | | Consolidated |
| | (in millions) |
CLOs | | $ | 272 | | | $ | (272) | | | $ | — | |
Asset-based | | 101 | | | (101) | | | — | |
Healthcare | | 91 | | | (91) | | | — | |
Municipal bonds (1) | | 105 | | | (105) | | | — | |
Other | | 133 | | | — | | | 133 | |
Total | | $ | 702 | | | $ | (569) | | | $ | 133 | |
____________________
(1) In the first quarter of 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund.
Change in Fair Value of Alternative Investments by Strategy
Nine Months Ended September 30, 2023
| | | | | | | | | | | | | | | | | | | | |
| | Investments | | Eliminations | | Consolidated |
| | (in millions) |
CLOs | | $ | 21 | | | $ | (23) | | | $ | (2) | |
Asset-based | | 3 | | | (3) | | | — | |
Healthcare | | 21 | | | (9) | | | 12 | |
Other | | 13 | | | — | | | 13 | |
Total | | $ | 58 | | | $ | (35) | | | $ | 23 | |
Change in Fair Value of Alternative Investments by Strategy
Nine Months Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | |
| | Investments | | Eliminations | | Consolidated |
| | (in millions) |
CLOs | | $ | (10) | | | $ | 10 | | | $ | — | |
Asset-based | | 7 | | | (7) | | | — | |
Healthcare | | (6) | | | 8 | | | 2 | |
Municipal bonds | | (4) | | | 4 | | | — | |
Other | | (34) | | | — | | | (34) | |
Total | | $ | (47) | | | $ | 15 | | | $ | (32) | |
Beginning in third quarter 2023, the Company records 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 restricted cashother assets that are either held in trust for the benefit of third partythird-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, total $286totaled $224 million and $285$222 million as of September 30, 20172023 and December 31, 2016,2022, 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 $1,676$1,107 million and $1,420$1,169 million, based on fair value, as of September 30, 20172023 and December 31, 2016,2022, respectively.
The fair valueCommitments
Upon closing of the Company’s pledged securitiesSound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to secure its obligations under its CDS exposure totaled $18invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval, which includes $630 million of invested capital (at fair value), and $116$890 million in unfunded commitments. See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for a description of the Sound Point Transaction.
Of the $1.5 billion mentioned above, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million plus previously distributed gains of $132 million for a total of $882 million as of September 30, 2017 and December 31, 2016, respectively. In February 2017, the Company terminated all of its remaining CDS contracts with one of its counterparties as to which it had collateral posting obligations and all of the collateral that the Company had been posting to that counterparty was returned to the Company. Please refer to Part I, Item I, Financial Statements, Note 8, Contracts Accounted for as Credit Derivatives, for additional information.
Liquidity Arrangements with respect to AGMH’s former Financial Products Business
AGMH’s former financial products segment had been in the business of borrowing funds through the issuance of guaranteed investment contracts (GICs) and medium term notes and reinvesting the proceeds in investments that met AGMH’s investment criteria. The financial products business also included the equity payment undertaking agreement portion of the leveraged lease business, described under "--Insurance Company Subsidiaries" above.
The GIC Business
Until November 2008, AGMH, through its financial products business, offered GICs to municipalities and other market participants. The GICs were issued through certain non-insurance subsidiaries of AGMH. In return for an initial payment, each GIC entitles its holder to receive the return of the holder’s invested principal plus interest at a specified rate, and to withdraw principal from the GIC as permitted by its terms. AGM insures the payment obligations on all these GICs.
The proceeds of GICs were loaned to AGMH’s former subsidiary FSA Asset Management LLC (FSAM). FSAM in turn invested these funds in fixed-income obligations (the FSAM assets).
2023. As of September 30, 2017, approximately 32.5%2023, AGAS commitments to Sound Point and AHP funds were $703 million (of which $446 million was funded with a NAV of the FSAM assets (measured by aggregate principal balance) were in cash or were obligations backed by the full faith and credit of the U.S. Although AGMH no longer holds any ownership interest in FSAM or the GIC issuers, AGM’s insurance policies on the GICs remain in place, and must remain in place until$469 million). This capital was committed to several funds, each GIC is terminated.
In June 2009, in connection with the Company's acquisition of AGMH from Dexia Holdings Inc., Dexia SA, the ultimate parent of Dexia Holdings Inc., and certain of its affiliates, entered into a number of agreements intended to mitigate the credit, interest rate and liquidity risks associated with the GIC business and the related AGM insurance policies. Some of those agreements have since terminated or expired, or been modified.
To support the primary payment obligations under the GICs, each of Dexia SA and Dexia Crédit Local S.A. are partydedicated to a put contract. Pursuant to the put contract, FSAM may put an amount of its FSAM assets to Dexia SAsingle strategy, including CLOs, asset-based finance and Dexia Crédit Local S.A. in exchange for funds that FSAM would in turn make available to meet demands for payment under the GICs. To secure their obligations under this put contract, Dexia SA and Dexia Crédit Local S.A. are required to post eligible highly liquid collateral having an aggregate value (subject to agreed reductions and advance rates) equal to at least the excess of (i) the aggregate principal amount of all outstanding GICs over (ii) the aggregate mark-to-market value of FSAM’s assets.
healthcare structured capital. As of September 30, 2017, the aggregate accreted GIC balance was approximately $1.4 billion, compared with approximately $10.2 billion as of December 31, 2009. As of September 30, 2017, the aggregate fair market value2023, three of the assets supporting the GIC business (disregarding the agreed upon reductions) plus cash and positive derivative value exceeded by nearly $0.7 billion the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Even after applying the agreed upon reductions to the fair market value of the assets, the aggregate value of the assets supporting the GIC business plus cash and positive derivative value exceeded the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Accordingly, no posting of collateral was required under the primary put contract.
To provide additional support, Dexia Crédit Local S.A. provides a liquidity commitment to FSAM to lend against FSAM assets under a revolving credit agreement. As of September 30, 2017 the commitment totaled $1.5 billion, ofsix funds in which approximately $0.8 billion was drawn. The agreement requires the commitment remain in place, generally until the GICs have been paid in full.
Despite the put contract and revolving credit agreement, and the significant portion of FSAM assets comprised of highly liquid securities backed by the full faith and credit of the U.S., AGM remains subject to the risk that Dexia SA and its affiliates may not fulfill their contractual obligations. In that case, the GIC issuers may not have the financial ability to pay upon the withdrawal of GIC funds or post collateral or make other payments in respect of the GICs, thereby resulting in claims upon the AGM financial guaranty insurance policies.
A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM in respect to AGMH's former GIC business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody's. FSAM is expected to have sufficient eligible and liquid assets to satisfy any expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.
The Medium Term Notes Business
In connection with the acquisition of AGMH, Dexia Crédit Local S.A. agreed to fund, on behalf of AGM, 100% of all policy claims made under financial guaranty insurance policies issued by AGM in relation to the medium term notes issuance program of FSA Global Funding Limited. As of September 30, 2017, FSA Global Funding Limited had approximately $294.9 million of medium term notes outstanding.
| |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an updated sensitivity analysis for credit derivatives and expected losses on contractsAGAS invests are accounted for as insurance. ForCIVs.
Lease Obligations
The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco,
London, Paris, and other quantitativelocations with various lease terms. See Part II, Item 8, Financial Statements and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk",Supplementary Data, Note 17, Leases, of our Company'sthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There2022, 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 condensed 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 borrowing funds to finance investments. 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.
Condensed Consolidated Cash Flows
The summarized condensed consolidated statements of cash flows in the table below present the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of consolidating FG VIEs and CIVs. In third quarter 2023, as a result of the Sound Point Transaction and AHP Transaction, the Company deconsolidated all CLOs and CLO warehouses and certain funds. As a result, beginning July 1, 2023, the Company’s cash flow statements will no longer include all the operating, investing and financing cash flow activity of the deconsolidated CIVs. See Item 1. Financial Statements, Note 1, Business and Basis of Presentation, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.
Summarized Condensed Consolidated Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
Net cash flows provided by (used in) operating activities, excluding FG VIEs and CIVs operating cash flows | $ | (210) | | | $ | 87 | | | $ | (217) | | | $ | (534) | |
FG VIEs and CIVs operating cash flows | 32 | | | (141) | | | 475 | | | (1,314) | |
Net cash flows provided by (used in) operating activities | (178) | | | (54) | | | 258 | | | (1,848) | |
| | | | | | | |
Net cash flows provided by (used in) investing activities, excluding FG VIEs and CIVs investing cash flows | 250 | | | 25 | | | 358 | | | 1,006 | |
FG VIEs and CIVs investing cash flows | 61 | | | 45 | | | (175) | | | 122 | |
Net cash flows provided by (used in) investing activities | 311 | | | 70 | | | 183 | | | 1,128 | |
| | | | | | | |
Net cash flows provided by (used in) financing activities, excluding FG VIEs and CIVs financing cash flows | | | | | | | |
Dividends paid | (16) | | | (16) | | | (51) | | | (49) | |
Repurchases of common shares | (64) | | | (97) | | | (90) | | | (400) | |
Issuance of long-term debt, net of issuance costs | 345 | | | — | | | 345 | | | — | |
Redemption of debt | (330) | | | — | | | (330) | | | — | |
Other | — | | | — | | | (15) | | | (6) | |
FG VIEs and CIVs financing cash flows | (135) | | | 109 | | | (392) | | | 1,110 | |
Net cash flows provided by (used in) financing activities (1) | (200) | | | (4) | | | (533) | | | 655 | |
| | | | | | | |
Effect of exchange rate changes,excluding FG VIEs and CIVs | (2) | | | (4) | | | — | | | (6) | |
Effect of exchange rate changes for FG VIEs and CIVs | — | | | — | | | — | | | — | |
Effect of exchange rate changes | (2) | | | (4) | | | — | | | (6) | |
Increase (decrease) in cash and cash equivalents and restricted cash | (69) | | | 8 | | | (92) | | | (71) | |
Cash and cash equivalents and restricted cash at beginning of period | 184 | | | 263 | | | 207 | | | 342 | |
Cash and cash equivalents and restricted cash at the end of the period | $ | 115 | | | $ | 271 | | | $ | 115 | | | $ | 271 | |
____________________
(1) 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 FG VIEs and CIVs, were an outflow of $217 million in nine months 2023 and an outflow of $534 million in nine months 2022. The decrease in outflows during nine months 2023 was primarily due to a $362 million decrease in net claim payments, primarily due to the 2022 Puerto Rico Resolutions, as well as a decrease of $94 million in tax payments. Cash flows from operations attributable to FG VIE and CIV were inflows in nine months 2023 and outflows in nine months 2022, primarily because all the CLOs and CLO warehouses, which generally reported significant operating cash flows, had limited operating activities and new issuances in the first half of 2023 pending the closing of the Sound Point Transaction and AHP Transaction, at which point the CLOs and CLO warehouses were deconsolidated. The
condensed consolidated statements of cash flows present the investing activities of the consolidated Sound Point funds, which were formerly known as AssuredIM funds, AssuredIM funds and CLOs as cash flows from operations. The increase in inflows in nine months 2023 compared with nine months 2022 was mainly due to a decrease of $2,714 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $850 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 decrease in investing cash inflows in nine months 2023 compared with nine months 2022 was mainly attributable to an increase in short-term investments in nine months 2023 compared to net sales of short-term and fixed-maturity investments in nine months 2022. In nine months 2022, investing inflows were used to fund claim payments under the 2022 Puerto Rico 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 (i) AGL share repurchases and dividends, (ii) paydowns of FG VIEs’ liabilities, and (iii) CLO issuances and CLO warehouse financing activities. The CIVs’ financing cash flows mainly included issuances and repayments of CLOs and CLO warehouse financing debt. The decrease in financing cash flow activity from VIEs was primarily due to a decrease of $2,254 million in issuances, partially offset by a decrease in repayments of $964 million by the previously consolidated CLOs and CLO warehouses. The proceeds from CLO issuances and CLO warehouse borrowings were 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 October 1, 2023 through November 7, 2023, the Company repurchased an additional 682,676 of common shares. As of November 7, 2023, the Company was authorized to purchase $372 million of its common shares. For more information about the Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders’ Equity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2023, there were no material changes into the market risks thatto which the Company is exposed to since December 31, 2016.2022.
| |
ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
Assured Guaranty’s management, with the participation of AGL’s President and Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are effective in recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission’s rules and forms, information required to be disclosed by AGL in the reports that it files or submits under the Exchange Act and ensuring that such information is accumulated and communicated to management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management of the Company, with the participation of its President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017.2023. Based on their evaluation as of September 30, 20172023 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 third quarter 2023 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 |
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, Commitments and Contingencies – Legal Proceedings and the Company's“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 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 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, 2016, in the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2017, and June 30, 2017, and in Part I, Item 1, Financial Statements, Note 14, Commitments and Contingencies – Legal Proceedings contained in this Form 10-Q. There were no material developments to such proceedings during the three months ended September 30, 2017.2022.
ITEM 1A.RISK FACTORS
Please refer toSee the risk factors set forth in Part I, "Item“Item 1A. Risk Factors"Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There2022 (2022 Annual Report) and Part II, “Item 1A. Risk Factors” for the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (Q2 Quarterly Report). Except for the risk factors entitled, “Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs) may expose it to increased credit, interest rate, liquidity and other risks” and “AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035, which may adversely affect the Company’s future results of operations and on an investment in the Company,” set forth in the 2022 Annual Report, which are removed and replaced in their entirety as set forth below, there have been no material changes to the risk factors disclosed in suchthe 2022 Annual Report on Form 10-Kor the Q2 Quarterly Report during the nine months ended September 30, 2017.2023.
Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs), including allocations of investments to Sound Point and exclusivity arrangement with Sound Point may expose it to increased credit, interest rate, liquidity and other risks.
The Company is using Sound Point’s investment knowledge and experience to expand the categories and types of its alternative investments (including those accounted for as CIVs) by: (a) allocating $1 billion of capital in Sound Point managed funds; (b) redeploying initial amounts allocated to Sound Point in future Sound Point funds; and (c) having Sound Point serve as the U.S. Insurance Subsidiaries’ sole alternative credit manager. This expansion of categories and types of investments, allocations to Sound Point and exclusivity arrangement with Sound Point may increase the credit, interest rate and liquidity risk in the Company’s investments (including those accounted for as CIVs). In addition, the fair value of most of these assets are reported in results of operations and may be more volatile than other investments made by the Company. As a result of the Company’s expansion of the categories and types of its investments, as of September 30, 2023, the U.S. Insurance Subsidiaries had investments in Sound Point managed funds with a fair value of $378 million. In addition, the Company had $252 million of other non-Sound Point alternative investments reported in the consolidated financial statements. This expansion also has resulted in the Company investing a portion of its portfolio in assets that are less liquid than some of its other investments, and so may increase the risks described under “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited”. Expanding the categories and types of Company investments (including those accounted for as CIVs), allocations to Sound Point and exclusivity arrangement with Sound Point may also expose the Company to other types of risks, including reputational risks.
AGL, AG Re and AGRO may become subject to taxes in Bermuda, which may adversely affect the Company’s future results of operations and an investment in the Company.
The Bermuda Minister of Finance, under Bermuda’s Exempted Undertakings Tax Protection Act 1966, as amended, has given AGL, AG Re and AGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or AGRO, or any of AGL’s or its subsidiaries’ operations, stocks, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, the Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035.
Further, on August 8, 2023, the Bermuda Government issued the first of a series of public consultation papers as part of its considerations on the introduction of a corporate income tax that would be taken into account in calculating the effective
| |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
tax rate of Bermuda businesses under the OECD’s global anti-base erosion (GloBE) rules. The second public consultation paper issued October 8, 2023, indicates that the Bermuda Government believes it is reasonable and proportionate for any new Bermuda corporate income tax regime to supersede any existing tax assurance certificates held by entities within the scope of the new Bermuda corporate income tax. Under the current proposal, Bermuda corporate income tax would apply only to large multinational enterprises (MNEs), as defined in the GloBE rules, with EUR 750 million or more in total global revenue in at least two of the previous four accounting periods. The proposed Bermuda corporate income tax legislation is currently anticipated to be effective for tax years beginning on or after January 1, 2025. The Bermuda Government is considering if amendments are necessary to the existing tax assurance certificate regime to ensure that tax may be collected in Bermuda from entities which are subject to the proposed Bermuda corporate income tax regime. Although we cannot predict when or if any new Bermuda corporate income tax law will be adopted or will become effective, the imposition of a Bermuda corporate income tax could, if applicable to the Company (or any Bermuda incorporated subsidiary of the Company), have an adverse effect on the Company's financial condition and results of operations.
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 Third Quarter 2017.third quarter 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) | Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (1) | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program (2) |
July 1 - July 31 | | 688,432 |
| | $ | 43.78 |
| | 685,243 |
| | $ | 167,872,823 |
| July 1 - July 31 | | 257,066 | | | $ | 57.64 | | | 257,066 | | | $ | 162,128,831 | |
August 1 - August 31 | | 679,770 |
| | $ | 44.17 |
| | 679,165 |
| | $ | 137,872,863 |
| August 1 - August 31 | | 264,107 | | | $ | 59.73 | | | 261,580 | | | $ | 146,509,723 | |
September 1 - September 30 | | 483,493 |
| | $ | 41.37 |
| | 483,493 |
| | $ | 117,872,889 |
| September 1 - September 30 | | 547,256 | | | $ | 60.61 | | | 547,256 | | | $ | 113,343,260 | |
Total | | 1,851,695 |
| | $ | 43.29 |
| | 1,847,901 |
| | |
| Total | | 1,068,429 | | | $ | 59.67 | | | 1,065,902 | | | |
____________________
(1) After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through November 7, 2023, the Company has repurchased a total of 143 million common shares for approximately $4.8 billion, excluding commissions, at an average price of $33.49 per share. On November 1, 2023, the Company announced that the Board of Directors had authorized an additional $300 million of share repurchases. As of November 7, 2023, the remaining authorization the Company was authorized to purchase was $372 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 third 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:
| | | | | | | | |
(1)Exhibit Number | | Description of Document |
4.1 | | | |
10.1 | | | Separation Agreement, dated as of July 7, 2023, between the Company has repurchased a total of 79.9 million common shares for approximately $2,166 million, excluding commissions, at an average price of $27.11 per share. The Board of Directors authorized, on November 1, 2017, an additional $300 million of share repurchases. As of November 2, 2017, $398 million of total capacity remained from the existing Board of Directors share repurchase authorizations, on a settlement basis.and David A. Buzen* |
22.0 | | | |
(2)31.1 | Excludes commissions. |
| | |
ITEM 5.31.2 | OTHER INFORMATION |
On November 1, 2017, Assured Guaranty Ltd. (the “Company”) mutually agreed with James M. Michener, the Company’s General Counsel and Secretary, that Mr. Michener would resign as General Counsel and Secretary and as an executive officer of the Company, effective December 31, 2017, in accordance with the terms of a separation agreement (the “Separation Agreement”) which he and the Company entered into on such date. Pursuant to the Separation Agreement, Mr. Michener will remain employed by the Company in a non-executive officer position, serving as Senior Advisor to the Chief Executive Officer, for a transition period (the “Transition Period”) beginning on January 1, 2018 and ending upon his retirement on December 31, 2018 (the “Retirement Date”). Ling Chow, the Company’s U.S. General Counsel, will succeed Mr. Michener as the Company’s new General Counsel, beginning on January 1, 2018. The Company entered into the Separation Agreement in recognition of Mr. Michener’s successful years of service with the Company and to encourage him to work through the Retirement Date in order to facilitate the transition of his duties to his successor, to advise the Company regarding ongoing litigation, and so he would remain available to consult on matters related to his experience with the Company.
The Separation Agreement provides that if Mr. Michener remains employed though the Retirement Date, his base salary and cash and equity incentive opportunities during the Transition Period will be equal to his current base salary and cash and equity incentive opportunities. The Compensation Committee will determine the exact amount of Mr. Michener’s
incentive awards for the 2017 fiscal year after the 2017 financial results are available. If the Compensation Committee awards Mr. Michener equity awards for the 2017 fiscal year, such awards will be granted as restricted stock units pursuant to a grant agreement substantially in the form attached as an exhibit to the Separation Agreement with 50% of such units settling on the one-year anniversary of the date of grant and 50% settling on the two-year anniversary of the date of grant. In addition, the Compensation Committee will determine the exact amount of Mr. Michener’s incentive awards for the 2018 fiscal year after the 2018 financial results are available. Mr. Michener’s 2018 incentive award amounts, if any, will be paid in cash rather than any equity grant because he will no longer be eligible for a grant pursuant to the Company’s 2004 Long-Term Incentive Plan once he is no longer employed by the Company. The portion of the 2018 incentive award amount, if any, attributable to an equity grant will be paid 50% in December 2019 and the remaining 50% in December 2020. The Separation Agreement specifies that during the Transition Period, Mr. Michener will be required to own AGL shares having a value equal to two times his base salary, which is the level applicable to managing directors, group heads and equivalent positions under the under the Company’s stock ownership guidelines.
Pursuant to the Separation Agreement, if Mr. Michener remains employed though the Retirement Date, any unvested equity awards that he holds on the Retirement Date will vest in accordance with the terms that the applicable award agreement provides upon retirement. However, any previously granted cash and equity awards, including the performance share units granted to Mr. Michener in 2017, that include Company or individual performance-based vesting conditions (e.g., the achievement of certain pre-established share price targets) remain subject to satisfaction of such applicable performance conditions following the Retirement Date. The Separation Agreement addresses the timing of payments and distributions to Mr. Michener so that they remain exempt from or comply with the provisions of Sections 409A and 457A of the Internal Revenue Code.
In the event that Mr. Michener’s employment is terminated before the Retirement Date as a result of death or permanent disability, upon the Compensation Committee’s evaluation of his performance for the relevant year, the Compensation Committee would have the discretion to award him a cash payment in lieu of an equity incentive and/or a cash incentive for the year during which such termination occurs. In the event of a termination prior to the Retirement Date for any other reason, any unvested equity awards that he holds on the date of such termination will vest in accordance with the terms that the applicable award agreement provides as a result of such other termination, as applicable.
Mr. Michener will remain eligible for the Company’s severance policy, which is described in its 2017 proxy statement, for any termination prior to the Retirement Date subject to the terms of such plan. Mr. Michener’s Bermuda housing subsidy will continue through December 31, 2017 and he will reimbursed for moving expenses from Bermuda to the United States. He will also be reimbursed for tax preparation and financial planning through calendar year 2018.
The Separation Agreement contains covenants by Mr. Michener relating to protection of the Company's confidential information, cooperation, non-competition, non-solicitation and non-disparagement and other standard provisions. Payments pursuant to the Separation Agreement are subject to forfeiture and/or clawback in the event of violation of such covenants. Mr. Michener executed a release of claims as part of the Separation Agreement. The Separation Agreement provides that Mr. Michener will execute another release of claims within 45 days after his retirement.
| | |
ITEM 6.32.1 | EXHIBITS. | | |
32.2 | | | |
101.1 | | | The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 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 September 30, 2023 formatted, in Inline XBRL (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101). |
See Exhibit Index for a list
* Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | |
| ASSURED GUARANTY LTD. (Registrant)
|
| |
Dated November 3, 20178, 2023 | By: | /s/ ROBERT A. BAILENSON
|
| | |
| | Robert A. Bailenson Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)
|
EXHIBIT INDEX
|
| | | |
Exhibit
Number
| | Description of Document |
31.1 |
| | |
31.2 |
| | |
32.1 |
| | |
32.2 |
| | |
101.1 |
| | The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2017 and 2016 (iv) Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2017 (v) Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements.
|