Puerto Rico
Gross Par and Gross Debt Service Outstanding
| | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Par Outstanding | | Gross Debt Service Outstanding |
| As of December 31, | | As of December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | (in millions) |
| Exposure to Puerto Rico | $ | 3,629 | | | $ | 3,789 | | | $ | 5,322 | | | $ | 5,674 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Puerto Rico
Net Par Outstanding
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| | (in millions) |
| Puerto Rico Exposures Subject to a Plan or Support Agreement | | | |
| Commonwealth of Puerto Rico - GO | $ | 1,097 | | | $ | 1,112 | |
| PBA | 122 | | | 134 | |
| Total GO/PBA Plan | 1,219 | | | 1,246 | |
| PRHTA (Transportation revenue) | 799 | | | 817 | |
| PRHTA (Highway revenue) | 457 | | | 493 | |
| PRCCDA (1) | 152 | | | 152 | |
| Total HTA/CCDA PSA | 1,408 | | | 1,462 | |
| PREPA | 748 | | | 776 | |
| PRIFA (1) | 16 | | | 16 | |
| Total Subject to a Plan or Support Agreement | 3,391 | | | 3,500 | |
| | | |
| Other Puerto Rico Exposures | | | |
| MFA | 179 | | | 223 | |
| PRASA and U of PR | 2 | | | 2 | |
| Total Other Puerto Rico Exposures | 181 | | | 225 | |
| Total net exposure to Puerto Rico | $ | 3,572 | | | $ | 3,725 | |
____________________
(1) As of the date of this filing, an order has been entered under Title VI of PROMESA modifying this debt, consistent with the relevant Support Agreement.
The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.
Amortization Schedule of Puerto Rico Net Par Outstanding and Net Debt Service Outstanding
As of December 31, 2021
| | | | | | | | | | | |
| Scheduled Net Par Amortization | | Scheduled Net Debt Service Amortization |
| (in millions) |
| 2022 (January 1 - March 31) | $ | — | | | $ | 88 | |
| 2022 (April 1 - June 30) | — | | | 2 | |
| 2022 (July 1 - September 30) | 176 | | | 264 | |
| 2022 (October 1 - December 31) | — | | | 3 | |
| Subtotal 2022 | 176 | | | 357 | |
| 2023 | 206 | | | 378 | |
| 2024 | 222 | | | 383 | |
| 2025 | 223 | | | 373 | |
| 2026 | 214 | | | 353 | |
| 2027-2031 | 953 | | | 1,494 | |
| 2032-2036 | 1,253 | | | 1,543 | |
| 2037-2041 | 320 | | | 364 | |
| 2042 | 5 | | | 5 | |
| Total | $ | 3,572 | | | $ | 5,250 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Exposure to the U.S. Virgin Islands
As of December 31, 2021, the Company had $471 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rated $469 million BIG (up from $216 million BIG as of December 31, 2020). The BIG USVI net par outstanding consisted of: (i) 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; (ii) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI; and (iii) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system. The COVID-19 pandemic and evolving governmental and private responses to the pandemic have been impacting the USVI economy, especially the tourism sector. The USVI is benefiting from the federal response to the 2017 hurricanes and COVID-19 and has made its debt service payments to date, but is experiencing fiscal pressure.
Specialty Insurance and Reinsurance Exposure
The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. As of December 31, 2021, gross exposure of $144 million and net exposure of $84 million of aircraft residual value insurance was rated BIG. As of December 31, 2020, gross and net exposure of $13 million of aircraft residual value insurance was rated BIG. All other exposures in the table below are investment-grade quality.
Specialty Insurance and Reinsurance Exposure
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 |
| | Gross Exposure | | Net Exposure | | Gross Exposure | | Net Exposure |
| | (in millions) |
Life insurance transactions (1) | | $ | 1,250 | | | $ | 871 | | | $ | 1,121 | | | $ | 720 | |
Aircraft residual value insurance policies | | 355 | | | 200 | | | 363 | | | 208 | |
| Total | | $ | 1,605 | | | $ | 1,071 | | | $ | 1,484 | | | $ | 928 | |
____________________
(1) The life insurance transactions net exposure is projected to reach $1.1 billion by September 30, 2026.
5. Expected Loss to be Paid (Recovered)
Accounting Policy
Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted estimates of all possible scenarios.
Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk-management activities. Expected loss to be paid (recovered) is important from a liquidity perspective in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts.
Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio. The Company monitors and assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio.
In circumstances where the Company has purchased its own insured obligations that had expected losses, and in cases
where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the Company are referred to as loss mitigation securities and are recorded in the investment portfolio at fair value, excluding the value of the Company’s insurance. For loss mitigation securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 8, Investments and Cash and Note 10, Fair Value Measurement.
Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects
of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic
effects of loss mitigation efforts.
The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. The three models are: (1) insurance, as described in Note 6, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 7, Contracts Accounted for as Credit Derivatives and Note 10, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 9, 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 the three accounting models.
Loss Estimation Process
The Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions, scenarios and the probabilities they assign to those scenarios based on actual developments during the period and their view of future performance.
The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such financial guaranties. As a result, the Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the life of most contracts.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities. Such information includes management’s view of the potential impact of COVID-19 on its distressed exposures. Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction.
Changes over a reporting period in the Company’s loss estimates for municipal obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers;
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables.
Actual losses will ultimately depend on future events or transaction performance and may be influenced by many
interrelated factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to
considerable volatility and may not reflect the Company’s ultimate claims paid.
In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which uses cash but reduces projected future losses.
Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit)
by Accounting Model
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Expected Loss to be Paid (Recovered) | | Net Economic Loss Development (Benefit) |
| | As of December 31, | | Year Ended December 31, |
| Accounting Model | | 2021 | | 2020 | | 2021 | | 2020 | | 2019 |
| | | (in millions) | | |
Insurance (see Note 6) | | $ | 364 | | | $ | 471 | | | $ | (281) | | | $ | 142 | | | $ | 14 | |
FG VIEs (see Note 9) | | 42 | | | 59 | | | (20) | | | 1 | | | (29) | |
Credit derivatives (see Note 7) | | 5 | | | (1) | | | 14 | | | 2 | | | 14 | |
| Total | | $ | 411 | | | $ | 529 | | | $ | (287) | | | $ | 145 | | | $ | (1) | |
The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under all accounting models (insurance, derivative and FG VIE). The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.00% to 1.98% with a weighted average of 1.02% as of December 31, 2021 and 0.00% to 1.72% with a weighted average of 0.60% as of December 31, 2020. Expected losses to be paid for U.S. dollar denominated transactions represented approximately 97.2% and 93.2% of the total as of December 31, 2021 and December 31, 2020, respectively.
Net Expected Loss to be Paid (Recovered)
Roll Forward
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Net expected loss to be paid (recovered), beginning of period | $ | 529 | | | $ | 737 | | | $ | 1,183 | |
| Economic loss development (benefit) due to: | | | | | |
| Accretion of discount | 7 | | | 9 | | | 22 | |
| Changes in discount rates | (33) | | | 13 | | | (11) | |
| Changes in timing and assumptions | (261) | | | 123 | | | (12) | |
| Total economic loss development (benefit) | (287) | | | 145 | | | (1) | |
| Net (paid) recovered losses | 169 | | | (353) | | | (445) | |
| Net expected loss to be paid (recovered), end of period | $ | 411 | | | $ | 529 | | | $ | 737 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 | | Economic Loss
Development (Benefit) | | Net
(Paid)
Recovered
Losses (1) | | Net Expected Loss to be Paid (Recovered) as of December 31, 2021 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 305 | | | $ | (182) | | | $ | 74 | | | $ | 197 | |
| Non-U.S. public finance | | 36 | | | (22) | | | (2) | | | 12 | |
| Public finance | | 341 | | | (204) | | | 72 | | | 209 | |
| Structured finance: | | | | | | | | |
U.S. RMBS | | 148 | | | (100) | | | 102 | | | 150 | |
Other structured finance | | 40 | | | 17 | | | (5) | | | 52 | |
| Structured finance | | 188 | | | (83) | | | 97 | | | 202 | |
| Total | | $ | 529 | | | $ | (287) | | | $ | 169 | | | $ | 411 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2019 | | Economic Loss
Development (Benefit) | | Net
(Paid)
Recovered
Losses (1) | | Net Expected Loss to be Paid (Recovered) as of December 31, 2020 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 531 | | | $ | 190 | | | $ | (416) | | | $ | 305 | |
| Non-U.S. public finance | | 23 | | | 13 | | | — | | | 36 | |
| Public finance | | 554 | | | 203 | | | (416) | | | 341 | |
| Structured finance: | | | | | | | | |
U.S. RMBS | | 146 | | | (71) | | | 73 | | | 148 | |
Other structured finance | | 37 | | | 13 | | | (10) | | | 40 | |
| Structured finance | | 183 | | | (58) | | | 63 | | | 188 | |
| Total | | $ | 737 | | | $ | 145 | | | $ | (353) | | | $ | 529 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| Sector | | Net Expected Loss to be Paid (Recovered) as of December 31, 2018 | | Economic Loss
Development (Benefit) | | Net
(Paid)
Recovered
Losses (1) | | Net Expected Loss to be Paid (Recovered) as of December 31, 2019 |
| | | (in millions) |
| Public finance: | | | | | | | | |
| U.S. public finance | | $ | 832 | | | $ | 224 | | | $ | (525) | | | $ | 531 | |
| Non-U.S. public finance | | 32 | | | (9) | | | — | | | 23 | |
| Public finance | | 864 | | | 215 | | | (525) | | | 554 | |
| Structured finance: | | | | | | | | |
U.S. RMBS | | 293 | | | (234) | | | 87 | | | 146 | |
Other structured finance | | 26 | | | 18 | | | (7) | | | 37 | |
| Structured finance | | 319 | | | (216) | | | 80 | | | 183 | |
| Total | | $ | 1,183 | | | $ | (1) | | | $ | (445) | | | $ | 737 | |
____________________(1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets”.
The tables above include: (a) LAE paid of $36 million, $25 million and $35 million for the years ended December 31,
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
2021, 2020 and 2019, respectively; and (b) expected LAE to be paid of $26 million as of December 31, 2021 and $23 million as of December 31, 2020. Ceded expected loss to be recovered were $10 million as of December 31, 2021 and $23 million as of December 31, 2020.
Selected U.S. Public Finance Transactions
The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $3.6 billion net par outstanding as of December 31, 2021, all of which was BIG. For additional information regarding the Company’s Puerto Rico exposure, see “Exposure to Puerto Rico” in Note 4, Outstanding Exposure.
In the fourth quarter of 2021, the Company sold a portion of its salvage and subrogation recoverable asset associated with certain matured Puerto Rico GO and PREPA exposures on which the Company had previously paid claims. This sale resulted in proceeds of $383 million, which is included in “net (paid) recovered losses” in the tables above, including $56 million that was settled in January 2022. Also in the fourth quarter of 2021, the Company updated its assumptions for the value of the CVIs and recovery bonds to be received under the GO/PBA Plan and other settlements. During 2021, the Company also incorporated refinements to reflect certain terms of the Puerto Rico support agreements.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the Bankruptcy Code became effective. As of December 31, 2021, the Company’s net par outstanding subject to the plan consisted of $100 million of pension obligation bonds. As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth.
The Company projects its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2021, including those mentioned above, to be $197 million, compared with $305 million as of December 31, 2020.
The economic benefit for U.S. public finance transactions was $182 million in 2021, which was primarily attributable to Puerto Rico exposures. The changes attributable to the Company’s Puerto Rico exposures reflect adjustments the Company made to the assumptions it used in its scenarios based on the public information as discussed under “Exposure to Puerto Rico” in Note 4, Outstanding Exposure, as well as nonpublic information related to its loss mitigation activities during the period.
Selected Non-U.S. Public Finance Transactions
Expected loss to be paid for non-U.S. public finance transactions was $12 million as of December 31, 2021, compared with $36 million as of December 31, 2020, primarily consisting of: (i) an obligation backed by the availability and toll revenues of a major arterial road, which has been underperforming due to higher costs compared with expectations at underwriting; and (ii) an obligation for which the Company has been paying claims because of the impact of negative Euro Interbank Offered Rate (Euribor) on the transaction. The economic benefit for non-U.S. public finance transactions, including those mentioned above, was approximately $22 million during 2021 and was primarily attributable to the impact of higher Euribor, the restructuring of certain exposures and improved performance outlook in certain road exposures.
U.S. RMBS Loss Projections
The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any expected representation and warranty (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.
The further behind mortgage borrowers fall in making payments, the more likely it is that they will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Mortgage borrowers that are not behind on payments and have not fallen two or more payments behind in the last two years (generally considered performing borrowers) have demonstrated an ability and willingness to pay through challenging economic periods, and as a result are viewed as less likely to default than delinquent borrowers or those that have experienced delinquency recently. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates (CDR), then projecting how the CDR will develop over time. Loans that are defaulted pursuant to the CDR after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A CDR is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (collateral pool balance). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector and vintage based on its experience to date. The Company continues to update its evaluation of these loss severities as new information becomes available.
The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above; assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.
Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend. The assumptions that the Company uses to project RMBS losses are shown in the sections below.
Net Economic Loss Development (Benefit)
U.S. RMBS
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | (in millions) |
| First lien U.S. RMBS | $ | — | | | $ | (45) | | | $ | (77) | |
| Second lien U.S. RMBS | (100) | | | (26) | | | (157) | |
As of December 31, 2021, the Company had a net R&W payable of $35 million to R&W counterparties, compared with a net R&W payable of $74 million as of December 31, 2020. The Company’s agreements with providers of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers. When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company reports a net R&W payable.
First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime
The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss projections in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third-party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Each quarter the Company reviews recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories.
First Lien Liquidation Rates
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| Current but recently delinquent: (1) | | | |
| 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% |
____________________
(1) Prior to the third quarter of 2021, the Company included current loans that had missed one payment (30 + days delinquent) within the last 12 months in this category. The Company observed that during the COVID-19 pandemic: (i) loans that became 60+ days delinquent may have elevated future default risk for longer than a year; and (ii) there may be an increased number of loans that missed only a single payment that should not be considered at elevated risk of default. Based on this view, starting in the third quarter of 2021, the Company includes only current loans that had been 60+ days delinquent within the last 24 months in this category, rather than current loans that had been 30+ days delinquent in the past 12 months.
Towards the end of the first quarter of 2020, lenders began offering mortgage borrowers the option to forbear interest and principal payments of their loans due to the COVID -19 pandemic, and to repay such amounts at a later date. This resulted in an increase in early-stage delinquencies in RMBS transactions during the second quarter of 2020 and late-stage delinquencies during the second half of 2020. Until the third quarter of 2021, the Company’s expected loss estimate assumed that some delinquencies were due to COVID-19 related forbearances, and had applied a liquidation rate of 20% to such loans, which was the same liquidation rate assumption used when estimating expected losses for current loans that were recently modified or delinquent. A substantial portion of the loans have resolved favorably, and the Company now expects that the loans that continue to be delinquent will default at a higher rate than the original overall assumption of 20%. Therefore, the Company discontinued the segregation of COVID-19 related forbearances and the application of a special 20% liquidation rate to such COVID-19 forbearances. Beginning in the third quarter of 2021, the Company includes remaining COVID-19 forbearance loans in the relevant delinquency categories consistent with all other loans. Assuming all other variables are held constant, applying the higher liquidation rates to the previously forborne loans that remain delinquent, rather than the previous
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
assumption of 20% that was applied to all COVID-19 forborne loans, did not significantly increase expected losses on this cohort.
While the Company uses liquidation rates as described above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a CDR curve. The start of that CDR curve is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that was calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.
In the most heavily weighted scenario (the base case), after the initial 36-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 and then steps to a final CDR of 5% of the CDR plateau. In the base case, the Company assumes the final CDR will be reached 1.5 years after the initial 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36-month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.
Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. The Company assumes in the base case that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base case that the recent levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18-month period, declining to 40% in the base case over 2.5 years.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base Case Expected Loss Estimates
First Lien U.S. RMBS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Alt-A and Prime: | | | | | | | | | | | |
| Plateau CDR | 0.9 | % | – | 11.6% | | 5.9% | | 0.0 | % | – | 9.7% | | 5.3% |
| Final CDR | 0.0 | % | – | 0.6% | | 0.3% | | 0.0 | % | – | 0.5% | | 0.3% |
| Initial loss severity: | | | | | | | |
| 2005 and prior | 60% | | | | 60% | | |
| 2006 | 60% | | | | 70% | | |
| 2007+ | 60% | | | | 70% | | |
| Option ARM: | | | | | | | | | | | |
| Plateau CDR | 1.8 | % | – | 11.9% | | 5.6% | | 2.3 | % | – | 11.9% | | 5.4% |
| Final CDR | 0.1 | % | – | 0.6% | | 0.3% | | 0.1 | % | – | 0.6% | | 0.3% |
| Initial loss severity: | | | | | | | |
| 2005 and prior | 60% | | | | 60% | | |
| 2006 | 60% | | | | 60% | | |
| 2007+ | 60% | | | | 60% | | |
| Subprime: | | | | | | | | | | | |
| Plateau CDR | 2.9 | % | – | 10.0% | | 6.0% | | 2.7 | % | – | 11.3% | | 5.6% |
| Final CDR | 0.1 | % | – | 0.5% | | 0.3% | | 0.1 | % | – | 0.6% | | 0.3% |
| Initial loss severity: | | | | | | | |
| 2005 and prior | 60% | | | | 60% | | |
| 2006 | 60% | | | | 70% | | |
| 2007+ | 60% | | | | 70% | | |
The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary conditional prepayment rate (CPR) follows a pattern similar to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for December 31, 2020.
In the third quarter of 2021, the Company implemented a new 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. The Company now assumes that 20% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans. The addition of this new assumption resulted in an economic benefit of $23 million.
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the initial CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of December 31, 2021 and December 31, 2020.
Total expected loss to be paid on all first lien U.S. RMBS was $167 million and $133 million as of December 31, 2021 and December 31, 2020, respectively. The economic loss development in 2021 for first lien U.S. RMBS transactions was de minimis and included loss development attributable to lower excess spread, which was offset by the implementation of a recovery assumption for deferred principal balances that had previously been written off and changes in discount rates. Other
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
changes in assumptions including lower severity assumptions for certain asset classes were substantially offset by updates in the delinquency profile of certain transactions and the removal of the liquidation rate previously applied to the COVID-19 forbearances.
Certain transactions benefit from excess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt linked to LIBOR. An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. LIBOR is anticipated to be discontinued after June 30, 2023, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio referencing LIBOR.
The Company used a similar approach to establish its pessimistic and optimistic scenarios as of December 31, 2021 as it used as of December 31, 2020, increasing and decreasing the periods of stress from those used in the base case. In the Company’s most stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 15 months, expected loss to be paid would increase from current projections by approximately $25 million for all first lien U.S. RMBS transactions.
In the Company’s least stressful scenario where the CDR plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over nine months), expected loss to be paid would decrease from current projections by approximately $18 million for all first lien U.S. RMBS transactions.
Second Lien U.S. RMBS Loss Projections
Second lien RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction, the CPR of the collateral, the interest rate environment, and assumptions about loss severity.
In second lien transactions, the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six months by calculating current representative liquidation rates. Second lien transactions have seen an increase in delinquencies because of COVID-19 related forbearances. As in the case of first lien transactions, starting in the third quarter of 2021, the Company includes remaining COVID-19 forbearance loans in the relevant delinquency categories consistent with all other loans. Assuming all other variables are held constant, applying the higher liquidation rates to the previously forborne loans that remain delinquent, rather than the previous assumption of 20% that was applied to all COVID-19 forborne loans, increased expected losses by approximately $14 million for second lien transactions.
Similar to first liens, the Company then calculates a CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau CDR period that follows the embedded plateau losses.
For the base case scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, representing six months of delinquent loan liquidations, followed by 28 months of decrease to the steady state CDR, the same as of December 31, 2020.
HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period.
The HELOC loans underlying the Company’s insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans were modified to extend the original interest-only period. The Company does not apply a CDR increase when such loans are projected to reach their principal amortization period due to the likelihood that those loans will either prepay or once again have their interest-only periods extended. In addition, based on
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
recent trends, in the third quarter of 2021, the Company reduced the CDR floor from 2.5% to 1.0%, as the future steady state CDR on all its HELOC transactions.
When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of December 31, 2021 and December 31, 2020, that it will generally recover 2% of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time. A second lien on the borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual recoveries of charged-off loans observed from period to period. 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. In the third quarter of 2021, the Company increased its recovery assumption for charged-off loans from 20% to 30%, as shown in the table below, based on recent observed trends. The higher recovery assumption, together with higher actual recoveries and other information obtained on charged-off loans, resulted in a $71 million increase in expected recoveries. Such recoveries are assumed to be received evenly over the next five years. If the recovery rate increases to 40%, expected loss to be paid would decrease from current projections by approximately $43 million. If the recovery rate decreases to 20% expected loss to be paid would increase from current projections by approximately $43 million.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien transactions (in the base case), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is consistent with how the Company modeled the CPR as of December 31, 2020. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.
In estimating expected losses, the Company modeled and probability weighted five scenarios, each with a different CDR curve applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate are the primary drivers behind the amount of losses the collateral will likely suffer.
The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Key Assumptions in Base Case Expected Loss Estimates
HELOCs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | As of December 31, 2020 |
| Range | | Weighted Average | | Range | | Weighted Average |
| Plateau CDR | 6.5 | % | – | 39.6% | | 16.4% | | 5.0 | % | – | 36.2% | | 12.9% |
| Final CDR trended down to | 1.0% | | | | 2.5 | % | – | 3.2% | | 2.5% |
| Liquidation rates: | | | | | | | |
| Current but recently delinquent (1) | 20% | | | | 20% | | |
| 30 – 59 Days Delinquent | 30% | | | | 30% | | |
| 60 – 89 Days Delinquent | 40% | | | | 40% | | |
| 90+ Days Delinquent | 60% | | | | 60% | | |
| Bankruptcy | 55% | | | | 55% | | |
| Foreclosure | 55% | | | | 55% | | |
| Real Estate Owned | 100% | | | | 100% | | |
| Loss severity on future defaults | 98% | | | | 98% | | |
| Projected future recoveries on previously charged-off loans | 30% | | | | 20% | | |
___________________
(1) Prior to the third quarter of 2021, the Company included current loans that had missed one payment (30 + days delinquent) within the last 12 months in this category. The Company observed that during the COVID-19 pandemic: (i) loans that became 60+ days delinquent may have elevated future default risk for longer than a year; and (ii) there may be an increased number of loans that missed only a single payment that should not be considered at elevated risk of default. Based on this view, starting in the third quarter of 2021, the Company includes only current loans that had been 60+ days delinquent within the last 24 months in this category, rather than current loans that had been 30+ days delinquent in the past 12 months.
The Company continues to evaluate the assumptions affecting its modeling results. The Company believes the most important driver of its projected second lien RMBS losses is the performance of its HELOC transactions. Total net expected recovery for all second lien U.S. RMBS was $17 million as of December 31, 2021 and total net expected loss to be paid was $15 million as of December 31, 2020. The $100 million economic benefit in 2021 was primarily attributable to higher recoveries on previously charged-off loans and improved performance in certain transactions.
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 scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. In the Company’s most stressful scenario, increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months) would increase the expected loss by approximately $6 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by approximately $7 million for HELOC transactions.
Structured Finance Excluding U.S. RMBS
The Company projected that its total net expected loss across its troubled structured finance exposures excluding U.S. RMBS as of December 31, 2021 was $52 million which included student loan securitizations issued by private issuers with $55 million in BIG net par outstanding. In general, the projected losses of these student loan securitizations are due to: (i) the poor credit performance of private student loan collateral and high loss severities; or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The Company also had exposure to troubled life insurance transactions with BIG net par of $40 million as of December 31, 2021. The economic loss development across all structured finance transactions excluding U.S. RMBS during 2021 was $17 million, which was primarily attributable to LAE for certain transactions and deterioration of certain aircraft residual value insurance exposures.
Recovery Litigation
In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. The impact, if any, of these and
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements.
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 4, Outstanding Exposure, for a discussion of the Company’s exposure to Puerto Rico and related recovery litigation being pursued by the Company.
6. Contracts Accounted for as Insurance
The portfolio of outstanding exposures discussed in Note 4, Outstanding Exposure, and Note 5, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 7, Contracts Accounted for as Credit Derivatives for amounts related to CDS and Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for amounts that are accounted for as consolidated FG VIEs.
Premiums
Accounting Policies
Financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition is consistent whether contracts are written on a direct basis, assumed from another financial guarantor, ceded to another insurer, or acquired in a business combination.
Premiums receivable represent the present value of contractual or expected future premium collections discounted using risk-free rates. Unearned premium reserve represents deferred premium revenue, less claim payments made (net of recoveries received) that have not yet been recognized in the statement of operations (contra-paid). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below under “Financial Guaranty Insurance Losses.”
The amount of deferred premium revenue at contract inception is determined as follows:
•For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.
•For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value (discounted at risk free rates) of either: (i) contractual premiums due; or (ii) in cases where the underlying collateral is composed of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually allowable, the amount of prepayments must be probable, and the timing and amount of prepayments must be reasonably estimable. Installment premiums typically relate to structured finance and infrastructure transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the transaction.
•For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the Company’s stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections primarily due to fair value adjustments recorded in connection with a business combination.
When the Company adjusts prepayment assumptions or expected premium collections for obligations backed by homogeneous pools of assets, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity. Accretion of the discount on premiums receivable is reported in “net earned premiums”.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured par amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured par amounts outstanding in the reporting period compared with the sum of each of the insured par amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished, and any nonrefundable deferred premium revenue related to that contract is accelerated and recognized as premium revenue. Effective January 1, 2020, the Company periodically assesses the need for an allowance for credit loss on premiums receivables.
For assumed reinsurance contracts, net earned premiums reported in the consolidated statements of operations are calculated based upon data received from ceding companies; however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates net earned premiums for the lag period. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to assumed reinsurance contracts, the Company assesses the credit quality and available liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.
Ceded unearned premium reserve is recorded as an asset. Direct, assumed and ceded earned premiums are presented together as net earned premiums in the statement of operations.
Any premiums related to FG VIEs are eliminated upon consolidation.
Insurance Contracts’ Premium Information
Net Earned Premiums
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Financial guaranty: | | | | | |
| Scheduled net earned premiums | $ | 322 | | | $ | 334 | | | $ | 331 | |
| Accelerations from refundings and terminations | 59 | | | 129 | | | 122 | |
| Accretion of discount on net premiums receivable | 30 | | | 20 | | | 17 | |
| Financial guaranty insurance net earned premiums | 411 | | | 483 | | | 470 | |
| Specialty net earned premiums | 3 | | | 2 | | | 6 | |
| Net earned premiums | $ | 414 | | | $ | 485 | | | $ | 476 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Gross Premium Receivable, Net of Commissions Payable on Assumed Business
Roll Forward
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Beginning of year | $ | 1,372 | | | $ | 1,286 | | | $ | 904 | |
| Less: Specialty insurance premium receivable | 1 | | | 2 | | | 1 | |
| Financial guaranty insurance premiums receivable | 1,371 | | | 1,284 | | | 903 | |
| Gross written premiums on new business, net of commissions | 369 | | | 462 | | | 689 | |
| Gross premiums received, net of commissions | (383) | | | (426) | | | (318) | |
| Adjustments: | | | | | |
| Changes in the expected term | 6 | | | (10) | | | (21) | |
| Accretion of discount, net of commissions on assumed business | 26 | | | 18 | | | 10 | |
| Foreign exchange gain (loss) on remeasurement | (22) | | | 43 | | | 21 | |
| Expected recovery of premiums previously written off | 4 | | | — | | | — | |
| Financial guaranty insurance premium receivable | 1,371 | | | 1,371 | | | 1,284 | |
| Specialty insurance premium receivable | 1 | | | 1 | | | 2 | |
| December 31, | $ | 1,372 | | | $ | 1,372 | | | $ | 1,286 | |
Approximately 78% and 80% of gross premiums receivable, net of commissions payable at December 31, 2021 and December 31, 2020, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in expected lives and new business.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Financial Guaranty Insurance
Expected Future Premium Collections and Earnings
| | | | | | | | | | | |
| | As of December 31, 2021 |
| Future Premiums
to be Collected (1) | | Future Net Premiums
to be Earned (2) |
| | (in millions) |
| 2022 (January 1 - March 31) | $ | 47 | | | $ | 78 | |
| 2022 (April 1 - June 30) | 39 | | | 78 | |
| 2022 (July 1 - September 30) | 28 | | | 77 | |
| 2022 (October 1 - December 31) | 33 | | | 75 | |
| Subtotal 2022 | 147 | | | 308 | |
| 2023 | 107 | | | 287 | |
| 2024 | 99 | | | 265 | |
| 2025 | 88 | | | 241 | |
| 2026 | 83 | | | 223 | |
| 2027-2031 | 354 | | | 920 | |
| 2032-2036 | 249 | | | 628 | |
| 2037-2041 | 165 | | | 361 | |
| After 2041 | 347 | | | 495 | |
| Total | $ | 1,639 | | | 3,728 | |
| Future accretion | | | 268 | |
| Total future net earned premiums | | | $ | 3,996 | |
____________________
(1) Net of assumed commissions payable.
(2) Net of reinsurance.
Selected Information for Financial Guaranty Insurance Policies with Premiums Paid in Installments
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| | (dollars in millions) |
| Premiums receivable, net of commissions payable | $ | 1,371 | | $ | 1,371 |
| Deferred premium revenue | $ | 1,663 | | $ | 1,664 |
| Weighted-average risk-free rate used to discount premiums | 1.6% | | 1.6% |
| Weighted-average period of premiums receivable (in years) | 12.7 | | 12.8 |
Policy Acquisition Costs
Accounting Policy
Policy acquisition costs that are directly related and essential to successful insurance contract acquisition, as well as ceding commission income and expense on ceded and assumed reinsurance contracts, are deferred and reported net.
Capitalized policy acquisition costs include the cost of underwriting personnel attributable to successful underwriting efforts. The Company conducts an annual time study, which requires the use of judgement, to estimate the amount of costs to be deferred.
Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with premiums received in installments are calculated at their contractually defined commission rates, discounted consistent with premiums receivable for all future periods, and included in DAC, with a corresponding offset to net premiums receivable or reinsurance balances payable.
DAC is amortized in proportion to net earned premiums. Amortization of deferred policy acquisition costs includes the accretion of discount on ceding commission receivable and payable. When an insured obligation is retired early, the remaining related DAC is expensed at that time.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Costs incurred for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as overhead costs are charged to expense as incurred.
Expected losses and LAE, investment income, and the remaining costs of servicing the insured or reinsured business, are considered in determining the recoverability of DAC.
Policy Acquisition Costs
Roll Forward of Deferred Acquisition Costs
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
| Beginning of year | $ | 119 | | | $ | 111 | | | $ | 105 | |
| Costs deferred during the period | 26 | | | 24 | | | 23 | |
| Costs amortized during the period | (14) | | | (16) | | | (17) | |
| December 31, | $ | 131 | | | $ | 119 | | | $ | 111 | |
Losses
Accounting Policies
Loss and LAE Reserve
Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses and reported in other assets. Any loss and LAE reserves related to FG VIEs are eliminated upon consolidation. Any expected losses to be paid (recovered) on credit derivatives are reflected in the fair value of credit derivatives.
Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company’s stand‑ready obligation. At contract inception, the entire stand-ready obligation is represented entirely by unearned premium reserve. Unearned premium reserve is deferred premium revenue, less claim payments (net of recoveries received) that have not yet been recognized in the statement of operations (contra-paid). A loss and LAE reserve for a financial guaranty insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (total losses) exceed the deferred premium revenue, on a contract-by-contract basis. As a result, the Company has expected loss to be paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes into income.
When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent there is no loss and LAE reserve on a contract, then such claim payment is recorded as “contra-paid,” which reduces the unearned premium reserve. The contra-paid is recognized in “loss and loss adjustment expenses (benefit)” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. “Loss and loss adjustment expenses (benefit)” in the consolidated statement of operations is presented net of cessions to reinsurers.
Salvage and Subrogation Recoverable
When the Company becomes entitled to the cash flow from the underlying collateral of, or other recoveries in relation to, an insured exposure under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the following: (i) a reduction in the corresponding loss and LAE reserve with a benefit to the consolidated statement of operations; (ii) no effect on the consolidated balance sheet or statement of operations, if “total loss” is not in excess of deferred premium revenue; or (iii) the recording of a salvage asset with a benefit to the consolidated statement of operations if the transaction is in a net recovery position at the reporting date. The ceded component of salvage and subrogation recoverable is reported in “other liabilities”.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Expected Loss to be Expensed
Expected loss to be expensed represents past or expected future financial guaranty insurance net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount.
Insurance Contracts’ Loss Information
Loss reserves are based on expected loss to be paid (recovered) which is discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0% to 1.98% with a weighted average of 1.02% as of December 31, 2021, and 0.0% to 1.72% with a weighted average of 0.60% as of December 31, 2020.
The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.
Net Reserve (Salvage) by Sector
| | | | | | | | | | | | | | |
| | As of December 31, |
| Sector | | 2021 | | 2020 |
| | | (in millions) |
| Public finance: | | | | |
| U.S. public finance | | $ | 60 | | | $ | 129 | |
| Non-U.S. public finance | | 1 | | | 11 | |
| Public finance | | 61 | | | 140 | |
| Structured finance: | | | | |
| U.S. RMBS | | (24) | | | (52) | |
| Other structured finance | | 42 | | | 34 | |
| Structured finance | | 18 | | | (18) | |
| Total | | $ | 79 | | | $ | 122 | |
Components of Net Reserve (Salvage)
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| | (in millions) |
| Loss and LAE reserve | $ | 869 | | | $ | 1,088 | |
| Reinsurance recoverable on unpaid losses (1) | (5) | | | (8) | |
| Loss and LAE reserve, net | 864 | | | 1,080 | |
| Salvage and subrogation recoverable | (801) | | | (991) | |
| Salvage and subrogation reinsurance payable (2) | 16 | | | 33 | |
| Salvage and subrogation recoverable, net | (785) | | | (958) | |
| Net reserve (salvage) | $ | 79 | | | $ | 122 | |
____________________
(1) Reported in “other assets” on the consolidated balance sheets.
(2) Reported in “other liabilities” on the consolidated balance sheets.
The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid, which represents the claim payments made and recoveries received that have not yet been recognized in the statements of operations; (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received); and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Reconciliation of Net Expected Loss to be Paid (Recovered) to Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
| | | | | |
| As of December 31, 2021 |
| | (in millions) |
| Net expected loss to be paid (recovered) - financial guaranty insurance | $ | 359 | |
| Contra-paid, net | 40 | |
| Salvage and subrogation recoverable, net | 785 | |
| Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance | (859) | |
| Net expected loss to be expensed (present value) | $ | 325 | |
The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
| | | | | |
| | As of December 31, 2021 |
| | (in millions) |
| 2022 (January 1 - March 31) | $ | 7 | |
| 2022 (April 1 - June 30) | 7 | |
| 2022 (July 1 - September 30) | 7 | |
| 2022 (October 1 - December 31) | 7 | |
| Subtotal 2022 | 28 | |
| 2023 | 27 | |
| 2024 | 27 | |
| 2025 | 26 | |
| 2026 | 26 | |
| 2027-2031 | 111 | |
| 2032-2036 | 66 | |
| 2037-2041 | 11 | |
| After 2041 | 3 | |
| Net expected loss to be expensed | 325 | |
| Future accretion | 129 | |
| Total expected future loss and LAE | $ | 454 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The following table presents the loss and LAE (benefit) reported in the consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.
Loss and LAE (Benefit) by Sector
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| Sector | | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Public finance: | | | | | | |
| U.S. public finance | | $ | (146) | | | $ | 225 | | | $ | 247 | |
| Non-U.S. public finance | | (9) | | | 5 | | | (7) | |
| Public finance | | (155) | | | 230 | | | 240 | |
| Structured finance: | | | | | | |
| U.S. RMBS | | (69) | | | (34) | | | (154) | |
| Other structured finance | | 4 | | | 7 | | | 7 | |
| Structured finance | | (65) | | | (27) | | | (147) | |
| Loss and LAE (benefit) | | $ | (220) | | | $ | 203 | | | $ | 93 | |
In each of the years presented, the primary component of U.S. public finance loss and LAE (benefit) was Puerto Rico exposures.
The following tables provide information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross | | Net Total BIG |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
| Number of risks (1) | 117 | | | 16 | | | 129 | | | 262 | | | 262 | |
| Remaining weighted-average period (in years) | 7.6 | | 8.9 | | 8.9 | | 8.5 | | 8.5 |
| | | | | | | | | |
| Outstanding exposure: | | | | | | | | | |
| Par | $ | 2,437 | | | $ | 177 | | | $ | 4,745 | | | $ | 7,359 | | | $ | 7,293 | |
| Interest | 1,000 | | | 36 | | | 1,942 | | | 2,978 | | | 2,962 | |
| Total (2) | $ | 3,437 | | | $ | 213 | | | $ | 6,687 | | | $ | 10,337 | | | $ | 10,255 | |
| | | | | | | | | |
| Expected cash outflows (inflows) | $ | 111 | | | $ | 40 | | | $ | 4,820 | | | $ | 4,971 | | | $ | 4,918 | |
| Potential recoveries (3) | (656) | | | (10) | | | (3,829) | | | (4,495) | | | (4,430) | |
| Subtotal | (545) | | | 30 | | | 991 | | | 476 | | | 488 | |
| Discount | 19 | | | (3) | | | (145) | | | (129) | | | (129) | |
| Expected losses to be paid (recovered) | $ | (526) | | | $ | 27 | | | $ | 846 | | | $ | 347 | | | $ | 359 | |
| | | | | | | | | |
| Deferred premium revenue | $ | 85 | | | $ | 2 | | | $ | 350 | | | $ | 437 | | | $ | 435 | |
| Reserves (salvage) | $ | (549) | | | $ | 25 | | | $ | 584 | | | $ | 60 | | | $ | 74 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross | | Net Total BIG |
| | BIG 1 | | BIG 2 | | BIG 3 | | Total BIG | |
| (dollars in millions) |
| Number of risks (1) | 125 | | | 19 | | | 126 | | | 270 | | | 270 | |
| Remaining weighted-average period (in years) | 7.5 | | 9.2 | | 9.4 | | 8.7 | | 8.7 |
| | | | | | | | | |
| Outstanding exposure: | | | | | | | | | |
| Par | $ | 2,791 | | | $ | 130 | | | $ | 5,009 | | | $ | 7,930 | | | $ | 7,855 | |
| Interest | 1,092 | | | 36 | | | 2,175 | | | 3,303 | | | 3,285 | |
| Total (2) | $ | 3,883 | | | $ | 166 | | | $ | 7,184 | | | $ | 11,233 | | | $ | 11,140 | |
| | | | | | | | | |
| Expected cash outflows (inflows) | $ | 172 | | | $ | 29 | | | $ | 4,441 | | | $ | 4,642 | | | $ | 4,591 | |
| Potential recoveries (3) | (697) | | | (3) | | | (3,385) | | | (4,085) | | | (4,011) | |
| Subtotal | (525) | | | 26 | | | 1,056 | | | 557 | | | 580 | |
| Discount | 22 | | | (3) | | | (122) | | | (103) | | | (104) | |
| Expected losses to be paid (recovered) | $ | (503) | | | $ | 23 | | | $ | 934 | | | $ | 454 | | | $ | 476 | |
| | | | | | | | | |
| Deferred premium revenue | $ | 116 | | | $ | 1 | | | $ | 394 | | | $ | 511 | | | $ | 508 | |
| Reserves (salvage) | $ | (538) | | | $ | 21 | | | $ | 619 | | | $ | 102 | | | $ | 127 | |
__________________
(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.
(2)Includes amounts related to FG VIEs.
(3)Represents expected inflows for future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments, 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.
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.
For example, the U.S. Insurance Subsidiaries have issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. The U.S. Insurance Subsidiaries insure periodic payments owed by the municipal obligors to the bank counterparties. In such cases, the U.S. Insurance Subsidiaries would be required to pay the termination payment owed by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy, if: (i) the U.S. Insurance Subsidiaries have been downgraded below the rating trigger set forth in a swap under which they have insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing the U.S. Insurance Subsidiaries or otherwise curing the downgrade of the U.S. Insurance Subsidiaries; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded below the rating trigger set forth in such swap (which rating trigger varies on a transaction by transaction basis), and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it. Conversely, no termination payment would be owed in such cases if the transaction documents include as a condition that an underlying event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded below a specified rating trigger, and such condition has not been met. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of the U.S. Insurance Subsidiaries were downgraded below “A-” by S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (S&P) or below “A3” by Moody’s Investors Service, Inc. (Moody’s), and the conditions
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
giving rise to the obligation of the U.S. Insurance Subsidiaries to make a payment under the swap policies were all satisfied, then the U.S. Insurance Subsidiaries could pay claims in an amount not exceeding approximately $21 million in respect of such termination payments.
As another example, with respect to variable rate demand obligations (VRDOs) for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% – 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2021, AGM and AGC had insured approximately $1.7 billion net par of VRDOs, of which approximately $25 million of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.
In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM in respect to AGMH’s former guaranteed investment contracts (GIC) business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody’s. AGMH’s former subsidiary FSA Asset Management LLC is expected to have sufficient eligible and liquid assets to satisfy any expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.
Reinsurance
The Company assumes financial guaranty exposure (Assumed Financial Guaranty Business) from third-party insurers, primarily other monoline financial guaranty companies that currently are in runoff (Legacy Monoline Insurers). The Company’s Assumed Financial Guaranty Business represents $16.3 billion, or approximately 4.4%, of the Company’s total gross financial guaranty insured exposure of $367.8 billion, as measured by insured debt service, as of December 31, 2021.
The Company’s assumed reinsurance agreements with the Legacy Monoline Insurers are generally subject to termination at the option of the ceding company: (i) if the Company fails to meet certain financial and regulatory criteria; (ii) if the Company fails to maintain a specified minimum financial strength rating(s); or (iii) upon certain changes of control of the Company. Upon termination due to one of the above events, the Company typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the Assumed Financial Guaranty Business (plus in certain cases, an additional required amount), after which the Company would be released from liability with respect to such business. As of December 31, 2021, if each third-party insurer ceding financial guaranty business to any of the Company’s insurance subsidiaries had a right to recapture such business, and chose to exercise such right, the aggregate amounts that AGC and AG Re could be required to pay to all such companies would be approximately $233 million and $33 million, respectively.
The Company also assumes specialty business at AGRO. AGRO’s assumed reinsurance agreements in respect of this specialty business generally require it to post collateral for the ceding insurer if AGRO fails to maintain a specified minimum financial strength rating(s). If S&P downgrades AGRO’s financial strength rating (currently “AA”) below “A-”, and A.M. Best Company, Inc. downgrades AGRO’s financial strength rating (currently “A+”) below “A-”, AGRO would be required to post, as of December 31, 2021, up to an estimated $14 million of collateral in respect of its assumed specialty business.
The Company cedes portions of its gross insured financial guaranty exposure (Ceded Financial Guaranty Business) to third-party insurers. This Ceded Financial Guaranty Business represents $410 million, or approximately 0.1%, of the Company’s total gross insured exposure of $367.8 billion, as measured by insured debt service, as of December 31, 2021. The Company also cedes $534 million of its $1.6 billion in gross insured specialty insurance and reinsurance business.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
In 2020, the Company reassumed $336 million in par, including $118 million in net par of Puerto Rico exposures, from its largest remaining legacy third-party financial guaranty reinsurer, resulting in a commutation gain of $38 million in 2020.
Effect of Reinsurance
The following table presents the components of premiums and losses reported in the consolidated statements of operations attributable to the Assumed and Ceded Businesses (both financial guaranty and specialty).
Effect of Reinsurance on Premiums Written, Premiums Earned and Loss and LAE (Benefit)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Premiums Written: | | | | | |
| Direct | $ | 355 | | | $ | 453 | | | $ | 663 | |
| Assumed | 22 | | | 1 | | | 14 | |
| Ceded (1) | — | | | 13 | | | 10 | |
| Net | $ | 377 | | | $ | 467 | | | $ | 687 | |
| | | | | |
| Premiums Earned: | | | | | |
| Direct | $ | 385 | | | $ | 448 | | | $ | 429 | |
| Assumed | 32 | | | 41 | | | 54 | |
| Ceded | (3) | | | (4) | | | (7) | |
| Net | $ | 414 | | | $ | 485 | | | $ | 476 | |
| | | | | |
| Loss and LAE (benefit): | | | | | |
| Direct (2) | $ | (203) | | | $ | 182 | | | $ | 101 | |
| Assumed | 5 | | | 24 | | | 2 | |
| Ceded | (22) | | | (3) | | | (10) | |
| Net | $ | (220) | | | $ | 203 | | | $ | 93 | |
____________________
(1) Positive ceded premiums written were due to commutations and changes in expected debt service schedules.
(2) See Note 5, Expected Loss to be Paid (Recovered), for additional information on the economic loss development (benefit).
7. Contracts Accounted for as Credit Derivatives
The portfolio of outstanding exposures discussed in Note 4, Outstanding Exposure, and Note 5, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and FG VIEs. Amounts presented in this note relate only to contracts accounted for as derivatives. See Note 6, Contracts Accounted for as Insurance for amounts that relate to insurance and Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for amounts that are accounted for as FG VIEs. The Company’s credit derivatives (financial guaranty contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps.
Credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.
Accounting Policy
Credit derivatives are recorded at fair value. Changes in fair value are reported in “net change in fair value of credit derivatives” in the consolidated statement of operations. The fair value of credit derivatives is reflected as either net assets or net liabilities determined on a contract-by-contract basis in the Company’s consolidated balance sheets. See Note 10, Fair Value Measurement, for a discussion on the fair value methodology for credit derivatives.
Credit Derivative Net Par Outstanding by Sector
The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 13.2 years and 11.9 years as of December 31, 2021 and December 31, 2020, respectively.
Credit Derivatives (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 | | As of December 31, 2020 |
| Sector | | Net Par
Outstanding | | Net Fair Value Asset (Liability) | | Net Par
Outstanding | | Net Fair Value Asset (Liability) |
| | | (in millions) |
| U.S. public finance | | $ | 1,705 | | | $ | (72) | | | $ | 1,980 | | | $ | (38) | |
| Non-U.S. public finance | | 1,800 | | | (48) | | | 2,257 | | | (27) | |
| U.S. structured finance | | 400 | | | (32) | | | 997 | | | (30) | |
| Non-U.S. structured finance | | 135 | | | (2) | | | 137 | | | (5) | |
| Total | | $ | 4,040 | | | $ | (154) | | | $ | 5,371 | | | $ | (100) | |
____________________
(1) Expected loss to be paid was $5 million as of December 31, 2021 and expected recoveries were $1 million as of December 31, 2020.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 | | As of December 31, 2020 |
| Rating Category | | Net Par
Outstanding | | % of Total | | Net Par
Outstanding | | % of Total |
| | | (dollars in millions) |
| AAA | | $ | 1,503 | | | 37.2 | % | | $ | 1,796 | | | 33.5 | % |
| AA | | 1,283 | | | 31.8 | | | 1,541 | | | 28.7 | |
| A | | 514 | | | 12.7 | | | 758 | | | 14.1 | |
| BBB | | 677 | | | 16.7 | | | 1,156 | | | 21.5 | |
| BIG | | 63 | | | 1.6 | | | 120 | | | 2.2 | |
| Credit derivative net par outstanding | | $ | 4,040 | | | 100.0 | % | | $ | 5,371 | | | 100.0 | % |
Fair Value of Credit Derivatives
Fair Value Gains (Losses) on Credit Derivatives
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Realized gains (losses) and other settlements | $ | (3) | | | $ | (4) | | | $ | (27) | |
| Net unrealized gains (losses) | (55) | | | 85 | | | 21 | |
| Fair value gains (losses) on credit derivatives | $ | (58) | | | $ | 81 | | | $ | (6) | |
During 2021, fair value losses on credit derivatives were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC’s credit protection decreased during the period. For those CDS transactions that
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company would expect to receive on these transactions increased. These losses were partially offset by price improvement in certain underlying collateral and the termination of certain CDS transactions.
During 2020, fair value gains on credit derivatives were generated primarily as a result of the increased cost to buy protection on AGC. Some of the unrealized fair value gains from the increased cost to buy protection on AGC was limited by certain transactions reaching their floor levels. As of December 31, 2020, approximately 51% of the fair value of CDS contracts was related to transactions that had reached their floors, which consisted of two transactions with $2.4 billion in net par outstanding.
During 2019, fair value losses on credit derivatives were generated primarily as a result of the decreased cost to buy protection on AGC, changes in discount rates and amount paid in relation to certain structured finance CDS transactions. These losses were partially offset by price improvements on the underlying collateral of the Company’s CDS.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date.
CDS Spread on AGC (in basis points)
| | | | | | | | | | | | | | | | | |
| As of |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Five-year CDS spread | 49 | | | 132 | | | 41 | |
| One-year CDS spread | 16 | | | 36 | | | 9 | |
Fair Value of Credit Derivative Assets (Liabilities) and Effect of AGC Credit Spread
| | | | | | | | | | | |
| As of |
| | December 31, 2021 | | December 31, 2020 |
| | (in millions) |
| Fair value of credit derivatives before effect of AGC credit spread | $ | (225) | | | $ | (313) | |
| Plus: Effect of AGC credit spread | 71 | | | 213 | |
| Net fair value of credit derivatives | $ | (154) | | | $ | (100) | |
The fair value of CDS contracts as of December 31, 2021, 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.
Collateral Posting for Certain Credit Derivative Contracts
The transaction documentation with one counterparty for $18 million in CDS net par insured by the Company requires the Company to post collateral, subject to a $18 million cap, to secure its obligation to make payments under such contracts. Eligible collateral is generally cash or U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. As of December 31, 2021, the Company did not need to post collateral to satisfy these requirements.
8. Investments and Cash
Accounting Policy
Fixed-maturity debt securities are classified as available-for-sale and are measured at fair value. Loss mitigation securities are accounted for based on their underlying investment type, excluding the effects of the Company’s insurance. Unrealized gains and losses that are not associated with credit related factors are reported as a component of accumulated OCI (AOCI), net of deferred income taxes, in shareholders’ equity. Available-for-sale fixed-maturity securities are recorded on a trade-date basis.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in certain money market funds.
Other invested assets primarily consist of equity method investments. The Company reports its interest in the earnings of equity method investments in “equity in earnings of investees” in the consolidated statement of operations. Where financial information of investees are not received on a timely basis, such results are reported on a lag. The Company classifies distributions received from equity method investments using the cumulative earnings approach in the consolidated statements of cash flows. Under the cumulative earnings approach, distributions received up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows. Distributions from equity method investments for which the Company elected the fair value option are classified as investing activities.
AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not reported in “investments” on the consolidated balance sheets, but rather, such AssuredIM Funds are consolidated and reported in “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles”, with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable noncontrolling interests (NCI). See Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for further information regarding the CIVs.
Cash consists of cash on hand, demand deposits for all entities, and cash and cash equivalents for consolidated AssuredIM Funds. See Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Net investment income primarily includes the income earned on fixed-maturity securities and short-term investments, including amortization of premiums and accretion of discounts. For mortgage-backed securities and any other securities for which there is prepayment risk, prepayment assumptions are evaluated quarterly and revised as necessary. For securities other than PCD securities, any necessary adjustments due to changes in effective yields and maturities are recognized in net investment income using the retrospective method.
Net realized investment gains (losses) include sales of investments, which are determined using the specific identification method, reductions to amortized cost of available-for-sale investments that have been written down due to the Company’s intent to sell them or it being more likely than not that the Company will be required to sell them, and the change in allowance for credit losses (including accretion) for periods starting on or after January 1, 2020, or other-than-temporary impairments for reporting periods prior to January 1, 2020.
For all securities that were originally purchased with credit deterioration, accrued interest is not separately presented, but rather is a component of the amortized cost of the instrument. For all other available-for-sale securities, a separate amount for accrued interest is reported in “other assets”.
Credit Losses
Credit Impairment – Subsequent to the Adoption of the Financial Instruments Credit Losses Standard on January 1, 2020:
For fixed-maturity securities for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to net realized investment gains (losses). The allowance for credit losses is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit related factors is presented as a component of AOCI.
When estimating future cash flows for fixed-maturity securities, management considers the historical performance of underlying assets and available market information as well as bond-specific considerations. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by security type:
•the extent to which fair value is less than amortized cost;
•credit ratings;
•any adverse conditions specifically related to the security, industry, and/or geographic area;
•changes in the financial condition of the issuer, or underlying loan obligors;
•general economic and political factors;
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•remaining payment terms of the security;
•prepayment speeds;
•expected defaults; and
•the value of any embedded credit enhancements.
Credit losses are reassessed each period. The allowance for credit losses and the corresponding charge to net realized investment gains (losses) can be reversed if conditions change, however, the allowance for credit losses will never be reduced below zero. When the Company determines that all or a portion of a fixed-maturity security is uncollectible, the uncollectible amortized cost amount is written off with a corresponding reduction to the allowance for credit losses. If cash flows that were previously written off are collected, the recovery is recognized in net realized investment gains (losses).
An allowance for credit loss is not established upon initial recognition of an available-for-sale debt security, except for purchased credit deteriorated (PCD) securities. PCD securities are defined as financial assets that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. An initial allowance for credit loss is recognized on the date of acquisition of PCD securities. The amortized cost of PCD securities on the date of acquisition is equal to the purchase price plus the allowance for credit loss, but no credit loss expense is recognized in the statement of operations on the date of acquisition. After the date of acquisition, deterioration (or improvement) in credit will result in an increase (or decrease) to the allowance and an offsetting credit loss expense (or benefit). To measure this, the Company performs a discounted cash flow analysis. For PCD securities that are also beneficial interests, favorable or adverse changes in expected cash flows are recognized as a decrease (or increase) to the allowance for credit losses. Those changes in expected cash flows that are not captured through the allowance are reflected as a prospective adjustment of the security’s yield within net investment income.
The Company has elected to not measure credit losses on its accrued interest receivable and instead writes off accrued interest at the earliest to occur: (i) the date it is deemed uncollectible; or (ii) when it is six months past due. All write-offs of accrued interest are recorded as a reduction to net investment income in the consolidated statements of operations. For securities the Company intends to sell and securities for which it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost, and the fair value of the security is below amortized cost, the amortized cost is written down to current fair value, with a corresponding charge to net realized investment gains (losses). No allowance is established in these situations and any previously recorded allowance is reversed. The new cost basis is not adjusted for subsequent increases in estimated fair value.
The length of time an instrument has been impaired or the effect of changes in foreign exchange rates are not considered in the Company’s assessment of credit loss. The assessment of whether a credit loss exists is performed each reporting period.
Credit Impairment – Prior to the Adoption of the Financial Instruments Credit Losses Standard on January 1, 2020:
Changes in fair value for other-than-temporarily-impaired securities were bifurcated between credit losses and non-credit changes in fair value. The credit loss on other-than-temporarily-impaired securities were reported in “net realized investment gains (losses).”
The Company had a formal review process to determine other-than-temporary impairment (OTTI) for securities in its investment portfolio where there was no intent to sell and it was not more-likely-than-not that it would have been required to sell the security before recovery. Factors considered when assessing impairment included:
•a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;
•a decline in the market value of a security for a continuous period of 12 months;
•recent credit downgrades of the applicable security or the issuer by rating agencies;
•the financial condition of the applicable issuer;
•whether loss of investment principal is anticipated;
•the impact of foreign exchange rates; and
•whether scheduled interest payments are past due.
The Company assessed the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the security was in an unrealized loss position and its net present value was less than the amortized cost of the investment, an OTTI was recorded. The net present value was calculated by discounting the
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Company’s estimate of projected future cash flows at the effective interest rate implicit in the debt security at the time of purchase. The Company’s estimates of projected future cash flows were driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company developed these estimates using information based on historical experience, credit analysis and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other relevant data. For mortgage-backed and asset-backed securities, cash flow estimates also included prepayment and other assumptions regarding the underlying collateral such as default rates, recoveries and changes in value. In addition to the factors noted above, the Company also sought advice from its outside investment managers.
The assumptions used in these projections required the use of significant management judgment. If management's assessment changed in the future, the Company may have ultimately recorded a loss after having originally concluded that the decline in value was temporary.
For securities in an unrealized loss position where the Company had the intent to sell or it is more-likely-than-not that it would be required to sell the security before recovery, the entire impairment loss (i.e., the difference between the security’s fair value and its amortized cost) was recorded in the consolidated statements of operations. Credit losses reduced the amortized cost of impaired securities. The amortized cost basis was adjusted for accretion and amortization (using the effective interest method) with a corresponding entry recorded in “net investment income”.
Investment Portfolio
The investment portfolio consists of both externally and internally managed portfolios. The majority of the investment portfolio is managed by three outside managers and AssuredIM, for which the Company has established investment guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.
The internally managed portfolio primarily consists of the Company’s investments in: (i) securities acquired for loss mitigation purposes; (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM; and (iii) other investments including certain fixed-maturity and short-term securities and equity method investments. Equity method investments primarily consist of generally less liquid alternative investments including: an investment in renewable and clean energy and private equity funds. The Company had unfunded commitments of $95 million as of December 31, 2021 related to certain of the Company’s alternative investments.
Investment Portfolio
Carrying Value
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| | (in millions) |
| Fixed-maturity securities (1): | | | |
| Externally managed | $ | 6,843 | | | $ | 7,301 | |
| Loss mitigation securities and other | 818 | | | 925 | |
| AssuredIM managed | 541 | | | 547 | |
| Short-term investments (2) | 1,225 | | | 851 | |
| Other invested assets: | | | |
| Equity method investments - AssuredIM Funds (3) | — | | | 91 | |
| Equity method investments - other | 169 | | | 107 | |
| Other | 12 | | | 16 | |
| Total | $ | 9,608 | | | $ | 9,838 | |
____________________
(1) 7.5% and 8.1% of fixed-maturity securities were rated BIG, as of December 31, 2021 and December 31, 2020, respectively, consisting primarily of loss mitigation securities.
(2) Weighted average credit rating of AAA as of both December 31, 2021 and December 31, 2020, based on the lower of the Moody’s and S&P classifications.
(3) As of December 31, 2021, this equity method investment was consolidated. See Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for further information regarding the CIVs.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The U.S. Insurance Subsidiaries, through their jointly-owned investment subsidiary, AGAS, are authorized to invest up to $750 million in AssuredIM Funds. As of December 31, 2021, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $702 million, of which $458 million represented net invested capital and $244 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, healthcare structured capital and municipal bonds. As of December 31, 2021 and December 31, 2020, the fair value of AGAS’ interest in AssuredIM Funds was $543 million and $345 million, respectively.
Accrued investment income was $69 million and $75 million as of December 31, 2021 and December 31, 2020, respectively. In 2021, 2020 and 2019, the Company did not write off any accrued investment income.
Fixed-Maturity Securities by Security Type
As of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Security Type | | Percent
of
Total (1) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | AOCI
Pre-tax Gain
(Loss) on
Securities
with
Credit Loss | | Weighted Average Credit Rating (2) |
| | | (dollars in millions) |
| Obligations of state and political subdivisions | | 43 | % | | $ | 3,386 | | | $ | (12) | | | $ | 290 | | | $ | (4) | | | $ | 3,660 | | | $ | — | | | AA- |
| U.S. government and agencies | | 2 | | | 123 | | | — | | | 7 | | | (2) | | | 128 | | | — | | | AA+ |
| Corporate securities (3) | | 32 | | | 2,516 | | | (1) | | | 111 | | | (21) | | | 2,605 | | | (4) | | | A |
| Mortgage-backed securities (4): | | | | | | | | | | | | | | | | |
| RMBS | | 6 | | | 454 | | | (17) | | | 24 | | | (24) | | | 437 | | | (24) | | | BBB+ |
| Commercial mortgage-backed securities (CMBS) | | 4 | | | 332 | | | — | | | 14 | | | — | | | 346 | | | — | | | AAA |
| Asset-backed securities: | | | | | | | | | | | | | | | | |
| CLOs | | 6 | | | 457 | | | — | | | 1 | | | — | | | 458 | | | — | | | AA- |
| Other | | 5 | | | 420 | | | (12) | | | 26 | | | (2) | | | 432 | | | (2) | | | CCC+ |
| Non-U.S. government securities | | 2 | | | 134 | | | — | | | 5 | | | (3) | | | 136 | | | — | | | AA- |
| Total fixed-maturity securities | | 100 | % | | $ | 7,822 | | | $ | (42) | | | $ | 478 | | | $ | (56) | | | $ | 8,202 | | | $ | (30) | | | A+ |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fixed-Maturity Securities by Security Type
As of December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Security Type | | Percent
of
Total (1) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | AOCI
Pre-tax Gain
(Loss) on
Securities
with
Credit Loss | | Weighted Average Credit Rating (2) |
| | | (dollars in millions) |
| Obligations of state and political subdivisions | | 44 | % | | $ | 3,633 | | | $ | (11) | | | $ | 369 | | | $ | — | | | $ | 3,991 | | | $ | — | | | AA- |
| U.S. government and agencies | | 2 | | | 151 | | | — | | | 12 | | | (1) | | | 162 | | | — | | | AA+ |
| Corporate securities (3) | | 29 | | | 2,366 | | | (42) | | | 210 | | | (21) | | | 2,513 | | | (16) | | | A |
| Mortgage-backed securities (4): | | | | | | | | | | | | | | | | |
| RMBS | | 7 | | | 571 | | | (19) | | | 35 | | | (21) | | | 566 | | | (20) | | | A- |
| CMBS | | 4 | | | 358 | | | — | | | 29 | | | — | | | 387 | | | — | | | AAA |
| Asset-backed securities: | | | | | | | | | | | | | | | | |
| CLOs | | 7 | | | 531 | | | — | | | 2 | | | (1) | | | 532 | | | — | | | AA- |
| Other | | 5 | | | 427 | | | (6) | | | 31 | | | (3) | | | 449 | | | (3) | | | CCC+ |
| Non-U.S. government securities | | 2 | | | 167 | | | — | | | 10 | | | (4) | | | 173 | | | — | | | AA- |
| Total fixed-maturity securities | | 100 | % | | $ | 8,204 | | | $ | (78) | | | $ | 698 | | | $ | (51) | | | $ | 8,773 | | | $ | (39) | | | A+ |
____________________
(1)Based on amortized cost.
(2) Ratings represent the lower of the Moody’s and S&P classifications, except for loss mitigation or risk management securities, which use internal ratings classifications. The Company’s portfolio primarily consists of high-quality, liquid instruments.
(3) Includes securities issued by taxable universities and hospitals.
(4) U.S. government-agency obligations were approximately 31% of mortgage-backed securities as of December 31, 2021 and 35% as of December 31, 2020, based on fair value.
Gross Unrealized Loss by Length of Time
for Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total |
| | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss | | Fair
Value | | Gross Unrealized
Loss |
| | (dollars in millions) |
| Obligations of state and political subdivisions | $ | 117 | | | $ | (3) | | | $ | 10 | | | $ | (1) | | | $ | 127 | | | $ | (4) | |
| U.S. government and agencies | 26 | | | — | | | 32 | | | (2) | | | 58 | | | (2) | |
| Corporate securities | 407 | | | (12) | | | 70 | | | (5) | | | 477 | | | (17) | |
| Mortgage-backed securities: | | | | | | | | | | | |
| RMBS | 4 | | | — | | | — | | | — | | | 4 | | | — | |
| Asset-backed securities: | | | | | | | | | | | |
| CLOs | 226 | | | — | | | — | | | — | | | 226 | | | — | |
| Non-U.S. government securities | 24 | | | (2) | | | 8 | | | (1) | | | 32 | | | (3) | |
| Total | $ | 804 | | | $ | (17) | | | $ | 120 | | | $ | (9) | | | $ | 924 | | | $ | (26) | |
| Number of securities (1) | | | 355 | | | | | 60 | | | | | 410 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Gross Unrealized Loss by Length of Time
for Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | |
| U.S. government and agencies | 22 | | | (1) | | | — | | | — | | | 22 | | | (1) | |
| Corporate securities | 73 | | | — | | | 45 | | | (5) | | | 118 | | | (5) | |
| Mortgage-backed securities: | | | | | | | | | | | |
| RMBS | 15 | | | (1) | | | 1 | | | — | | | 16 | | | (1) | |
| CMBS | — | | | — | | | 1 | | | — | | | 1 | | | — | |
| Asset-backed securities: | | | | | | | | | | | |
| CLOs | 251 | | | (1) | | | 81 | | | — | | | 332 | | | (1) | |
| Non-U.S. government securities | — | | | — | | | 38 | | | (4) | | | 38 | | | (4) | |
| Total | $ | 362 | | | $ | (3) | | | $ | 166 | | | $ | (9) | | | $ | 528 | | | $ | (12) | |
| Number of securities (1) | | | 94 | | | | | 46 | | | | | 139 | |
___________________
(1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.
The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of December 31, 2021 and December 31, 2020 were not related to credit quality. In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss position prior to expected recovery in value. As of December 31, 2021, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 23 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2020, 11 securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $6 million as of December 31, 2021 and $8 million as of December 31, 2020.
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of December 31, 2021 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Distribution of Fixed-Maturity Securities by Contractual Maturity
As of December 31, 2021
| | | | | | | | | | | |
| | Amortized
Cost | | Estimated
Fair Value |
| | (in millions) |
| Due within one year | $ | 224 | | | $ | 229 | |
| Due after one year through five years | 1,816 | | | 1,896 | |
| Due after five years through 10 years | 1,711 | | | 1,802 | |
| Due after 10 years | 3,285 | | | 3,492 | |
| Mortgage-backed securities: | | | |
| RMBS | 454 | | | 437 | |
| CMBS | 332 | | | 346 | |
| Total | $ | 7,822 | | | $ | 8,202 | |
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 $243 million as of December 31, 2021 and $262 million, as of December 31, 2020. The investment
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
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 $1,231 million and $1,511 million, based on fair value as of December 31, 2021 and December 31, 2020, respectively.
There were no investments that were non-income producing for the years ended December 31, 2021 and December 31, 2020.
Net Investment Income
Net investment income is a function of the yield that the Company earns on 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.
Net Investment Income
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Investment income: | | | | | |
| Externally managed | $ | 204 | | | $ | 231 | | | $ | 273 | |
| Loss mitigation securities and other | 55 | | | 65 | | | 114 | |
| Managed by AssuredIM (1) | 16 | | | 8 | | | — | |
| Investment income | 275 | | | 304 | | | 387 | |
| Investment expenses | (6) | | | (7) | | | (9) | |
| Net investment income | $ | 269 | | | $ | 297 | | | $ | 378 | |
____________________
(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.
Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Gross realized gains on sales available-for-sale securities | $ | 20 | | | $ | 27 | | | $ | 56 | |
| Gross realized losses on sales available-for-sale securities | (5) | | | (5) | | | (3) | |
| Net foreign currency gains (losses) | 2 | | | 6 | | | 3 | |
| Change in credit impairment and intent to sell (1) | (7) | | | (17) | | | (35) | |
| Other net realized gains (losses) | 5 | | | 7 | | | 1 | |
| Net realized investment gains (losses) | $ | 15 | | | $ | 18 | | | $ | 22 | |
____________________
(1)Credit impairment in 2021 was primarily due to loss mitigation securities. COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in 2020. Credit impairment in 2019 was primarily attributable to foreign exchange losses and loss mitigation securities.
The following table presents the roll forward of the credit losses on fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2021 and 2020 or an OTTI in 2019 and for which unrealized loss was recognized in AOCI.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Roll Forward of Credit Losses for Fixed-Maturity Securities
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Allowance for Credit Losses | | OTTI |
| | (in millions) |
| Balance, beginning of period | $ | 78 | | | $ | — | | | $ | 185 | |
Effect of adoption of accounting guidance on credit losses on
January 1, 2020 | — | | | 62 | | | — | |
Additions for securities for which credit
impairments were not previously recognized | 4 | | | 1 | | | — | |
| Reductions for securities sold and other settlements | (42) | | | — | | | (15) | |
Additions (reductions) for credit losses on securities for
which credit impairments were previously recognized | 2 | | | 15 | | | 16 | |
| Balance, end of period | $ | 42 | | | $ | 78 | | | $ | 186 | |
The Company recorded $6 million and $16 million in credit loss expense for the years ended December 31, 2021 and December 31, 2020, respectively. The Company did not purchase any securities with credit deterioration during the periods presented. Most of the Company’s securities with credit deterioration are loss mitigation or other risk management securities.
Equity in Earnings of Investees
Equity in Earnings of Investees
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| AssuredIM Fund | $ | 30 | | | $ | 14 | | | $ | — | |
| Other | 64 | | | 13 | | | 4 | |
| Total equity in earnings of investees (1) | $ | 94 | | | $ | 27 | | | $ | 4 | |
____________________
(1) Includes $36 million and $14 million for the year ended December 31, 2021 and December 31, 2020, respectively, related to fair value gains on investments at fair value option using NAV, as a practical expedient. There were no fair value gains (losses) on investments at fair value option using NAV as a practical expedient for 2019.
Dividends received from equity method investments were $15 million, $10 million and $6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The table below presents summarized financial information for equity method investments that meet, in aggregate, the requirements for disclosing summarized disclosures as of December 31, 2021. Amounts in the table below represent amounts reported in the consolidated financial statements as of December 31, 2021 and 2020, and for the years ended December 31, 2021, 2020 and 2019. The financial statements for the majority of these equity method investments are reported on a lag.
Balance Sheet Data
| | | | | | | | | | | |
| As of December, 31 |
| 2021 | | 2020 |
| (in millions) |
| Total assets | $ | 1,543 | | | $ | 1,150 | |
| Total liabilities | 412 | | | 499 | |
| Total equity | 1,131 | | | 651 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Statement of Operations Data
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
| Total revenues | $ | 548 | | | $ | 225 | | | $ | 94 | |
| Total expenses | 64 | | | 84 | | | 67 | |
| Net income (loss) | 484 | | | 141 | | | 26 | |
9. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
Accounting Policy
The types of entities that the Company assesses for consolidation principally include: (i) entities whose debt obligations the insurance subsidiaries insure in its financial guaranty business; and (ii) investment vehicles in which AGAS has a variable interest, and which AssuredIM manages (including CLOs that are collateralized financing entities (CFEs), CLO warehouses and AssuredIM Funds). For each of these types of entities, the Company first determines whether the entity is a VIE or a voting interest entity (VOE) which involves assessing whether the equity investment at risk is sufficient to cover the entity’s expected losses and whether the holders of the equity investment at risk (as a group) have substantive voting rights.
For entities determined to be a VIE, and for which the Company has a variable interest, the Company assesses whether it is the primary beneficiary of the VIE. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with an entity and continuously reassesses whether it is the primary beneficiary. In determining whether it is the primary beneficiary, the Company considers all facts and circumstances, including an evaluation of economic interests in the VIE held directly and indirectly through related parties and entities under common control. The Company is the primary beneficiary of a VIE when it has both: (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
If the Company concludes that it is the primary beneficiary of the VIE, it consolidates the VIE in the Company’s consolidated financial statements. If, as part of its continual reassessment of the primary beneficiary determination, the Company concludes that it is no longer the primary beneficiary of a VIE, the Company deconsolidates the entity and recognizes the impact of that change on the consolidated financial statements.
If the entity being evaluated for consolidation is not initially determined to be a VIE (or, later, if a significant event occurs that causes an entity to no longer qualify as a VIE), then the entity would be a VOE. Consolidation generally is required when the Company, directly or indirectly, has a controlling financial interest of the VOE being assessed.
FG VIEs
The Company has elected the fair value option for assets and liabilities of FG VIEs. Upon initial adoption of the new accounting guidance for VIEs in 2010, the Company elected to fair value its FG VIE assets and liabilities as the carrying amount transition method was not practical. To allow for consistency in the accounting for its consolidated FG VIE assets and liabilities, the Company has elected the fair value option for FG VIEs that it has subsequently consolidated. The Company records the fair value of FG VIEs’ assets and liabilities based on modeled prices.
The net change in the fair value of consolidated FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in instrument-specific credit risk (ISCR) which is separately presented in OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs.”
The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the Company’s CDS spread from the most recent date of consolidation to the current period. In general, if the Company’s CDS spread tightens, more value will be assigned to the Company’s credit; however, if the Company’s CDS widens, less value is assigned to the Company’s credit.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The Company has limited contractual rights to obtain the financial records of its consolidated FG VIEs. The FG VIEs do not prepare separate GAAP financial statements; therefore, the Company compiles GAAP financial information for them based on trustee reports prepared by and received from third parties. Such trustee reports are not available to the Company until approximately 30 days after the end of any given period. The time required to perform adequate reconciliations and analyses of the information in these trustee reports results in a one quarter lag in reporting the FG VIEs’ activities. As a result of the lag in reporting FG VIEs, cash and short-term investments do not reflect cash outflows to the holders of the debt issued by the FG VIEs for claim payments made by the Company’s insurance subsidiaries to the consolidated FG VIEs until the subsequent reporting period. The Company updates the model assumptions each reporting period for the most recent available information, which incorporates the impact of material events that may have occurred since the quarter lag date.
The cash flows generated by the FG VIEs’ assets are classified as cash flows from investing activities. Paydowns of FG VIEs’ liabilities are supported by the cash flows generated by FG VIEs’ assets and, for liabilities with recourse, possibly claim payments made by AGM or AGC under their financial guaranty insurance contracts. Paydowns of FG VIEs’ liabilities both with and without recourse are classified as cash flows used in financing activities. Interest income, interest expense and other expenses of the FG VIEs’ assets and liabilities are classified as operating cash flows. Claim payments made by AGM and AGC under the financial guaranty contracts issued to the FG VIEs are eliminated upon consolidation and therefore such claim payments are treated as paydowns of FG VIEs’ liabilities and as a financing activity as opposed to an operating activity of AGM and AGC.
CIVs
CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses in which the Company is the primary beneficiary. The consolidated AssuredIM Funds are investment companies for accounting purposes and therefore account for their underlying investments at fair value. The consolidated CLOs are CFEs, and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured under the fair value option using the CFE practical expedient. The assets and liabilities of consolidated CLO warehouses managed by AssuredIM (collectively, the consolidated CLOs) are also reported at fair value. Changes in the fair value of assets and liabilities of CIVs, interest income and interest expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the consolidated statements of operations. Certain AssuredIM private equity funds, whose financial statements are not prepared in time for the Company’s periodic reporting, are reported on a quarter lag.
Upon consolidation of an AssuredIM Fund, the Company records NCI for the portion of each fund owned by employees and any third-party investors. Redeemable NCI is classified outside of shareholders’ equity, within temporary equity, and non-redeemable NCI is presented within shareholders’ equity in the consolidated balance sheets. Amendments to redemption features may result in reclassifications between redeemable NCI and non-redeemable NCI.
Investment transactions in the consolidated AssuredIM Funds are recorded on a trade/contract date basis. Money market funds in consolidated AssuredIM Funds are classified as cash equivalents and carried at cost, consistent with those funds’ separately issued financial statements, and therefore the Company has included these amounts in the total amount of cash on the consolidated statements of cash flows. Cash flows of the CIVs attributable to such entities’ investment purchases and dispositions, as well as operating expenses of the investment vehicles, are presented as cash flow from operating activities in the consolidated statements of cash flows. Borrowings under credit facilities, debt issuances and repayments, and capital cash flows to and from investors are presented as financing activities, consistent with investment company guidelines.
FG VIEs
The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs, generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on FG VIEs’ liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 5, Expected Loss to be Paid (Recovered).
As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed no longer to have those protective rights, the VIE is deconsolidated.
The FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because they guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. 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.
Number of Consolidated FG VIEs
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | |
| Beginning of year | 25 | | | 27 | | | 31 | |
| Consolidated | 1 | | | 2 | | | 1 | |
| Deconsolidated | (1) | | | (2) | | | (3) | |
| Matured | — | | | (2) | | | (2) | |
| December 31 | 25 | | | 25 | | | 27 | |
The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the consolidated balance sheets, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities with recourse.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Consolidated FG VIEs by Type of Collateral
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| | (in millions) |
| FG VIEs’ assets: | | | |
| U.S. RMBS first lien | $ | 221 | | | $ | 243 | |
| U.S. RMBS second lien | 39 | | | 53 | |
| Total FG VIEs’ assets | $ | 260 | | | $ | 296 | |
| | | |
| FG VIEs’ liabilities with recourse: | | | |
| U.S. RMBS first lien | $ | 227 | | | $ | 260 | |
| U.S. RMBS second lien | 42 | | | 56 | |
| Total FG VIEs’ liabilities with recourse | $ | 269 | | | $ | 316 | |
| FG VIEs’ liabilities without recourse: | | | |
| U.S. RMBS first lien | $ | 20 | | | $ | 17 | |
| Total FG VIEs’ liabilities without recourse | $ | 20 | | | $ | 17 | |
The change in the ISCR of the FG VIEs’ assets held as of December 31, 2021, 2020 and 2019 that was reported in the consolidated statements of operations for 2021, 2020 and 2019 were gains of $14 million, $6 million and $39 million, respectively. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield.
The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. In general, if the insurance subsidiaries’ CDS spread tightens, more value will be assigned to insurance subsidiaries’ credit; however, if the insurance subsidiaries’ CDS spread widens, less value is assigned to the insurance subsidiaries’ credit.
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| | (in millions) |
| Excess of unpaid principal over fair value of: | | | |
| FG VIEs’ assets | $ | 255 | | | $ | 274 | |
| FG VIEs’ liabilities with recourse | 12 | | | 15 | |
| FG VIEs’ liabilities without recourse | 15 | | | 16 | |
| Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 52 | | | 68 | |
| Unpaid principal for FG VIEs’ liabilities with recourse (1) | 281 | | | 330 | |
____________________
(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2021 through 2038.
CIVs
CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses in which the Company is the primary beneficiary. The table below summarizes the number of consolidated CIVs by type as of December 31, 2021 and December 31, 2020. As of both dates, the Company consolidated one CIV that meets the criteria for a VOE, because the Company possesses substantially all of the economics and all of the decision-making of that CIV.
Number of Consolidated CIVs by Type
| | | | | | | | | | | | | | |
| | | As of December 31, |
| CIV Type | | 2021 | | 2020 |
| Funds | | 8 | | | 7 | |
| CLOs | | 9 | | | 3 | |
| CLO warehouses | | 3 | | | 1 | |
| Total number of consolidated CIVs | | 20 | | | 11 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The table below summarizes the change in the number of consolidated CIVs during each of the periods. During 2021, five consolidated CLO warehouses became CLOs. During 2020, two consolidated CLO warehouses became CLOs.
Roll Forward of Number of Consolidated CIVs
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Beginning of year | 11 | | | 4 | | | — | |
| Consolidated | 10 | | | 7 | | | 4 | |
| Deconsolidated | (1) | | | — | | | — | |
| December 31 | 20 | | | 11 | | | 4 | |
As of December 31, 2021 and December 31, 2020, all but one of the CIVs are VIEs. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities.
In the fourth quarter of 2021, an AssuredIM Fund secured additional capital commitments, triggering a reconsideration of the Company’s previous conclusion not to consolidate that AssuredIM Fund (the Fund). As a result of the reconsideration, the Company concluded that it became the Fund’s primary beneficiary, as the dilution of the Fund’s lead investor’s interest caused that investor to lose its substantive ability to dissolve the Fund and remove the Company as the Fund’s general partner. Accordingly, the Company consolidated the Fund and recognized a gain on consolidation of $31 million. Total assets and liabilities consolidated were $273 million and $33 million, respectively. In addition, the consolidation resulted in a non-controlling interest of $89 million. There were no other gains or losses on consolidation or deconsolidation during the periods presented.
The gain on consolidation is primarily the difference between: (i) the sum of the carrying value of the Company’s interest in the Fund immediately prior to consolidation; and (ii) the sum of the fair value of the partners’ capital allocated to the Company, relating to its limited partner and general partner interests in the Fund immediately prior to consolidation. The fair value of the general partner’s capital represents an allocation of undistributed carried interest. The carried interest has not yet been recorded by AssuredIM as the requirements for revenue recognition have not yet been met. Carried interest generated by the Fund will be recognized as revenue, by AssuredIM, once the probability of a significant reversal of revenue no longer exists. Meanwhile the compensation related to that carried interest, that is awarded to certain employees that manage the Fund, would be recognized as an expense by AssuredIM to the extent that it is probable of being made and reasonably estimable. Any carried interest that is recognized as revenue, relating to a consolidated AssuredIM fund, is reported in the Asset Management segment, and eliminated in consolidation.
The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Assets and Liabilities of CIVs
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| | (in millions) |
| Assets: | | | |
| Fund assets: | | | |
| Cash and cash equivalents | $ | 64 | | | $ | 117 | |
| Fund investments, at fair value: | | | |
| Equity securities and warrants (1) | 252 | | | 18 | |
| Obligations of state and political subdivisions | 101 | | | 61 | |
| Corporate securities | 98 | | | 9 | |
| Structured products (2) | 62 | | | 39 | |
| Due from brokers and counterparties | 49 | | | 35 | |
| Other | 1 | | | — | |
| CLO and CLO warehouse assets: | | | |
| Cash | 156 | | | 17 | |
| CLO investments: | | | |
| Loans in CLOs, fair value option | 3,913 | | | 1,291 | |
| Loans in CLO warehouses, fair value option | 331 | | | 170 | |
| Short-term investments, at fair value | 145 | | | 139 | |
| Due from brokers and counterparties | 99 | | | 17 | |
| Total assets (3) | $ | 5,271 | | | $ | 1,913 | |
| | | |
| Liabilities: | | | |
CLO obligations, fair value option (4) | $ | 3,665 | | | $ | 1,227 | |
| Warehouse financing debt, fair value option (5) | 126 | | | 25 | |
| Securities sold short, at fair value | 41 | | | 47 | |
| Due to brokers and counterparties | 570 | | | 290 | |
| Other liabilities | 34 | | | 1 | |
| Total liabilities | $ | 4,436 | | | $ | 1,590 | |
____________________
(1) Includes investments in AssuredIM Funds or other affiliated entities of $198 million and $10 million as of December 31, 2021 and December 31, 2020, respectively.
(2) Includes investments in affiliated entities of $25 million and $16 million as of December 31, 2021 and December 31, 2020, respectively.
(3) Includes assets of a VOE as of December 31, 2021 and December 31, 2020 of $12 million and $10 million, respectively.
(4) The weighted average maturity of CLO obligations was 6.6 years and 5.6 years for December 31, 2021 and December 31, 2020, respectively. The weighted average interest rate of CLO obligations was 1.8% as of December 31, 2021 and 2.4% for December 31, 2020. CLO obligations will mature at various dates from 2033 to 2035.
(5) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.8 years as of December 31, 2021 and 1.7 years as of December 31, 2020. The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.1% as of December 31, 2021 and 1.7% as of December 31, 2020. Warehouse financing debt will mature at various dates during 2023.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Redeemable Noncontrolling Interests in CIVs
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | (in millions) |
| Beginning balance | $ | 21 | | | $ | 7 | | | $ | — | |
| Reallocation of ownership interests | — | | | (10) | | | — | |
| Contributions to CIVs | — | | | 25 | | | 12 | |
| Distributions from CIVs | — | | | — | | | (4) | |
| Net income (loss) attributable to the redeemable NCI | 1 | | | (1) | | | (1) | |
| December 31, | $ | 22 | | | $ | 21 | | | $ | 7 | |
As of December 31, 2021 the CIVs had a commitment to invest of $336 million.
As of December 31, 2021, the CIVs included forward currency contracts and interest rate swaps with a notional of $26 million and $23 million, respectively, and average notional of $19 million and $15 million, respectively. As of December 31, 2020, the CIVs included forward currency contracts and interest rate swaps with a notional of $11 million and $8 million, respectively, and average notional of $6 million and $4 million, respectively. The fair value of the forward contracts and interest rate swaps is reported in the “assets of CIVs” or “liabilities of CIVs” in the consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the consolidated statements of operations. The net change in fair value of forward currency contracts and interest rate swaps were losses of less than $1 million in both 2021 and 2020.
Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or the Company. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or the Company.
As of December 31, 2021, these credit facilities had varying maturities ranging from June 3, 2023 to October 20, 2023 with the aggregate principal amount not exceeding $1.0 billion. The available commitment was based on the amount of equity contributed to the warehouse which was $205 million. As of December 31, 2021, $103 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 100 basis points (bps) to 3-month LIBOR plus 100 bps (with a floor on the LIBOR/Euribor rates of zero). The CLO warehouses were in compliance with all financial covenants as of December 31, 2021.
As of December 31, 2021, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $80 million jointly and $53 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributed to the funds. As of the date of consolidation, $16 million was drawn down by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime Floor of 3%). The fund was in compliance with all financial covenants as of December 31, 2021.
As of December 31, 2020, €20 million (or $25 million) and €1 million (or $1 million) had been drawn under a BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1) credit facility dated August 26, 2020 by EUR 2021-1 and AssuredIM, respectively. During the first quarter of 2021, EUR 2021-1 and AssuredIM repaid the borrowings under this credit facility.
Other Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the original insured financial guaranty insurance or credit derivative contract, the Company classifies the assets and liabilities of those VIEs in the line items that most accurately reflect the nature of the items, as opposed to within the FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $96 million and liabilities of $11 million as of December 31, 2021 and assets of $96 million and liabilities of $3 million as of December 31, 2020, primarily reported in “investments” and “credit derivative liabilities” on the consolidated balance sheets.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Non-Consolidated VIEs
As described in Note 4, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 16 thousand policies monitored as of December 31, 2021, approximately 15 thousand policies are not within the scope of FASB Accounting Standards Codification (ASC) 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of December 31, 2021 and 2020, the Company identified 69 and 79 policies, respectively, that contain provisions and experienced events that may trigger consolidation. Based on management’s assessment of these potential triggers or events, the Company consolidated 25 FG VIEs as of December 31, 2021 and December 31, 2020, respectively. The Company’s exposure provided through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 4, Outstanding Exposure.
The Company manages funds and CLOs that have been determined to be VIEs, in which the Company concluded that it is not the primary beneficiary, because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company's equity interests in these entities are reported in “other invested assets” on the consolidated balance sheet. The maximum exposure to loss is limited to the Company’s investment in equity interests as well as foregone future management and performance fees. See Note 11, Asset Management Fees, for earnings and receivables from managing funds and CLOs. See Note 17, Related Party Transactions, for other receivables from and payables to AssuredIM funds.
10. Fair Value Measurement
Accounting Policy
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During 2021, no changes were made to the Company’s valuation models that had or are expected to have a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.
The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date.
The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
There was a transfer of a fixed-maturity security from Level 3 to Level 2 during 2020. There were no other transfers into or from Level 3 during the periods presented.
Carried at Fair Value
Fixed-Maturity Securities
The fair value of fixed-maturity securities is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news.
Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. The valuation of fixed-maturity securities is more subjective when markets are less liquid due to the lack of market-based inputs.
As of December 31, 2021, the Company used models to price 191 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $1.2 billion. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecasts and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the security including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.
Short-Term Investments
Short-term investments that are traded in active markets are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Other Invested Assets
Other invested assets that are carried at fair value primarily include: (i) equity securities traded in active markets that are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices; and (ii) equity method investments for which the Company elected the fair value option using NAV, as a practical expedient, which are excluded from the fair value hierarchy.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Other Assets
Committed Capital Securities
The fair value of CCS, which is reported in “other assets” on the consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (see Note 13, Long-Term Debt and Credit Facilities). The change in fair value of the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, LIBOR curve projections, the Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3 in the fair value hierarchy.
Supplemental Executive Retirement Plans
The Company classifies assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the consolidated statements of operations.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes in the fair value reported in the consolidated statements of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions are generally terminated for an amount that approximates the present value of future premiums or for a negotiated amount, rather than at fair value.
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative contracts in determining the fair value of these contracts.
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at December 31, 2021 were such that market prices of the Company’s CDS contracts were not available.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Assumptions and Inputs
The various inputs and assumptions that are key to the measurement of the Company’s fair value for CDS contracts are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company.
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. It is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.
Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from trading desks for the specific asset in question. The Company validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are unpublished spread quotes from market participants or market traders who are not trustees. The Company obtains this information as the result of direct communication with these sources as part of the valuation process. The following spread hierarchy is utilized in determining which source of gross spread to use.
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
The rates used to discount future expected premium cash flows ranged from 0.11% to 1.78% at December 31, 2021 and 0.19% to 1.33% at December 31, 2020.
The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its transactions. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS transactions that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a transaction generally decreases.
In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. Based on fair value, approximately 51% of the Company’s CDS contracts were fair valued using this minimum premium as of December 31, 2020. As of December 31, 2021, the corresponding percentage was de minimis. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC’s credit spreads. In general, when AGC’s credit spreads narrow, the cost to hedge AGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC’s credit spreads widen, the cost to hedge AGC’s name increases causing more transactions to price at established floor levels. The Company corroborates the
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s own credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture.
The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.
A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are less than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of such contract and discounting such amounts using the LIBOR corresponding to the weighted average remaining life of the contract.
Strengths and Weaknesses of Model
The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
The primary strengths of the Company’s CDS modeling techniques are:
•The model takes into account the transaction structure and the key drivers of market value.
•The model maximizes the use of market-driven inputs whenever they are available.
•The model is a consistent approach to valuing positions.
The primary weaknesses of the Company’s CDS modeling techniques are:
•There is no exit market or any actual exit transactions; therefore, the Company’s exit market is a hypothetical one based on the Company’s entry market.
•There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.
•The markets for the inputs to the model are highly illiquid, which impacts their reliability.
•Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.
FG VIEs’ Assets and Liabilities
The Company elected the fair value option for the FG VIEs’ assets and liabilities and classifies them as Level 3 in the fair value hierarchy. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. The FG VIEs issued securities are typically collateralized by first lien and second lien RMBS.
The fair value of the Company’s 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
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
changes to some of these inputs could have materially changed the market value of the FG VIEs’ assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets.
The third party utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds.
The models used to price the FG VIEs’ liabilities 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.
Significant changes to any of the inputs described above could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse.
Assets and Liabilities of CIVs
The consolidated CLOs are CFEs, and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured under the fair value option using the CFE practical expedient. Loans in CLOs are priced using a loan pricing service which aggregates quotes from loan market participants. The loans are all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt is measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by the Company).
Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE. The Company has elected the fair value option to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO.
Investments held by CIVs which are listed or quoted on a national securities exchange or market are values 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. These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments. Inputs are used in applying the various valuation techniques and broadly refer to the current assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors. Investments in private equity funds are generally valued utilizing NAV.
Level 2 assets in the CIVs include assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the fair value option), securities sold short and derivative liabilities. Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, 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 December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) |
| Assets: | | | | | | | |
| Investments, available-for-sale: | | | | | | | |
| Fixed-maturity securities: | | | | | | | |
| Obligations of state and political subdivisions | $ | — | | | $ | 3,588 | | | $ | 72 | | | $ | 3,660 | |
| U.S. government and agencies | — | | | 128 | | | — | | | 128 | |
| Corporate securities | — | | | 2,605 | | | — | | | 2,605 | |
| Mortgage-backed securities: | | | | | | | |
| RMBS | — | | | 221 | | | 216 | | | 437 | |
| CMBS | — | | | 346 | | | — | | | 346 | |
| Asset-backed securities | — | | | 27 | | | 863 | | | 890 | |
| Non-U.S. government securities | — | | | 136 | | | — | | | 136 | |
| Total fixed-maturity securities | — | | | 7,051 | | | 1,151 | | | 8,202 | |
| Short-term investments | 1,225 | | | — | | | — | | | 1,225 | |
| Other invested assets (1) | 6 | | | — | | | 6 | | | 12 | |
| FG VIEs’ assets | — | | | — | | | 260 | | | 260 | |
| Assets of CIVs (2): | | | | | | | |
| Fund investments: | | | | | | | |
| Equity securities and warrants | — | | | 7 | | | 239 | | | 246 | |
| Obligations of state and political subdivisions | — | | | 101 | | | — | | | 101 | |
| Corporate securities | — | | | 7 | | | 91 | | | 98 | |
| Structured products | — | | | 62 | | | — | | | 62 | |
| CLOs and CLO warehouse assets: | | | | | | | |
| Loans | — | | | 4,244 | | | — | | | 4,244 | |
| Short-term investments | 145 | | | — | | | — | | | 145 | |
| Total assets of CIVs | 145 | | | 4,421 | | | 330 | | | 4,896 | |
| Other assets | 53 | | | 54 | | | 25 | | | 132 | |
| Total assets carried at fair value | $ | 1,429 | | | $ | 11,526 | | | $ | 1,772 | | | $ | 14,727 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Credit derivative liabilities | $ | — | | | $ | — | | | $ | 156 | | | $ | 156 | |
| FG VIEs’ liabilities (3) | — | | | — | | | 289 | | | 289 | |
| Liabilities of CIVs: | | | | | | | |
| CLO obligations of CFEs | — | | | — | | | 3,665 | | | 3,665 | |
| Warehouse financing debt | — | | | 103 | | | 23 | | | 126 | |
| Securities sold short | — | | | 41 | | | — | | | 41 | |
| Securitized borrowing | — | | | — | | | 17 | | | 17 | |
| Total liabilities of CIVs | — | | | 144 | | | 3,705 | | | 3,849 | |
| Other liabilities | — | | | 1 | | | — | | | 1 | |
| Total liabilities carried at fair value | $ | — | | | $ | 145 | | | $ | 4,150 | | | $ | 4,295 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) |
| Assets: | | | | | | | |
| Investments, available-for-sale: | | | | | | | |
| Fixed-maturity securities | | | | | | | |
| Obligations of state and political subdivisions | $ | — | | | $ | 3,890 | | | $ | 101 | | | $ | 3,991 | |
| U.S. government and agencies | — | | | 162 | | | — | | | 162 | |
| Corporate securities | — | | | 2,483 | | | 30 | | | 2,513 | |
| Mortgage-backed securities: | | | | | | | |
| RMBS | — | | | 311 | | | 255 | | | 566 | |
| CMBS | — | | | 387 | | | — | | | 387 | |
| Asset-backed securities | — | | | 41 | | | 940 | | | 981 | |
| Non-U.S. government securities | — | | | 173 | | | — | | | 173 | |
| Total fixed-maturity securities | — | | | 7,447 | | | 1,326 | | | 8,773 | |
| Short-term investments | 786 | | | 65 | | | — | | | 851 | |
| Other invested assets (1) | 10 | | | — | | | 5 | | | 15 | |
| FG VIEs’ assets | — | | | — | | | 296 | | | 296 | |
| Assets of CIVs (2): | | | | | | | |
| Fund investments: | | | | | | | |
| Equity securities | — | | | 8 | | | 2 | | | 10 | |
| Obligations of state and political subdivisions | — | | | 61 | | | — | | | 61 | |
| Corporate securities | — | | | 9 | | | — | | | 9 | |
| Structured products | — | | | 39 | | | — | | | 39 | |
| CLOs and CLO warehouse assets: | | | | | | | |
| Loans | — | | | 1,461 | | | — | | | 1,461 | |
| Short-term investments | 139 | | | — | | | — | | | 139 | |
| Total assets of CIVs | 139 | | | 1,578 | | | 2 | | | 1,719 | |
| Other assets | 42 | | | 48 | | | 55 | | | 145 | |
| Total assets carried at fair value | $ | 977 | | | $ | 9,138 | | | $ | 1,684 | | | $ | 11,799 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Credit derivative liabilities | $ | — | | | $ | — | | | $ | 103 | | | $ | 103 | |
| FG VIEs’ liabilities (3) | — | | | — | | | 333 | | | 333 | |
| Liabilities of CIVs: | | | | | | | |
| CLO obligations of CFEs | — | | | — | | | 1,227 | | | 1,227 | |
| Warehouse financing debt | — | | | 25 | | | — | | | 25 | |
| Securities sold short | — | | | 47 | | | — | | | 47 | |
| Total liabilities of CIVs | — | | | 72 | | | 1,227 | | | 1,299 | |
| Other liabilities | — | | | 1 | | | — | | | 1 | |
| Total liabilities carried at fair value | $ | — | | | $ | 73 | | | $ | 1,663 | | | $ | 1,736 | |
____________________
(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $19 million and $91 million of equity method investments measured at fair value under the fair value option using the NAV as a practical expedient as of December 31, 2021 and December 31, 2020, respectively.
(2) Excludes $6 million and $8 million as of December 31, 2021 and December 31, 2020, respectively, in investments in AssuredIM Funds for which the Company records a 100% NCI. The consolidation of these funds result in a gross up of assets and NCI on the consolidated financial statements; however, they result in no economic equity or net income attributable to AGL.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
(3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
Changes in Level 3 Fair Value Measurements
The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during the years ended December 31, 2021 and 2020.
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities | | | | Assets of CIVs | | | |
| | Obligations
of State and
Political
Subdivisions | | Corporate Securities | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Equity Securities and Warrants | | Corporate Securities | | Other
(7) | |
| | (in millions) |
| Fair value as of December 31, 2020 | $ | 101 | | | $ | 30 | | | $ | 255 | | | $ | 940 | | | $ | 296 | | | $ | 2 | | | $ | — | | | $ | 54 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | |
| Net income (loss) | 23 | | (1) | 2 | | (1) | 16 | | (1) | 18 | | (1) | 26 | | (2) | 35 | | (4) | — | | | (27) | | (3) |
| Other comprehensive income (loss) | (5) | | | 16 | | | (1) | | | (5) | | | — | | | — | | | — | | | — | | |
| Purchases | — | | | — | | | — | | | 344 | | | — | | | 56 | | | — | | | — | | |
| Sales | (44) | | | (48) | | | — | | | (142) | | | — | | | (28) | | | — | | | — | | |
| Settlements | (3) | | | — | | | (54) | | | (292) | | | (62) | | | — | | | — | | | — | | |
| Consolidations | — | | | — | | | — | | | — | | | — | | | 174 | | | 91 | | | — | | |
| Fair value as of December 31, 2021 | $ | 72 | | | $ | — | | | $ | 216 | | | $ | 863 | | | $ | 260 | | | $ | 239 | | | $ | 91 | | | $ | 27 | | |
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | | | $ | 27 | | (2) | $ | 33 | | (4) | $ | — | | | $ | (28) | | (3) |
| OCI | $ | 1 | | | $ | — | | | $ | (1) | | | $ | (6) | | | | | | | | | $ | — | | |
Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis
Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | |
| | Credit Derivative Asset (Liability), net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| | (in millions) | |
| Fair value as of December 31, 2020 | $ | (100) | | | $ | (333) | | | $ | (1,227) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | (58) | | (6) | | (8) | | (2) | | 15 | | (4) | |
| Other comprehensive income (loss) | — | | | (1) | | | — | | |
| Issuances | — | | | — | | | (3,367) | | |
| Settlements | 4 | | | 53 | | | 891 | | |
| Consolidations | — | | | — | | | (17) | | |
| Fair value as of December 31, 2021 | $ | (154) | | | $ | (289) | | | $ | (3,705) | | |
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2021 included in: | | | | | | |
| Earnings | $ | (74) | | (6) | | $ | (6) | | (2) | | $ | (2) | | (4) | |
| OCI | | | $ | (1) | | | | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis
Year Ended December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Maturity Securities | | | | Assets of CIVs | | | |
| Obligations
of State and
Political
Subdivisions | | Corporate Securities | | RMBS | | Asset-
Backed
Securities | | FG VIEs’
Assets | | Equity Securities and Warrants | | Corporate Securities | | Structured Products | | Other
(7) | |
| (in millions) |
| Fair value as of December 31, 2019 | $ | 107 | | | $ | 41 | | | $ | 308 | | | $ | 658 | | | $ | 442 | | | $ | 17 | | | $ | 47 | | | $ | — | | | $ | 55 | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | | | | | | | | | | | | | |
| Net income (loss) | 5 | | (1) | | (6) | | (1) | | 15 | | (1) | | 25 | | (1) | | (70) | | (2) | | 7 | | (4) | | 2 | | (4) | | 3 | | (4) | | (1) | | (3) | |
| Other comprehensive income (loss) | (8) | | | (5) | | | (22) | | | (7) | | | — | | | — | | | — | | | — | | | — | | |
| Purchases | — | | | — | | | — | | | 384 | | | — | | | 128 | | | 5 | | | 17 | | | — | | |
| Sales | — | | | — | | | — | | | (102) | | | — | | | (150) | | | (54) | | | (20) | | | — | | |
| Settlements | (3) | | | — | | | (46) | | | (17) | | | (83) | | | — | | | — | | | — | | | — | | |
| Consolidation | — | | | — | | | — | | | — | | | 18 | | | — | | | — | | | — | | | — | | |
| Deconsolidations | — | | | — | | | — | | | — | | | (11) | | | — | | | — | | | — | | | — | | |
| Transfers out of Level 3 | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | — | | |
| Fair value as of December 31, 2020 | $ | 101 | | | $ | 30 | | | $ | 255 | | | $ | 940 | | | $ | 296 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 54 | | |
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2020 included in: | | | | | | | | | | | | | | | | | | |
| Earnings | | | | | | | | | $ | 7 | | (2) | | $ | (2) | | (4) | | $ | — | | | $ | — | | | $ | (1) | | (3) | |
| OCI | $ | (8) | | | $ | (5) | | | $ | (20) | | | $ | (4) | | | | | | | | | | | | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis
Year Ended December 31, 2020
| | | | | | | | | | | | | | | | | | | | |
| Credit Derivative Asset (Liability), net (5) | | FG VIEs’ Liabilities (8) | | Liabilities of CIVs | |
| (in millions) | |
| Fair value as of December 31, 2019 | $ | (185) | | | $ | (469) | | | $ | (481) | | |
| Total pre-tax realized and unrealized gains (losses) recorded in: | | | | | | |
| Net income (loss) | 81 | | (6) | | 57 | | (2) | | (8) | | (4) | |
| Other comprehensive income (loss) | — | | | 9 | | | — | | |
| Issuances | — | | | — | | | (738) | | |
| Settlements | 4 | | | 77 | | | — | | |
| Consolidations | — | | | (19) | | | — | | |
| Deconsolidations | — | | | 12 | | | — | | |
| Fair value as of December 31, 2020 | $ | (100) | | | $ | (333) | | | $ | (1,227) | | |
| Change in unrealized gains (losses) related to financial instruments held as of December 31, 2020 included in: | | | | | | |
| Earnings | $ | 87 | | (6) | | $ | (17) | | (2) | | $ | (8) | | (4) | |
| OCI | | | $ | 9 | | | | |
__________________(1)Included in “net realized investment gains (losses)” and “net investment income”.
(2)Included in “fair value gains (losses) on FG VIEs”.
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income”.
(4)Reported in “fair value gains (losses) on CIVs”.
(5)Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the 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 Consolidated Financial Statements, Continued
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instrument Description | | Fair Value
(in millions) | | Significant Unobservable
Inputs | | Range | | Weighted Average (4) |
| Assets (2): | | | | | | | | | | |
| Fixed-maturity securities (1): | | | | | | | | | | |
| Obligations of state and political subdivisions | | $ | 72 | | | Yield | | 4.4 | % | - | 24.5% | | 6.2% |
| RMBS | | 216 | | | CPR | | 0.0 | % | - | 22.7% | | 10.4% |
| | CDR | | 1.4 | % | - | 12.0% | | 5.9% |
| | Loss severity | | 50.0 | % | - | 125.0% | | 84.9% |
| | Yield | | 3.8 | % | - | 5.6% | | 4.5% |
| Asset-backed securities: | | | | | | | | | | |
| Life insurance transactions | | 367 | | | Yield | | 5.0% | | |
| CLOs | | 458 | | | Discount margin | | 0.0 | % | - | 2.9% | | 1.8% |
| Others | | 38 | | | Yield | | 3.2 | % | - | 7.9% | | 7.9% |
| FG VIEs’ assets (1) | | 260 | | | CPR | | 0.9 | % | - | 24.5% | | 13.3% |
| | CDR | | 1.4 | % | - | 26.9% | | 7.6% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 81.6% |
| | Yield | | 1.4 | % | - | 8.0% | | 4.6% |
| Assets of CIVs (3): | | | | | | | | | | |
| Equity securities and warrants | | 239 | | | Yield | | 7.7% | | |
| | | Discount rate | | 14.7 | % | - | 23.9% | | 21.6% |
| | | Market multiple-enterprise value/revenue | | 1.10x | | |
| | | Market multiple-enterprise value/EBITDA (6) | | 3.00x | - | 10.50x | | 8.95x |
| | | Market multiple-price to book | | 1.85x | | |
| Corporate securities | | 91 | | | Discount rate | | 14.7 | % | - | 21.4% | | 17.8% |
| | | | Yield | | 16.4% | | |
| Other assets (1) | | 23 | | | Implied Yield | | 2.7 | % | - | 3.3% | | 3.0% |
| | Term (years) | | 10 years | | |
| Liabilities: | | | | | | | | | | |
| Credit derivative liabilities, net | | (154) | | | Year 1 loss estimates | | 0.0 | % | - | 85.8% | | 0.1% |
| | Hedge cost (in bps) | | 8.0 | - | 37.1 | | 12.6 |
| | Bank profit (in bps) | | 0.0 | - | 187.8 | | 67.9 |
| | Internal floor (in bps) | | 8.8 | | |
| | Internal credit rating | | AAA | - | CCC | | AA |
| FG VIEs’ liabilities | | (289) | | | CPR | | 0.9 | % | - | 24.5% | | 13.3% |
| | CDR | | 1.4 | % | - | 26.9% | | 7.6% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 81.6% |
| | Yield | | 1.4 | % | - | 8.0% | | 3.7% |
| Liabilities of CIVs: | | | | | | | | | | |
| CLO obligations of CFEs (5) | | (3,665) | | | Yield | | 1.6 | % | - | 13.7% | | 2.1% |
| Warehouse financing debt | | (23) | | | Yield | | 12.6 | % | - | 16.0% | | 13.8% |
| Securitized borrowing | | (17) | | | Discount rate | | 23.9% | | |
| | | | Market multiple-enterprise value/revenue | | 10.50x | | |
____________________
(1) Discounted cash flow is used as the primary valuation technique.
(2) Excludes several investments reported in “other invested assets” with a fair value of $6 million.
(3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
(5) See CFE fair value methodology described above for consolidated CLOs.
(6) Earnings before interest, taxes, depreciation, and amortization.
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instrument Description | | Fair Value
(in millions) | | Significant
Unobservable
Inputs | | Range | | Weighted Average (4) |
| Assets (2): | | | | | | | | | | |
| Fixed-maturity securities (1): | | | | | | | | | | |
| Obligations of state and political subdivisions | | $ | 101 | | | Yield | | 6.4 | % | - | 33.4% | | 12.8% |
| Corporate security | | 30 | | | Yield | | 42.0% | | |
| RMBS | | 255 | | | CPR | | 0.4 | % | - | 30.0% | | 7.1% |
| | CDR | | 1.5 | % | - | 9.9% | | 6.0% |
| | Loss severity | | 45.0 | % | - | 125.0% | | 83.6% |
| | Yield | | 3.7 | % | - | 5.9% | | 4.5% |
| Asset-backed securities: | | | | | | | | | | |
| Life insurance transactions | | 367 | | | Yield | | 5.2% | | |
| CLOs | | 532 | | | Discount margin | | 0.1 | % | - | 3.1% | | 1.9% |
| Others | | 41 | | | Yield | | 2.6 | % | - | 9.0% | | 9.0% |
| FG VIEs’ assets (1) | | 296 | | | CPR | | 0.9 | % | - | 19.0% | | 9.4% |
| | CDR | | 1.9 | % | - | 26.6% | | 6.0% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 81.5% |
| | Yield | | 1.9 | % | - | 6.0% | | 4.8% |
| Assets of CIVs: | | | | | | | | | | |
| Equity securities (3) | | 2 | | | Yield | | 9.7% | | |
| Other assets (1) | | 52 | | | Implied Yield | | 3.4 | % | - | 4.2% | | 3.8% |
| | | Term (years) | | 10 years | | |
| Liabilities: | | | | | | | | | | |
| Credit derivative liabilities, net | | (100) | | | Year 1 loss estimates | | 0.0 | % | - | 85.0% | | 1.9% |
| | Hedge cost (in bps) | | 19.0 | - | 99.0 | | 32.0 |
| | Bank profit (in bps) | | 47.0 | - | 329.0 | | 93.0 |
| | Internal floor (in bps) | | 15.0 | - | 30.0 | | 21.0 |
| | Internal credit rating | | AAA | - | CCC | | AA- |
| FG VIEs’ liabilities | | (333) | | | CPR | | 0.9 | % | - | 19.0% | | 9.4% |
| | CDR | | 1.9 | % | - | 26.6% | | 6.0% |
| | Loss severity | | 45.0 | % | - | 100.0% | | 81.5% |
| | Yield | | 1.9 | % | - | 6.2% | | 3.8% |
| Liabilities of CIVs: | | | | | | | | | | |
| CLO obligations of CFEs (5) | | (1,227) | | | Yield | | 2.2 | % | - | 15.2% | | 2.5% |
____________________
(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 $5 million.
(3) The primary inputs to the valuation are recent market transaction prices, supported by market multiples and yield/discount rates.
(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, where it is calculated as a percentage of fair value.
(5) See CFE fair value methodology described above for consolidated CLOs.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Not Carried at Fair Value
Financial Guaranty Insurance Contracts
Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, and also includes adjustments for stressed losses, ceding commissions and return on capital. The Company classified the fair value of financial guaranty insurance contracts as Level 3.
Long-Term Debt
Long-term debt issued by the U.S. Holding Companies is valued by broker-dealers using third party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry.
Assets and Liabilities of CIVs
Cash equivalents are recorded at cost which approximates fair value. Due from/to brokers and counterparties primarily consists of cash, margin deposits, and cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date. Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the consolidated balance sheets where a contractual right of offset exists under an enforceable netting arrangement. The cash at brokers is partially related to collateral for securities sold short and derivative contracts; its use is therefore restricted until the securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy.
Other Liabilities
The primary component of other liabilities as of December 31, 2021 in the table below is AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain BlueMountain European CLOs, which was required to comply with its European risk retention obligations. The maturity dates are in 2034 and 2035. AssuredIM’s obligation under the master repurchase agreement is not guaranteed by any Assured Guaranty insurance or holding companies.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.
Fair Value of Financial Instruments Not Carried at Fair Value
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 |
| | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| | (in millions) |
| Assets (liabilities) | | | | | | | |
| Assets of CIVs (1) | $ | 171 | | | $ | 171 | | | $ | 152 | | | $ | 152 | |
| Other assets (including other invested assets) (2) | 134 | | | 135 | | | 84 | | | 86 | |
| Financial guaranty insurance contracts (3) | (2,394) | | | (2,315) | | | (2,464) | | | (3,882) | |
| Long-term debt | (1,673) | | | (1,832) | | | (1,224) | | | (1,561) | |
| Liabilities of CIVs (4) | (586) | | | (586) | | | (290) | | | (290) | |
| Other liabilities (5) | (45) | | | (45) | | | (27) | | | (27) | |
____________________
(1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2) Includes accrued interest, receivable for an unsettled sale of a portion of the Puerto Rico salvage and subrogation recoverable, management fees receivables, promissory note receivable and receivables for securities sold. Carrying value approximates fair value.
(3) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.
(4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value.
(5) Include accrued interest, repurchase agreement liability of $37 million as of December 31, 2021 and payables for securities purchased. Carrying value approximates fair value.
11. Asset Management Fees
The Company receives a management fee and performance fee, incentive allocation or carried interest (collectively referred to as performance fees) in exchange for providing investment advisory services to manage investment funds and CLOs. The annual management fees are typically based on a percentage of the value of the client’s net assets under management, and are generally as follows:
•Depending on the investment strategy, the management fee charged is a range of up to 2.00% per annum calculated on either the beginning of the month or quarter, or month-end NAV or other relevant basis (e.g., committed capital) of the respective funds.
•For the Company’s management or servicing of the AssuredIM CLOs the Company receives, generally 0.25% to 0.50% (combined senior investment management fee and subordinated investment management fee) per annum based on NAV. The portion of these fees that pertains to the investment by AssuredIM is typically rebated to the AssuredIM Funds.
In accordance with the investment management agreements, and by serving as the general partner, managing member or managing general partner, the Company also receives performance fees. Performance fee revenues are generated on certain management contracts when certain minimum rates of return, i.e. performance hurdles, are exceeded. Performance fee revenue may fluctuate from period to period and may not correlate with general market changes. Annual performance fee rates are generally as follows:
•Range from 10% to 20% of the net profits in excess of the high-water mark for the respective fund, or
•Range from 18% to 30% of the total cash received by investors in excess of certain benchmarks, or
•30% of the net profits in excess of the high-water mark and a credit for management fees.
For the Company’s management or servicing of the AssuredIM CLOs, the Company generally receives performance fee of 20% per annum of the remaining interest proceeds and principal proceeds after a performance hurdle is exceeded. The portion of these fees that pertains to the investment by AssuredIM Funds is typically rebated to the AssuredIM Funds.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The general partner has the right, in its sole discretion, to require certain AssuredIM Funds to distribute to the general partner an amount equal to its presumed tax liability attributable to the allocated taxable income relating to performance fee with respect to such fiscal year and are contractually not subject to clawback. The general partner received tax distributions in 2022 related to its presumed tax liability in 2021, and there were no tax distributions for 2020 and 2019.
The Company may reduce, waive or rebate the management fee and/or the performance fee with respect to any investor and/or affiliate. Certain current and former employees of the Company who have investments in the AssuredIM Funds may not be charged any management fees or performance fee.
Accounting Policy
Management, CLO and performance fees earned by AssuredIM are accounted for as contracts with customers. An entity may recognize revenue when the contractual performance criteria have been met and only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. Given the uniqueness of each fee arrangement, performance fee contractual provisions are evaluated on an individual basis to determine the timing of revenue recognition.
Components of Asset Management Fees
The following table presents the sources of asset management fees and performance fees on a consolidated basis. The year ended December 31, 2019 amounts presented in this note reflect only one quarter of activity from October 1, 2019, the BlueMountain Acquisition Date, through December 31, 2019.
Asset Management Fees
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Management fees: | | | | | |
| CLOs (1) | $ | 41 | | | $ | 21 | | | $ | 3 | |
| Opportunity funds and liquid strategies | 17 | | | 8 | | | 2 | |
| Wind-down funds | 7 | | | 25 | | | 13 | |
| Total management fees | 65 | | | 54 | | | 18 | |
| Performance fees | 1 | | | — | | | 4 | |
| Reimbursable fund expenses | 22 | | | 35 | | | — | |
| Total asset management fees | $ | 88 | | | $ | 89 | | | $ | 22 | |
_____________________
(1) To the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs. Gross management fees from CLOs, before rebates, were $47 million in 2021, $40 million in 2020 and $11 million in 2019.
The Company had management and performance fees receivable, which are included in “other assets” on the consolidated balance sheets, of $8 million as of December 31, 2021 and $5 million as of December 31, 2020. The Company had no unearned revenues as of December 31, 2021 and December 31, 2020.
12. Goodwill and Other Intangible Assets
All of the Company’s goodwill relates to the AssuredIM entities that were acquired in 2019 as part of the BlueMountain Acquisition. All of the goodwill is assigned to the Asset Management reporting unit and segment. Once goodwill is assigned to a reporting unit, generally all of the activities within the reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Accounting Policy
Goodwill represents the excess of cost over the net fair value of assets and liabilities at the date of acquisition. The Company tests goodwill for impairment annually, as of December 31, or more frequently if circumstances indicate an impairment may have occurred. The goodwill impairment analysis is performed at the reporting unit level, which is the same as
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
the Company’s operating segment level excluding the effects of the subleases on AssuredIM’s prior office space. If, after assessing qualitative factors, the Company believes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company will evaluate impairment quantitatively to determine the amount of goodwill impairment, which is the excess of the carrying amount of the reporting unit over its fair value.
Finite-lived intangible assets are recorded at fair value on the date of acquisition and are amortized over their estimated useful lives. The Company assesses finite-lived intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable. The carrying amount is deemed unrecoverable if it is greater than the sum of undiscounted cash flows expected to result from use and eventual disposition of the finite-lived intangible asset. If deemed unrecoverable, the Company records an impairment loss for the excess of the carrying amount over fair value.
The Company assesses indefinite-lived intangible assets for impairment annually as of December 31, or more frequently if circumstances indicate an impairment may have occurred. If a qualitative assessment reveals that it is more-likely-than-not that the asset is impaired, the Company calculates an updated fair value.
Goodwill and Intangible Assets
Inherent in the fair value determinations are certain judgments and estimates relating to future cash flows, including the Company’s interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations. The Company’s ability to raise third-party funds and increase and retain AUM is directly related to the performance of the assets it manages as measured against market averages and the performance of the Company’s competitors. If the Company performs worse than its competitors, it could impede its ability to raise funds, seek investors and hire and retain professionals, and may lead to an impairment of goodwill. The Company’s goodwill impairment assessment is sensitive to the Company’s assumptions of discount rates, market multiples, projections of AUM growth, and other factors, which may vary. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.
The Company’s finite-lived intangible assets consist primarily of contractual rights to earn future asset management fees from the acquired management and CLO contracts as well as a CLO distribution network. The Company’s indefinite-lived intangible assets consist of the value of insurance licenses acquired in prior business combinations.
The following table summarizes the carrying value for the Company’s goodwill and other intangible assets:
Goodwill and Other Intangible Assets
| | | | | | | | | | | | | | | | | |
| Weighted Average Amortization Period as of December 31, 2021 | | As of December 31, |
| | | 2021 | | 2020 |
| | | | (in millions) |
| Goodwill (1) | | | $ | 117 | | | $ | 117 | |
| Finite-lived intangible assets: | | | | | |
| CLO contracts | 6.8 years | | 42 | | | 42 | |
| Investment management contracts | 2.5 years | | 24 | | | 24 | |
| CLO distribution network | 2.8 years | | 9 | | | 9 | |
| Trade name | 7.8 years | | 3 | | | 3 | |
| Favorable sublease | 2.2 years | | 1 | | | 1 | |
| Lease-related intangibles | 5.2 years | | 3 | | | 3 | |
| Finite-lived intangible assets, gross | 5.4 years | | 82 | | | 82 | |
| Accumulated amortization | | | (30) | | | (18) | |
| Finite-lived intangible assets, net | | | 52 | | | 64 | |
| Indefinite-lived intangible assets (insurance licenses) | | | 6 | | | 22 | |
| Total goodwill and other intangible assets | | | $ | 175 | | | $ | 203 | |
_____________________
(1) Includes goodwill allocated to the European subsidiaries of BlueMountain. The balance changes due to foreign currency translation. The amount of goodwill deductible for tax purposes was approximately $99 million as of December 31, 2021 and $107 million as of December 31, 2020.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Goodwill and substantially all finite-lived intangible assets relate to AssuredIM. In 2021, the results of a qualitative assessment indicated that it was more likely-than-not that the fair value of the reporting unit was greater than its carrying value and therefore no goodwill impairment was recorded. To date, there have been no impairments of goodwill or finite-lived intangible assets. Amortization expense associated with the finite-lived intangible assets was $12 million, $13 million and $3 million for the years ended December 31, 2021, 2020 and 2019, respectively, and is reported in “other operating expenses” in the consolidated statements of operations.
As of December 31, 2021, future annual amortization of finite-lived intangible assets for the years 2022 through 2026 and thereafter is estimated to be:
Estimated Future Amortization Expense for Finite-Lived Intangible Assets
| | | | | | | | |
| | As of December 31, 2021 |
| Year | | (in millions) |
| 2022 | $ | 11 | |
| 2023 | 11 | |
| 2024 | 10 | |
| 2025 | 6 | |
| 2026 | | 5 | |
| Thereafter | 9 | |
Total | $ | 52 | |
On February 24, 2021, the Company received the last regulatory approval required to merge MAC with and into AGM, with AGM as the surviving company. The merger was effective on April 1, 2021. Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM. As a result, the Company wrote off the $16 million carrying value of the indefinite-lived intangible asset related to the MAC insurance licenses in the first quarter of 2021. This was reported in “other operating expenses” in the Insurance segment.
13. Long-Term Debt and Credit Facilities
Accounting Policy
Long-term debt is recorded at principal amounts net of any: (1) unamortized original issue discount or premium; (2) unamortized acquisition date fair value adjustments for AGM and AGMH debt; and (3) debt issuance costs. Original issue discount and premium, acquisition date fair value adjustments for AGM and AGMH debt, and debt issuance costs are accreted into interest expense over the contractual term of the applicable debt. When long-term debt is redeemed, the difference between the cash paid to redeem the debt and the carrying value of the debt is reported as a “loss on extinguishment of debt” in the consolidated statements of operations. When one consolidated subsidiary (AGUS) purchases outstanding debt of another consolidated subsidiary (AGMH’s), the difference between the cash paid to redeem the debt and the carrying value of the debt is reported as “other income” in the consolidated statements of operations.
CCS are carried at fair value with changes in fair value reported in the consolidated statement of operations. See Note 10, Fair Value Measurement, – Other Assets – Committed Capital Securities, for a discussion of the fair value measurement of the CCS.
Long-Term Debt
The Company’s long-term debt outstanding primarily consists of debt issued by the U.S. Holding Companies. All of the U.S. Holding Companies’ long-term debt is fully and unconditionally guaranteed by AGL; AGL’s guarantee of the junior subordinated debentures is on a junior subordinated basis.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Principal and Carrying Amounts of 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 December 31, 2021 | | As of December 31, 2020 |
| | Principal | | Carrying
Value | | Principal | | Carrying
Value |
| | (in millions) |
| AGUS 7% Senior Notes | $ | 200 | | | $ | 197 | | | $ | 200 | | | $ | 197 | |
| AGUS 5% Senior Notes (2) | 330 | | | 329 | | | 500 | | | 498 | |
| AGUS 3.15% Senior Notes | 500 | | | 495 | | | — | | | — | |
| AGUS 3.6% Senior Notes | 400 | | | 395 | | | — | | | — | |
| AGUS Series A Enhanced Junior Subordinated Debentures | 150 | | | 150 | | | 150 | | | 150 | |
AGMH 67/8% Quarterly Interest Bonds (1) (2) | — | | | — | | | 100 | | | 71 | |
| AGMH 6.25% Notes (1) (2) | — | | | — | | | 230 | | | 145 | |
| AGMH 5.6% Notes (1) (2) | — | | | — | | | 100 | | | 58 | |
| AGMH Junior Subordinated Debentures (1) (3) | 146 | | | 105 | | | 146 | | | 102 | |
| AGM Notes Payable | 2 | | | 2 | | | 3 | | | 3 | |
| Total | $ | 1,728 | | | $ | 1,673 | | | $ | 1,429 | | | $ | 1,224 | |
____________________
(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.
(2) Redeemed or partially redeemed in 2021.
(3) Net of AGMH’s long-term debt purchased by AGUS.
Debt Issued by AGUS
7% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 (7% Senior Notes) for net proceeds of $197 million. Although the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price.
5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 (5% Senior Notes) for net proceeds of $495 million. The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of AGL common shares. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. On September 27, 2021, the Company used a portion of the proceeds from the issuance of AGUS’s 3.6% Senior Notes to redeem $170 million of the outstanding principal of these 5% Senior Notes.
3.15% Senior Notes. On May 26, 2021, AGUS issued $500 million of 3.150% Senior Notes due 2031 (3.15% Senior Notes) for net proceeds of $494 million The net proceeds from the issuance were used for the redemption on July 9, 2021, of all of AGMH’s debt maturing in 2101 and a portion of AGMH debt maturing in 2102, as described below, with the balance being used for general corporate purposes, including share repurchases. AGUS may redeem all or part of the 3.15% Senior Notes at any time or from time to time prior to March 15, 2031 (the date that is three months prior to the maturity of the 3.15% Senior Notes), at its option, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 3.15% Senior Notes being redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (excluding interest accrued to the redemption date) from the redemption date to March 15, 2031 discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30- day months) at a discount rate equal to the Treasury Rate plus 25 bps; plus, in each case, accrued and unpaid interest on the 3.15% Senior Notes to be redeemed to, but excluding, the redemption date. AGUS may redeem all or part of the 3.15% Senior Notes at any time or from time to time on and after March 15, 2031, at its option, at a redemption price equal to 100% of the principal amount of the 3.15% Senior Notes being redeemed, plus accrued and unpaid interest on the 3.15% Senior Notes to be redeemed to, but excluding, the redemption date. The 3.15% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
by AGL. The 3.15% Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding. The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.
3.6% Senior Notes. On August 20, 2021, AGUS issued $400 million of 3.600% Senior Notes due 2051 (3.6% Senior Notes) for net proceeds of $395 million. The net proceeds from the issuance were used for the redemption on September 27, 2021, of all of AGMH’s debt maturing in 2103, the remaining AGMH debt maturing in 2102, and a portion of AGUS’s debt maturing in 2024, as described below. AGUS may redeem all or part of the 3.6% Senior Notes at any time or from time to time prior to March 15, 2051 (the date that is six months prior to the maturity of the 3.6% Senior Notes), at its option, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 3.6% Senior Notes being redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (excluding interest accrued to the redemption date) from the redemption date to March 15, 2051 discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Rate plus 30 bps; plus, in each case, accrued and unpaid interest on the 3.6% Senior Notes to be redeemed to, but excluding, the redemption date. AGUS may redeem all or part of the 3.6% Senior Notes at any time or from time to time on and after March 15, 2051, at its option, at a redemption price equal to 100% of the principal amount of the 3.6% Senior Notes being redeemed, plus accrued and unpaid interest on the 3.6% Senior Notes to be redeemed to, but excluding, the redemption date. The 3.6% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by AGL. The 3.6% Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding. The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.
Series A Enhanced Junior Subordinated Debentures. On December 20, 2006, AGUS issued $150 million of Debentures due 2066. The Debentures pay a floating rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%. AGUS may select at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date. The debentures are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption.
Debt Issued by AGMH
6 7/8% Notes. On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% Notes (6 7/8% Quarterly Interest Bonds) due December 15, 2101, which were redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest to the date of redemption. On July 9, 2021, the Company used a portion of the proceeds from the issuance of AGUS’ 3.15% Senior Notes to redeem the $100 million outstanding principal of AGMH’s 6 7/8% Notes.
6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which were redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest to the date of redemption. On July 9, 2021 the Company used a portion of the proceeds from the issuance of AGUS’s 3.15% Senior Notes to redeem $100 million of AGMH’s 6.25% Notes, and on September 27, 2021, the Company used a portion of the proceeds from the issuance of AGUS’s 3.6% Senior Notes to redeem the remaining $130 million outstanding principal of AGMH’s 6.25% Notes.
5.6% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which were redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest to the date of redemption. On September 27, 2021, the Company used a portion of the proceeds from the issuance of AGUS’s 3.6% Senior Notes to redeem the $100 million outstanding principal of AGMH’s 5.6% Notes.
Junior Subordinated Debentures. On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.4%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is 20 years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH. Over the past several years AGUS purchased, and as of December 31, 2021 and 2020, AGUS holds approximately $154 million in principal of the AGMH Subordinated Debentures.
Loss on Extinguishment of Debt
On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt as follows:
•all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and
•$100 million of the $230 million of AGMH’s 6.25% Notes due in 2102.
On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows:
•all $100 million of AGMH’s 5.60% Notes due in 2103,
•the remaining $130 million of AGMH 6.25% Notes due in 2102, and
•$170 million of the $500 million of AGUS’s 5% Senior Notes due in 2024.
As a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) in the year ended December 31, 2021, which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The loss on extinguishment of debt primarily consists of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the acquisition of AGMH in 2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS’s 5% Senior Notes.
Debt Service
Scheduled principal payments of the Company’s debt are as follows:
Debt Maturity Schedule (1)
As of December 31, 2021
| | | | | | | | |
| Year | | Principal |
| | | (in millions) |
| 2022 | | $ | 1 | |
| 2023 | | — | |
| 2024 | | 330 | |
| 2025 | | 1 | |
| 2026 | | — | |
| 2027-2046 | | 700 | |
| 2047-2066 | | 696 | |
| Total | | $ | 1,728 | |
____________________
(1) Includes eliminations of AGMH’s debt purchased by AGUS.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Table below summarizes the components of interest expense.
Interest Expense
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| AGUS 7% Senior Notes | $ | 13 | | | $ | 13 | | | $ | 13 | |
| AGUS 5% Senior Notes | 23 | | | 26 | | | 26 | |
| AGUS 3.15% Senior Notes | 10 | | | — | | | — | |
| AGUS 3.6% Senior Notes | 5 | | | — | | | — | |
| AGUS Series A Enhanced Junior Subordinated Debentures | 4 | | | 5 | | | 7 | |
AGMH 67/8% Quarterly Interest Bonds | 4 | | | 7 | | | 7 | |
| AGMH 6.25% Notes | 10 | | | 15 | | | 16 | |
| AGMH 5.6% Notes | 5 | | | 6 | | | 6 | |
| AGMH Junior Subordinated Debentures (1) | 12 | | | 13 | | | 14 | |
| Other | 1 | | | — | | | — | |
| Total | $ | 87 | | | $ | 85 | | | $ | 89 | |
____________________
(1) Net of interest expense on AGMH’s long-term debt purchased by AGUS.
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. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty’s financial statements.
The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC’s or AGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase the AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.
Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM CPS is one-month LIBOR plus 200 bps.
Short-Term Loan Facility
On February 3, 2022, the Company entered into a secured short-term loan facility with a major financial institution to partially fund gross payments in connection with the possible resolution of a portion of its Puerto Rico exposures. See Note 4, Outstanding Exposure. The short-term loan facility permits the Company to borrow up to $550 million for up to thirty days and up to $150 million for up to six months. The one month component will bear interest at 1.10% per annum and the six months component will bear a floating interest rate equal to the forward-looking term Secured Overnight Financing Rate (SOFR) for a tenor of one month provided by CME Group Benchmark Administration Limited, plus 1.10% per annum. The Company also will pay a structuring fee on the amounts borrowed under the facility. There have not been any drawings under this facility.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
14. Employee Benefit Plans
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
Under the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended (the Incentive Plan), the number of AGL common shares that may be delivered under the Incentive Plan may not exceed 18,670,000. In the event of certain transactions affecting AGL’s common shares, the number or type of shares subject to the Incentive Plan, the number and type of shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may be adjusted.
The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and full value awards that are based on AGL’s common shares. The grant of full value awards may be in return for a participant's previously performed services, or in return for the participant surrendering other compensation that may be due, or may be contingent on the achievement of performance or other objectives during a specified period, or may be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become vested upon a change in control of AGL.
The Incentive Plan is administered by the Compensation Committee of AGL's Board of Directors (the Board), except as otherwise determined by the Board. The Board may amend or terminate the Incentive Plan. As of December 31, 2021, 8,449,295 common shares were available for grant under the Incentive Plan.
Accounting Policy
Share-based compensation expense is based on the grant date fair value using the grant date closing price, the lattice, Monte Carlo or Black-Scholes-Merton (Black-Scholes) pricing models. The Company amortizes the fair value of share-based awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the exception of retirement‑eligible employees. For retirement-eligible employees, certain awards contain retirement provisions and therefore are amortized over the period through the date the employee first becomes eligible to retire and is no longer required to provide service to earn part or all of the award.
The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan is estimated at the beginning of the offering period using the Black-Scholes option valuation model.
The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with the exception of retirement-eligible employees. For retirement-eligible employees, the expense is recognized immediately.
Long-Term Incentive Plan
Restricted Stock Units
Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. Restricted stock units awarded to employees have vesting terms similar to those of the restricted stock awards, as described below, and are delivered on the vesting date. The Company has granted restricted stock units to directors of the Company.
Restricted Stock Unit Activity
| | | | | | | | | | | | | | |
| Nonvested Stock Units | | Number of Stock Units | | Weighted Average Grant Date Fair Value Per Share |
| Nonvested at December 31, 2020 | 936,449 | | | $ | 41.68 | |
| Granted | 340,787 | | | 44.08 | |
| Vested | (311,683) | | | 38.77 | |
| Forfeited | (59,251) | | | 46.89 | |
| Nonvested at December 31, 2021 | 906,302 | | | $ | 43.25 | |
As of December 31, 2021, the total unrecognized compensation cost related to outstanding nonvested restricted stock units was $21 million, which the Company expects to recognize over the weighted-average remaining service period of 1.8 years. The total fair value of restricted stock units vested during the years ended December 31, 2021, 2020 and 2019 was $12
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
million, $11 million and $11 million, respectively. The weighted-average grant-date fair value of restricted stock units granted during the years ended December 31, 2021, 2020 and 2019 was $44.08, $41.31, and $44.40, respectively.
Performance Restricted Stock Units
The Company has granted performance restricted stock units under the Incentive Plan. These awards vest if AGL’s total shareholder return (TSR) relative to the performance of a peer group and growth in core adjusted book value during the relevant three-year performance period reaches certain hurdles. The minimum vesting percentage for these awards is zero, the target vesting percentage is 100% and the maximum vesting percentage is 250% for the awards tied to TSR and 200% for those tied to growth in core adjusted book value. If the performance is between the specified levels, the vesting level is interpolated. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends paid on common stock during the performance cycle for the number of shares earned.
Performance Restricted Stock Unit Activity
| | | | | | | | | | | | | | |
| Performance Restricted Stock Units | | Number of Performance Share Units | | Weighted Average Grant Date Fair Value Per Share |
| Nonvested at December 31, 2020 | 568,957 | | | $ | 43.64 | |
| Granted (1) | 378,394 | | | 52.04 | |
| Vested (1) | (332,439) | | | 26.11 | |
| Forfeited | — | | | — | |
| Nonvested at December 31, 2021 (2) | 614,912 | | | $ | 46.25 | |
____________________
(1) Includes 142,222 performance restricted stock units that were granted prior to 2021 at a weighted average grant date fair value of $25.70, but met performance hurdles and vested during 2021. The weighted average grant date fair value per share excludes these shares.
(2) Excludes 69,817 performance restricted stock units that have met performance hurdles and will be eligible for vesting after December 31, 2021.
As of December 31, 2021, the total unrecognized compensation cost related to outstanding nonvested performance share units was $21 million, which the Company expects to recognize over the weighted-average remaining service period of 1.8 years. The total value of performance restricted stock units vested during the years ended December 31, 2021, 2020 and 2019 was based on grant date fair value and was $9 million, $8 million and $6 million, respectively.
For the 2021, 2020 and 2019 awards, the grant-date fair value of the performance restricted stock units tied to relative TSR was calculated using a Monte Carlo simulation in order to determine the total return of the Company’s shares relative to the total return of financial companies in the Russell Midcap Financial Services Index. The inputs to the simulation include the beginning prices of shares, historical volatilities, and dividend yields of all relevant companies as well as all possible pairwise correlation coefficients among the relevant companies. In addition, the risk-free return and discount for illiquidity are also included. For the 2021, 2020 and 2019 awards, the grant-date fair value of the performance restricted stock units tied to core adjusted book value was based on the grant date closing price. The weighted-average grant-date fair value of the 2021, 2020 and 2019 awards was $52.04, $41.03 and $44.00, respectively.
Restricted Stock Awards
Restricted stock awards are valued based on the closing price of the underlying shares at the date of grant. Restricted stock awards to employees generally vest over a three- or four-year period and restricted stock awards to outside directors vest in full in one year.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Restricted Stock Award Activity
| | | | | | | | | | | | | | |
| Nonvested Shares | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
| Nonvested at December 31, 2020 | 68,098 | | | $ | 28.12 | |
| Granted | 44,797 | | | 51.34 | |
| Vested | (68,098) | | | 28.12 | |
| Forfeited | — | | | — | |
| Nonvested at December 31, 2021 | 44,797 | | | $ | 51.34 | |
As of December 31, 2021, the total unrecognized compensation cost related to outstanding nonvested restricted stock awards was $0.8 million, which the Company expects to recognize over the weighted-average remaining service period of 0.3 years. The total fair value of shares vested during the years ended December 31, 2021, 2020 and 2019 was $1.9 million, $2.3 million and $1.8 million, respectively. The weighted-average grant-date fair value of shares granted during the years ended December 31, 2021, 2020 and 2019 was $51.34, $28.12 and $45.98, respectively.
Time Vested Stock Options
Stock options may be granted once a year with exercise prices equal to the closing price on the date of grant. No time vested stock options have been granted since 2014. All of the 15,979 time vested options that were outstanding as of December 31, 2020 were exercised in 2021 at an average exercise price of $21.88.
The total intrinsic value of stock options exercised during the years ended December 31, 2021, 2020 and 2019 was $0.2 million, $1.0 million and $8.2 million, respectively. During the years ended December 31, 2021, 2020 and 2019, $0.02 million, $0.9 million and $2.3 million, respectively, was received from the exercise of stock options. In order to satisfy stock option exercises, the Company issues new shares. The tax benefit from time vested stock options exercised during 2021 was de minimis.
Performance Stock Options
The Company may grant performance stock options under the Incentive Plan. These awards are non-qualified stock options with exercise prices equal to the closing price of an AGL common share on the applicable date of grant. No performance stock options have been granted since 2012. No performance options were outstanding and exercisable as of December 31, 2021 and 2020.
Employee Stock Purchase Plan
The Company established the AGL Employee Stock Purchase Plan (Stock Purchase Plan) in accordance with Internal Revenue Code Section 423, and participation is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10% of the participant's compensation or, if less, shares having a value of $25,000. Participants may purchase shares at a purchase price equal to 85% of the lesser of the fair market value of the stock on the first day or the last day of the subscription period. The Company has reserved for issuance and purchases under the Stock Purchase Plan 850,000 AGL common shares. As of December 31, 2021, 118,495 common shares were available for grant under the Stock Purchase Plan.
The fair value of each award under the Stock Purchase Plan is estimated using the following assumptions: a) the expected dividend yield is based on the current expected annual dividend and share price on the grant date; b) the expected volatility is estimated at the date of grant based on the historical share price volatility, calculated on a daily basis; c) the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; and d) the expected life is based on the term of the offering period.
Stock Purchase Plan
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (dollars in millions) |
| Proceeds from purchase of shares by employees | $ | 2.1 | | | $ | 1.5 | | | $ | 1.5 | |
| Number of shares issued by the Company | 67,615 | | | 72,797 | | | 40,732 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Share-Based Compensation Expense
The following table presents share-based compensation costs and the amount of such costs that are deferred as policy acquisition costs, pre-tax. Amortization of previously deferred share compensation costs is not shown in the table below.
Share-Based Compensation Expense Summary
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
| Share‑based compensation expense | $ | 27 | | | $ | 25 | | | $ | 21 | |
| Share‑based compensation capitalized as DAC | 2 | | | 1 | | | 1 | |
| Income tax benefit | 4 | | | 4 | | | 3 | |
Defined Contribution Plan
The Company maintains a savings incentive plan, which is qualified under Section 401(a) of the Internal Revenue Code for U.S. employees. The savings incentive plan is available to eligible full-time employees upon hire. Eligible participants could contribute a percentage of their eligible compensation subject to U.S. Internal Revenue Service (IRS) limitations. Contributions were matched by the Company at a rate of 100% up to 7% for 2021 and 2020 and 6% for 2019 of participant’s eligible compensation, subject to IRS limitations. Any amounts over the IRS limits are contributed to and matched by the Company at a rate of 100% up to 6% of participant’s eligible compensation into a nonqualified supplemental executive retirement plan for employees eligible to participate in such nonqualified plan. The Company also made a core contribution of 7% for 2021 and 2020 and 6% for 2019 of the participant’s eligible compensation to the qualified plan, subject to IRS limitations, and a core contribution of 6% of the participant’s eligible compensation to the nonqualified supplemental executive retirement plan for eligible employees, regardless of whether the employee contributes to the plan(s). Employees become fully vested in Company contributions after one year of service, as defined in the plan. Plan eligibility is immediate upon hire. The Company also maintains similar non-qualified plans for non-U.S. employees.
The Company recognized defined contribution expenses of $20 million, $20 million and $12 million for the years ended December 31, 2021, 2020 and 2019, respectively.
15. Income Taxes
AGL and its Bermuda subsidiaries, AG Re, AGRO, and Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries), are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL’s U.S., U.K. and French subsidiaries are subject to income taxes imposed by U.S., U.K. and French authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code (the Code) to be taxed as a U.S. domestic corporation..
In November 2013, AGL became tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. As a U.K. tax resident company, AGL is required to file a corporation tax return with Her Majesty’s Revenue & Customs. AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The corporation tax rate was 19%. The Company expects that the dividends AGL receives from its direct subsidiaries will be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, the Company obtained a clearance from Her Majesty’s Revenue & Customs confirming any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The Company does not expect any profits of non-U.K. resident members of the group to be taxed under the U.K. “controlled foreign companies” regime.
AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries.
Assured Guaranty Overseas US Holdings Inc. and its subsidiaries, AGRO and AG Intermediary Inc., file their own consolidated federal income tax return.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
The CARES (Coronavirus Aid, Relief, and Economic Security) Act became law on March 27, 2020 and was updated on April 9, 2020. The CARES Act, among other tax changes, accelerates the ability of companies to receive refunds of alternative minimum tax (AMT) credits related to tax years beginning in 2018 and 2019. As a result, the Company received a refund for AMT credits in 2020.
As a result of the BlueMountain Acquisition referred to in Note 2, Business Combinations, the entities acquired will be included in the AGUS consolidated federal income tax return.
Accounting Policy
The provision for income taxes consists of an amount for taxes currently payable and an amount for deferred taxes. Deferred income taxes are provided for temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized.
Non-interest-bearing tax and loss bonds are purchased in the amount of the tax benefit that results from deducting statutory-basis contingency reserves as provided under Internal Revenue Code Section 832(e). The Company records the purchase of tax and loss bonds in deferred taxes.
The Company recognizes tax benefits only if a tax position is “more likely than not” to prevail.
The Company elected to account for tax associated with Global Intangible Low-Taxed Income (GILTI) as a current-period expense when incurred.
Deferred and current tax assets and liabilities are reported in other assets or liabilities on the consolidated balance sheets.
Tax Assets (Liabilities)
Deferred and Current Tax Assets (Liabilities)
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (in millions) |
| Net deferred tax assets (liabilities) | $ | (33) | | | $ | (100) | |
| Net current tax assets (liabilities) | (43) | | | 21 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Components of Net Deferred Tax Assets (Liabilities)
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (in millions) |
| Deferred tax assets: | | | |
Unearned premium reserves, net | $ | 51 | | | $ | 56 | |
Investment basis differences | — | | | 47 | |
| Rent | 17 | | | 24 | |
Foreign tax credit | 24 | | | 24 | |
Net operating loss | 28 | | | 33 | |
| Depreciation | 27 | | | — | |
Deferred compensation | 29 | | | 29 | |
Other | 19 | | | 4 | |
| Total deferred tax assets | 195 | | | 217 | |
| | | |
| Deferred tax liabilities: | | | |
Unrealized appreciation on investments | 74 | | | 102 | |
| Discount on long-term debt | 7 | | | 41 | |
| Market discount on investments | 25 | | | 42 | |
DAC | 20 | | | 22 | |
Investment basis differences | 5 | | | — | |
Loss and LAE reserve | 44 | | | 44 | |
| Lease | 16 | | | 17 | |
Unrealized gains on CCS | 5 | | | 11 | |
Other | 8 | | | 14 | |
| Total deferred tax liabilities | 204 | | | 293 | |
| Less: Valuation allowance | 24 | | | 24 | |
| Net deferred tax assets (liabilities) | $ | (33) | | | $ | (100) | |
As part of the acquisition of CIFG Holding Inc. (CIFGH, and together with its subsidiaries, CIFG), the Company acquired $189 million of net operating losses (NOL) which will begin to expire in 2033. The NOL has been limited under Internal Revenue Code Section 382 due to a change in control as a result of the acquisition. As of December 31, 2021, the Company had $131 million of NOLs available to offset its future U.S. taxable income.
Valuation Allowance
The Company has $24 million of foreign tax credit (FTC) due to the 2017 Tax Cuts and Jobs Act (TCJA) for use against regular tax in future years. FTCs will expire in 2027. In analyzing the future realizability of FTCs, the Company notes limitations on future foreign source income due to overall foreign losses as negative evidence. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC of $24 million will not be utilized, and therefore recorded a valuation allowance with respect to this tax attribute. During 2020, the Company reduced its valuation allowance from $36 million as of December 31, 2019 to $24 million as of December 31, 2020 due to the expiration of the FTC from previous acquisitions. There were no changes in the valuation allowance during 2021 and 2019.
The Company came to the conclusion that it is more likely than not that the remaining deferred tax assets will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years, and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with the remaining deferred tax assets. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.
Provision for Income Taxes
The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 21% in 2021, 2020 and 2019, U.K. subsidiaries
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
taxed at the U.K. marginal corporate tax rate of 19%, French subsidiaries taxed at the French marginal corporate tax rate of 27.5% in 2021 and 28% in 2020, and no taxes for the Company’s Bermuda Subsidiaries unless subject to U.S. tax by election. Controlled foreign corporations (CFCs) apply the local marginal corporate tax rate. In addition, the TCJA creates a new requirement that a portion of the GILTI earned by CFCs must be included currently in the gross income of the CFCs’ U.S. shareholder. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions.
A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below.
Effective Tax Rate Reconciliation
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Expected tax provision (benefit) | $ | 76 | | | $ | 83 | | | $ | 91 | |
| Tax-exempt interest | (19) | | | (20) | | | (19) | |
| Change in liability for uncertain tax positions | — | | | (17) | | | 1 | |
| Effect of provision to tax return filing adjustments | (4) | | | (7) | | | (6) | |
| Non-controlling interest | (8) | | | (1) | | | — | |
| State taxes | 7 | | | 4 | | | 1 | |
| Taxes on reinsurance | (2) | | | 9 | | | (5) | |
| Foreign taxes | 8 | | | (3) | | | 6 | |
| Other | — | | | (3) | | | (6) | |
| Total provision (benefit) for income taxes | $ | 58 | | | $ | 45 | | | $ | 63 | |
| | | | | |
| Effective tax rate | 12.2 | % | | 10.9 | % | | 13.7 | % |
The expected tax provision (benefit) is calculated as the sum of pre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pre-tax loss in one jurisdiction and pre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.
The following tables present pre-tax income and revenue by jurisdiction.
Pre-tax Income (Loss) by Tax Jurisdiction
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| U.S. | $ | 378 | | | $ | 385 | | | $ | 440 | |
| Bermuda | 115 | | | 16 | | | 33 | |
| U.K. | (8) | | | 13 | | | (8) | |
| Other | (8) | | | (1) | | | (1) | |
| Total | $ | 477 | | | $ | 413 | | | $ | 464 | |
Revenue by Tax Jurisdiction
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| U.S. | $ | 685 | | | $ | 894 | | | $ | 779 | |
| Bermuda | 123 | | | 151 | | | 146 | |
| U.K. | 41 | | | 60 | | | 36 | |
| Other | (1) | | | 10 | | | 2 | |
| Total | $ | 848 | | | $ | 1,115 | | | $ | 963 | |
Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Audits
As of December 31, 2021, AGUS and Assured Guaranty Overseas US Holdings Inc. had open tax years with the U.S. IRS for 2018 forward. The companies are not currently under audit with the IRS. The Company’s U.K. subsidiaries are not currently under examination and have open tax years of 2020 forward. The Company’s French subsidiary is not currently under examination and has open tax years of 2019 forward.
Uncertain Tax Positions
The following table provides a reconciliation of the beginning and ending balances of the total liability for unrecognized tax positions, excluding accrued interest.
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| (in millions) |
| Beginning of year | $ | — | | | $ | 15 | | | $ | 14 | |
| Effect of provision to tax return filing adjustments | — | | | — | | | 5 | |
| Decrease in unrecognized tax positions as a result of settlement of positions taken during the prior period | — | | | (15) | | | — | |
| Reductions to unrecognized tax benefits as a result of the applicable statute of limitations | — | | | — | | | (4) | |
| Balance as of December 31, | $ | — | | | $ | — | | | $ | 15 | |
The Company’s policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued zero, $0.3 million and $1 million for full years 2021, 2020 and 2019, respectively. As of both December 31, 2021 and 2020, the Company has accrued zero of interest.
The total amount of reserves for unrecognized tax positions, including accrued interest, that would affect the effective tax rate, if recognized, was zero as of both December 31, 2021 and 2020, and $17 million as of December 31, 2019.
16. Insurance Company Regulatory Requirements
The following table summarizes the policyholder’s surplus and net income amounts reported to local regulatory bodies in the U.S. and Bermuda for insurance subsidiaries within the group. The discussion that follows describes the basis of accounting and differences to GAAP.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Insurance Regulatory Amounts Reported
U.S. and Bermuda
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Policyholders’ Surplus | | Net Income (Loss) |
| As of December 31, | | Year Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 | | 2019 |
| (in millions) |
| U.S. statutory companies: | | | | | | | | | |
| AGM (1) (2) | $ | 3,053 | | | $ | 2,763 | | | $ | 352 | | | $ | 398 | | | $ | 312 | |
| AGC (3) | 2,070 | | | 1,717 | | | 282 | | | 73 | | | 226 | |
| Bermuda statutory companies: | | | | | | | | | |
| AG Re | 944 | | | 1,026 | | | 121 | | | 24 | | | 45 | |
| AGRO | 425 | | | 429 | | | 6 | | | 7 | | | 12 | |
____________________
(1) Until April 1, 2021, AGM owned 60.7% of Municipal Assurance Holdings, Inc. (MAC Holdings), the parent of financial guaranty insurer MAC. AGC owned the remaining 39.3% of MAC Holdings. On April 1, 2021, Assured Guaranty executed a multi-step transaction to merge MAC with and into AGM, with AGM as the surviving company. Furthermore, in accordance with the National Association of Insurance Commissioners (NAIC) Annual Statement instructions, the prior year numbers have been restated to reflect the merger of MAC with and into AGM as if the purchase of AGC’s interest in MAC Holdings and the MAC merger had occurred as of January 1, 2020. AGM amounts for 2019 were not required to be restated.
(2) Policyholders’ surplus is net of contingency reserves of $877 million and $1,012 million as of December 31, 2021 and December 31, 2020, respectively.
(3) Policyholders’ surplus is net of contingency reserves of $348 million and $545 million as of December 31, 2021 and December 31, 2020, respectively.
Basis of Regulatory Financial Reporting
United States
Each of the Company’s U.S. domiciled insurance companies’ ability to pay dividends depends, among other things, upon its financial condition, results of operations, cash requirements, compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of its state of domicile and other states. Financial statements prepared in accordance with accounting practices prescribed or permitted by local insurance regulatory authorities differ in certain respects from GAAP.
The Company’s U.S. domiciled insurance companies prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the NAIC and their respective insurance departments. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual. The Company has no permitted accounting practices on a statutory basis.
GAAP differs in certain significant respects from the U.S. insurance companies’ statutory accounting practices prescribed or permitted by insurance regulatory authorities. The principal differences result from the statutory accounting practices listed below.
•Upfront premiums are earned upon expiration of risk and installment premiums are earned on a pro-rata basis over the installment period, rather than in proportion to the amount of insurance protection provided under GAAP. The timing of premium accelerations may also differ between statutory and GAAP. Under GAAP, premiums are accelerated only upon the legal defeasance of an insured obligation, whereas statutory premiums may be accelerated earlier if an insured obligation is economically defeased prior to legal defeasance.
•Acquisition costs are charged to expense as incurred rather than expensed over the period that the related premiums are earned under GAAP. Ceding commission income is earned immediately except for amounts in excess of acquisition costs, which are deferred, rather than fully deferred under GAAP.
•A contingency reserve is established according to applicable insurance laws, whereas no such reserve is required under GAAP.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
•Certain assets designated as “non-admitted assets” are charged directly to statutory surplus, rather than reflected as assets under GAAP.
•Investments in subsidiaries are carried on the balance sheet on the equity basis, to the extent admissible, rather than consolidated with the parent under GAAP.
•The amount of admitted deferred tax assets are subject to an adjusted surplus threshold and subject to a limitation calculated in accordance with statutory accounting principles (SAP). Under GAAP there is no non-admitted asset determination, rather a valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized.
•Insured credit derivatives are accounted for as insurance contracts rather than accounted for as derivative contracts that are measured at fair value under GAAP.
•Bonds are reported at either amortized cost or the lower of amortized cost or fair value, rather than classified as available-for-sale securities and carried at fair value under GAAP.
•The impairment model for fixed-maturity debt securities classified as available-for-sale under GAAP differs from the statutory impairment model. Under SAP, for debt securities that have been determined to be other-than-temporarily impaired, they are written down to fair value with a realized loss recognized through income. Under GAAP, consideration of the length of time during which fair value has been less than its amortized cost basis when determining whether a credit loss exists is not allowed and only the portion of impairment related to credit losses is recorded in an allowance for credit losses account with an offsetting entry to realized loss and any portion not related to credit losses is recorded through AOCI. GAAP also differs from SAP as the GAAP allowance for credit losses can be reversed for subsequent increases in expected cash flows.
•Insured obligations of VIEs, where the Company is deemed the primary beneficiary, are accounted for as insurance contracts. Under GAAP, such VIEs are consolidated and any transactions with the Company are eliminated.
•Surplus notes are recognized as surplus and each payment of principal and interest is recorded only upon approval of the insurance regulator rather than as liabilities with periodic accrual of interest under GAAP.
•Acquisitions are accounted for as either statutory purchases or statutory mergers, rather than under the purchase method under GAAP.
•Losses are discounted at tax equivalent yields, and recorded when there is a significant credit deterioration on specific insured obligations and the obligations are in default or default is probable not necessarily upon non-payment of principal or interest by an insured. Under GAAP, expected losses are discounted at the risk free rate at the end of each reporting period and are recorded only to the extent they exceed deferred premium revenue.
•The present value of contractual or expected installment premiums and commissions are not recorded on the balance sheet as they are under GAAP.
•The put options in CCS are not accounted for as derivatives as they are under GAAP.
•Foreign denominated unearned premiums reserve is remeasured at current exchange rates. rather than carried at historical rates under GAAP.
Bermuda
AG Re, a Bermuda regulated Class 3B insurer, and AGRO, a Bermuda regulated Class 3A and Class C insurer, prepare their statutory financial statements in conformity with the accounting principles set forth in the Insurance Act 1978, amendments thereto and related regulations. As of December 31, 2016, the Bermuda Monetary Authority (the Authority) requires insurers to prepare statutory financial statements in accordance with the particular accounting principles adopted by the insurer (which, in the case of AG Re and AGRO, are U.S. GAAP), subject to certain adjustments. The principal difference relates to certain assets designated as “non-admitted assets” which are charged directly to statutory surplus rather than reflected as assets as they are under U.S. GAAP.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
United Kingdom
AGUK prepares its Solvency and Financial Condition Report and other required regulatory financial reports based on Prudential Regulation Authority and Solvency II Regulations (Solvency II). As of December 31, 2021 and December 31, 2020, AGUK’s Own Funds were £591 million (or $800 million) and £573 million (or $783 million), respectively.
France
AGE prepares its Solvency and Financial Condition Report and other required regulatory financial reports based on Autorité de Contrôle Prudentiel et de Résolution (ACPR) regulations and Solvency II. As of December 31, 2021 and December 31, 2020, AGE’s Own Funds were €58 million (or $66 million) and €75 million (or $92 million), respectively.
Dividend Restrictions and Capital Requirements
United States
Under the New York insurance law, AGM may only pay dividends out of “earned surplus,” which is the portion of an insurer’s surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to the insurer’s shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the New York Superintendent of Financial Services (New York Superintendent) in an amount that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders’ surplus (as of its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income during that period.
The maximum amount available during 2022 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $305 million. Of such $305 million, $96 million is estimated to be available for distribution in the first quarter of 2022.
Under Maryland’s insurance law, AGC may, with prior notice to the Maryland Insurance Commissioner, pay an ordinary dividend in an amount that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders’ surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. The maximum amount available during 2022 for AGC to distribute as ordinary dividends is approximately $207 million. Of such $207 million, approximately $126 million is available for distribution in the first quarter of 2022.
Bermuda
For AG Re, any distribution (including repurchase of shares) of any share capital, contributed surplus or other statutory capital that would reduce its total statutory capital by 15% or more of its total statutory capital as set out in its previous year's financial statements requires the prior approval of the Authority. Separately, dividends are paid out of an insurer’s statutory surplus and cannot exceed that surplus. Furthermore, annual dividends cannot exceed 25% of total statutory capital and surplus as set out in its previous year’s financial statements, which is $236 million, without AG Re certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 2022 AG Re has the capacity to: (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Authority; and (ii) declare and pay dividends in an aggregate amount up to approximately $236 million as of December 31, 2021. 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 $165 million as of December 31, 2021; and (ii) the amount of statutory surplus, which as of December 31, 2021 was $86 million.
For AGRO, a subsidiary of AG Re, annual dividends cannot exceed $106 million, without AGRO certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 2022 AGRO has the capacity to: (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority; and (ii) declare and pay dividends in an aggregate amount up to approximately $106 million as of December 31, 2021. 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 $421 million as of December 31, 2021; and (ii) the amount of statutory surplus, which as of December 31, 2021 was $288 million.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
United Kingdom
U.K. company law prohibits AGUK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the Prudential Regulation Authority’s capital requirements may in practice act as a restriction on dividends for AGUK.
France
French company law prohibits AGE from declaring a dividend to its shareholders unless it has “profits and /or reserves available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While French law imposes no statutory restrictions on an insurer’s ability to declare a dividend, the ACPR’s capital requirements may, in practice, act as a restriction on dividends for AGE.
Dividend Restrictions and Capital Requirements
Distributions from / Contributions to Insurance Company Subsidiaries
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
| Dividends paid by AGC to AGUS | $ | 94 | | | $ | 166 | | | $ | 123 | |
| Dividends paid by AGM to AGMH | 291 | | | 267 | | | 220 | |
| Dividends paid by AG Re to AGL (1) | 150 | | | 150 | | | 275 | |
| Repurchase of common stock by AGC from AGUS | — | | | — | | | 100 | |
| Dividends from AGUK to AGM (2) | — | | | 124 | | | — | |
| Contributions from AGM to AGE (2) | — | | | (123) | | | — | |
____________________
(1) The 2021 and 2020 amounts included fixed-maturity securities with a fair value of $46 million and $47 million, respectively.
(2) In 2020, the dividend paid to AGM from AGUK was contributed to AGE.
17. Related Party Transactions
From time to time, certain officers, directors, employees, their family members and related charitable foundations may make investments in various private funds, vehicles or accounts managed by AssuredIM. These investments are available to those of the Company’s employees whom the Company has determined to have a status that reasonably permits the Company to offer them these types of investments in compliance with applicable laws. Generally, these investments are not subject to the management fees and performance allocations or incentive fees charged to other investors. See Note 11, Asset Management Fees, for information on management fees from AssuredIM Funds and CLOs.
As of December 31, 2021 and December 31, 2020, each of Wellington Management Company, LLP (together with its affiliates, Wellington) and BlackRock Financial Management Inc. (together with its affiliates, BlackRock) directly or indirectly owned more than 5% of the Company’s common shares. Wellington is one of the Company’s investment managers, and BlackRock was also one of the Company’s investment managers until September 2020. BlackRock also provided and continues to provide investment reporting software to the Company.
The Company owns a minority interest in Wasmer, Schroeder & Company LLC (Wasmer), which until July 1, 2020, was also one of the Company’s investment portfolio managers. The Company’s investment management agreement with Wasmer was transferred to the Charles Schwab Corporation (Schwab) on July 1, 2020, in connection with the closing on July 1, 2020 of the purchase by Schwab of the business of Wasmer.
The investment management and reporting software expense from transactions with Wellington, BlackRock and Wasmer were approximately $2.4 million in 2021, $3.4 million in 2020 and $3.8 million in 2019. In addition, the Company recognized $0.5 million and $1.0 million in 2020 and 2019, respectively, in income from its investment in Wasmer, which is
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
included in “equity in earnings of investees” in the consolidated statements of operations. Accrued expenses from transactions with these related parties were $1 million and $1 million as of December 31, 2021 and December 31, 2020, respectively.
Other related party transactions include receivables from and payables to AssuredIM Funds and receivables due from employees. Total other assets and liabilities with related parties were $4 million and $2 million, respectively, as of December 31, 2021 and $9 million and $1 million, respectively, as of December 31, 2020. In addition, see Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for the investments in AssuredIM Funds and other affiliated entities that are held by CIVs.
In addition, the Company cancelled 385,777 common shares it received in December 2020 from the Company’s former Chief Investment Officer and Head of Asset Management pursuant to the terms of the separation agreement. The Company recognized $12 million benefit in “other income” in the consolidated statements of operations in connection with this, with an offset to “retained earnings”.
18. Leases
The Company is party to various non-cancelable lease agreements, substantially all of which are operating leases. The majority of the Company's leases relate to office space dedicated to the Company's operations in various locations (primarily New York City, San Francisco, Bermuda, London and Paris,) consisting of a total of 271 thousand square feet with expiration dates ranging from 2022 to 2032. The Company subleases certain properties that are not used in its operations.
Accounting Policy
The Company determines if an arrangement is a lease at inception. For leases with an original term of more than 12 months, where the Company is the lessee, it recognizes a right-of-use (ROU) asset in “other assets” and a lease liability in “other liabilities” on the consolidated balance sheets for its operating leases. An ROU asset represents the Company’s right to use an underlying asset for the lease term, and a lease liability represents the Company’s obligation to make lease payments arising from the lease. At the inception of a lease, the total fixed payments under a lease agreement are discounted utilizing an incremental borrowing rate that represents the Company’s collateralized borrowing rate. The rate is determined based on the lease term as of the lease commencement date. Some of the Company’s leases include renewal options, which are not included in the lease terms unless the Company is reasonably certain to exercise the option.
The Company elected the practical expedient to account for all lease components and their associated non-lease components (i.e., common area maintenance, real estate taxes, building insurance, etc.) as a single lease component and include all fixed payments in the measurement of ROU assets and lease liabilities. Operating lease expense is recognized on a straight-line basis over the lease term. Costs related to variable lease and non-lease components for the Company’s leases are expensed in the period incurred. Sublease income is earned on a straight-line basis over the term of the lease.
The Company assesses ROU assets for impairment when certain events occur or when there are changes in circumstances including potential alternative uses. If circumstances require an ROU asset to be tested for possible impairment, and the carrying value of the ROU asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value and reported in “other operating expenses” in the consolidated statement of operations.
Lease Assets and Liabilities
As of December 31, 2021, the ROU asset and lease liability was $100 million and $136 million, respectively. As of December 31, 2020, the ROU asset and lease liability was $79 million and $119 million, respectively. The weighted average remaining lease term as of both December 31, 2021 and December 31, 2020 was 8.6 years. The Company used a weighted average rate of 2.40% and 2.58% as of December 31, 2021 and December 31, 2020, respectively.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Lease Expense and Other Information
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions) |
| Operating lease cost (1) | | $ | 16 | | | $ | 30 | | | $ | 10 | |
| Other lease costs (2) | | 3 | | | 4 | | | 2 | |
| Sublease income | | (5) | | | (3) | | | — | |
| Total lease cost (3) | | $ | 14 | | | $ | 31 | | | $ | 12 | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash outflows for operating leases | | $ | 20 | | | $ | 19 | | | $ | 11 | |
| ROU assets obtained in exchange for new operating lease liabilities (4) | | 35 | | | 4 | | | 37 | |
____________________
(1) The 2020 amount includes $13 million ROU asset impairment on an ROU asset.
(2) Includes variable, short-term and finance lease costs.
(3) Includes amortization on finance lease ROU assets and interest on finance lease liabilities reported in “other operating expenses” in the consolidated statements of operations.
(4) The amounts in 2021 relate primarily to additional office space leased in New York City. The amounts for 2019 relate primarily to the BlueMountain Acquisition. See Note 2, Business Combinations, for additional information.
During the fourth quarter of 2020, the Company made the decision to actively market for sublease office space acquired in the BlueMountain Acquisition. Accordingly, the Company recognized an ROU asset impairment of $13 million as of December 31, 2020 within the Asset Management segment, reducing the carrying value of the associated ROU asset to its estimated fair value. This ROU asset fair value was estimated using an income-approach based on forecasted future cash flows expected to be derived from the property based on current sublease market rent.
Future Minimum Rental Payments
Operating Leases
| | | | | | | | |
| | As of December 31, 2021 |
| Year | | (in millions) |
| 2022 | | $ | 23 | |
| 2023 | | 23 | |
| 2024 | | 16 | |
| 2025 | | 13 | |
| 2026 | | 12 | |
| Thereafter | | 65 | |
| Total lease payments | | 152 | |
| Less: Imputed interest | | 16 | |
| Total lease liabilities | | $ | 136 | |
19. Commitments and Contingencies
Legal Proceedings
Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of AGL’s insurance subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company is involved in a number of legal actions in the Federal District Court for Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See “Exposure to Puerto Rico” section of Note 4, Outstanding Exposure, for a description of such actions. See also “Recovery Litigation” section of Note 5, Expected Loss to be Paid (Recovered), for a description of recovery litigation
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
unrelated to Puerto Rico. Also, in the ordinary course of their respective business, certain of AGL’s investment management subsidiaries are involved in litigation with third parties regarding fees, appraisals, or portfolio companies. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year.
The Company also receives subpoenas and interrogatories from regulators from time to time.
Accounting Policy
The Company establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. 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 (the Supreme Court), asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination in December 2008 of nine credit derivative transactions between LBIE and AGFP and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination in July 2008 of 28 other credit derivative transactions between LBIE and AGFP and AGFP’s calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP properly terminated the transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP has calculated that LBIE owes AGFP approximately $4 million for the claims which were dismissed and approximately $21 million in connection with the termination of the other credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. AGFP filed a motion to dismiss the claims for breach of the implied covenant of good faith in LBIE’s complaint, and on March 15, 2013, the court granted AGFP’s motion to dismiss in respect of the count relating to the nine credit derivative transactions and narrowed LBIE’s claim with respect to the 28 other credit derivative transactions. LBIE’s administrators disclosed in an April 10, 2015 report to LBIE’s unsecured creditors that LBIE’s valuation expert has calculated LBIE’s claim for damages in aggregate for the 28 transactions to range between a minimum of approximately $200 million and a maximum of approximately $500 million, depending on what adjustment, if any, is made for AGFP's credit risk. In addition, LBIE seeks prejudgment interest from the time of termination onwards. AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP’s counterclaims, and on July 2, 2018, the court granted in part and denied in part AGFP’s motion. The court dismissed, in its entirety, LBIE’s remaining claim for breach of the implied covenant of good faith and fair dealing and also dismissed LBIE’s claim for breach of contract solely to the extent that it is based upon AGFP’s conduct in connection with the auction. With respect to LBIE’s claim for breach of contract, the court held that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. On October 1, 2018, AGFP filed an appeal with the Appellate Division of the Supreme Court of the State of New York, First Judicial Department, seeking reversal of the portions of the lower court’s ruling denying AGFP’s motion for summary judgment with respect to LBIE’s sole remaining claim for breach of contract. On January 17, 2019, the Appellate Division affirmed the Supreme Court’s decision, holding that the lower court correctly determined that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. The trial was originally scheduled for March 9, 2020, but was postponed due to COVID-19. On November 3, 2020, LBIE moved to reopen its Chapter 15 case in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) and remove this action to the United States District Court for the Southern District of New York for assignment to the Bankruptcy Court. On March 22, 2021, the Bankruptcy Court denied the motion and remanded the action to the Supreme Court. On March 29, 2021, the action was reassigned to Justice Melissa A. Crane. A bench trial was held from October 18, 2021 through November 19, 2021; a decision is pending subject to post-trial briefing and argument.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
20. Shareholders’ Equity
Accounting Policy
The Company records share repurchases as a reduction to “common shares” and “additional paid-in capital”. Once additional paid-in capital has been exhausted, share repurchases are recorded as a reduction to common shares and retained earnings.
Share Issuances
AGL has authorized share capital of $5 million divided into 500,000,000 shares with a par value $0.01 per share. Except as described below, AGL’s common shares have no preemptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL’s common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL’s assets, if any remain after the payment of all AGL’s debt and liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a shareholder at fair market value. All of the common shares are fully paid and non-assessable. Holders of AGL’s common shares are entitled to receive dividends as lawfully may be declared from time to time by the Board.
In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL’s shares) of a shareholder are treated as “controlled shares” (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL’s issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL’s Bye-Laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a CFC as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL’s Bye-Laws as a 9.5% U.S. Shareholder).
Subject to AGL’s Bye-Laws and Bermuda law, AGL’s Board has the power to issue any of AGL’s unissued shares as it determines, including the issuance of any shares or class of shares with preferred, deferred or other special rights.
Under AGL’s Bye-Laws and subject to Bermuda law, if AGL’s Board determines that any ownership of AGL's shares may result in adverse tax, legal or regulatory consequences to the Company, any of the Company’s subsidiaries or any of AGL’s shareholders or indirect holders of shares or its affiliates (other than such as AGL’s Board considers de minimis), the Company has the option, but not the obligation, to require such shareholder to sell to AGL, or to a third party to whom AGL assigns the repurchase right, the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board to represent the shares’ fair market value (as defined in AGL’s Bye-Laws). In addition, AGL’s Board may determine that shares held carry different voting rights when it deems it appropriate to do so to: (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. “Controlled shares” includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL’s Bye-Laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.
Share Repurchases
On February 23, 2022, the Board authorized the repurchase of an additional $350 million of its common shares. Under this and previous authorizations, as of February 24, 2022, the Company was authorized to purchase $364 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
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date.
Share Repurchases
| | | | | | | | | | | | | | | | | | | | |
| Year | | Number of Shares Repurchased | | Total Payments
(in millions) | | Average Price Paid Per Share |
| 2019 | | 11,163,929 | | | $ | 500 | | | $ | 44.79 | |
| 2020 | | 15,787,804 | | | 446 | | | 28.23 | |
| 2021 | | 10,519,040 | | | 496 | | | 47.19 | |
| 2022 (through February 24, 2022 on a settlement date basis) | | 1,682,800 | | | 92 | | | 54.32 | |
Deferred Compensation
Certain executives of the Company elected to invest a portion of their AG US Group Services Inc. supplemental executive retirement plan (AGS SERP) accounts in the employer stock fund in the AGS SERP. Each unit in the employer stock fund represents the right to receive one AGL common share upon a distribution from the AGS SERP. Each unit equals the number of AGL common shares which could have been purchased with the value of the account deemed invested in the employer stock fund as of the date of such election. As of December 31, 2021 and 2020, there were 74,309 and 74,309 units, respectively, in the AGS SERP. See Note 14, Employee Benefit Plans.
Dividends
Any determination to pay cash dividends is at the discretion of the Company’s Board, and depends upon the Company’s results of operations, cash flows from operating activities, its financial position, capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual restrictions on the payment of dividends, other potential uses for such funds, and any other factors the Company’s Board deems relevant. For more information concerning regulatory constraints that affect the Company’s ability to pay dividends, see Note 16, Insurance Company Regulatory Requirements.
On February 23, 2022, the Company declared a quarterly dividend of $0.25 per common share compared with $0.22 per common share paid in 2021, an increase of 13.6%.
21. Other Comprehensive Income
The following tables present the changes in each component of AOCI and the effect of reclassifications out of AOCI into the respective lines in the consolidated statements of operations.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments with: | | ISCR on FG VIEs’ Liabilities with Recourse | | Cumulative
Translation
Adjustment | | Cash
Flow
Hedge | | Total
AOCI |
| No Credit Impairment | | Credit Impairment |
| (in millions) |
| Balance, December 31, 2020 | $ | 577 | | | $ | (30) | | | $ | (20) | | | $ | (36) | | | $ | 7 | | | $ | 498 | |
| Other comprehensive income (loss) before reclassifications | (184) | | | — | | | (3) | | | — | | | — | | | (187) | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | 21 | | | (7) | | | — | | | — | | | — | | | 14 | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (3) | | | — | | | — | | | (3) | |
| Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Total before tax | 21 | | | (7) | | | (3) | | | — | | | 1 | | | 12 | |
| Tax (provision) benefit | (3) | | | 1 | | | 1 | | | — | | | — | | | (1) | |
| Total amount reclassified from AOCI, net of tax | 18 | | | (6) | | | (2) | | | — | | | 1 | | | 11 | |
| Other comprehensive income (loss) | (202) | | | 6 | | | (1) | | | — | | | (1) | | | (198) | |
| Balance, December 31, 2021 | $ | 375 | | | $ | (24) | | | $ | (21) | | | $ | (36) | | | $ | 6 | | | $ | 300 | |
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Year Ended December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments with: | | ISCR on FG VIEs’ Liabilities with Recourse | | Cumulative
Translation
Adjustment | | Cash
Flow
Hedge | | Total
AOCI |
| No Credit Impairment | | Credit Impairment |
| (in millions) |
| Balance, December 31, 2019 | $ | 352 | | | $ | 48 | | | $ | (27) | | | $ | (38) | | | $ | 7 | | | $ | 342 | |
| Effect of adoption of accounting guidance on credit losses | 62 | | | (62) | | | — | | | — | | | — | | | — | |
| Other comprehensive income (loss) before reclassifications | 189 | | | (29) | | | 7 | | | 2 | | | — | | | 169 | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | 30 | | | (16) | | | — | | | — | | | — | | | 14 | |
| Total before tax | 30 | | | (16) | | | — | | | — | | | — | | | 14 | |
| Tax (provision) benefit | (4) | | | 3 | | | — | | | — | | | — | | | (1) | |
| Total amount reclassified from AOCI, net of tax | 26 | | | (13) | | | — | | | — | | | — | | | 13 | |
| Other comprehensive income (loss) | 163 | | | (16) | | | 7 | | | 2 | | | — | | | 156 | |
| Balance, December 31, 2020 | $ | 577 | | | $ | (30) | | | $ | (20) | | | $ | (36) | | | $ | 7 | | | $ | 498 | |
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Year Ended December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2018 | $ | 59 | | | $ | 94 | | | $ | (31) | | | $ | (37) | | | $ | 8 | | | $ | 93 | |
| Other comprehensive income (loss) before reclassifications | 339 | | | (62) | | | (8) | | | (1) | | | — | | | 268 | |
| Less: Amounts reclassified from AOCI to: | | | | | | | | | | | |
| Net realized investment gains (losses) | 55 | | | (32) | | | — | | | — | | | — | | | 23 | |
| Net investment income | 1 | | | 15 | | | — | | | — | | | — | | | 16 | |
| Fair value gains (losses) on FG VIEs | — | | | — | | | (15) | | | — | | | — | | | (15) | |
| Interest expense | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Total before tax | 56 | | | (17) | | | (15) | | | — | | | 1 | | | 25 | |
| Tax (provision) benefit | (10) | | | 1 | | | 3 | | | — | | | — | | | (6) | |
| Total amount reclassified from AOCI, net of tax | 46 | | | (16) | | | (12) | | | — | | | 1 | | | 19 | |
| Other comprehensive income (loss) | 293 | | | (46) | | | 4 | | | (1) | | | (1) | | | 249 | |
| Balance, December 31, 2019 | $ | 352 | | | $ | 48 | | | $ | (27) | | | $ | (38) | | | $ | 7 | | | $ | 342 | |
22. Earnings Per Share
Accounting Policy
The Company computes EPS using the two-class method, which is an earnings allocation formula that determines EPS for: (i) each class of common shares (the Company has a single class of common shares); and (ii) participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. Restricted stock awards and share units under the AGS SERP are considered participating securities as they received non-forfeitable rights to dividends (or dividend equivalents) similar to common shares.
Basic EPS is computed by dividing net income (loss) available to common shareholders of Assured Guaranty by the weighted-average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock, restricted stock units, stock options and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of: (1) the treasury stock method; or (2) the two-class method assuming nonvested shares are not converted into common shares.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Computation of Earnings Per Share
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions, except per share amounts) |
| Basic EPS: | | | | | |
| Net income (loss) attributable to AGL | $ | 389 | | | $ | 362 | | | 402 | |
| Less: Distributed and undistributed income (loss) available to nonvested shareholders | — | | | 1 | | | 1 | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 389 | | | $ | 361 | | | 401 | |
| Basic shares | 73.5 | | | 85.5 | | | 99.3 | |
| | | | | |
| Basic EPS | $ | 5.29 | | | $ | 4.22 | | | $ | 4.04 | |
| | | | | |
| Diluted EPS: | | | | | |
| Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic | $ | 389 | | | $ | 361 | | | $ | 401 | |
| 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 | $ | 389 | | | $ | 361 | | | $ | 401 | |
| | | | | |
| Basic shares | 73.5 | | | 85.5 | | | 99.3 | |
| Dilutive securities: | | | | | |
| Options and restricted stock awards | 0.8 | | | 0.7 | | | 0.9 | |
| Diluted shares | 74.3 | | | 86.2 | | | 100.2 | |
| | | | | |
| Diluted EPS | $ | 5.23 | | | $ | 4.19 | | | $ | 4.00 | |
| | | | | |
| Potentially dilutive securities excluded from computation of EPS because of antidilutive effect | 0.1 | | | 0.8 | | | — | |
23. Parent Company
The following tables present the condensed financial statements of Assured Guaranty Ltd., the Company’s parent company, for the periods as indicated.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Assured Guaranty Ltd. (Parent Company)
Condensed Balance Sheets
(in millions)
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| Assets | | | |
| Investments | $ | 188 | | | $ | 190 | |
| Investments in subsidiaries | 5,994 | | | 6,432 | |
| Dividends receivable from subsidiaries | 81 | | | — | |
| Other assets (1) | 46 | | | 38 | |
| Total assets | $ | 6,309 | | | $ | 6,660 | |
| | | |
| Liabilities | | | |
| Other liabilities (1) | $ | 17 | | | $ | 17 | |
| Total liabilities | $ | 17 | | | $ | 17 | |
| | | |
| Total shareholders’ equity attributable to AGL | $ | 6,292 | | | $ | 6,643 | |
| Total liabilities and shareholders’ equity | $ | 6,309 | | | $ | 6,660 | |
____________________
(1) Mainly consists of due from and due to affiliates.
Assured Guaranty Ltd. (Parent Company)
Condensed Statements of Operations and Comprehensive Income
(in millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| Net investment income | $ | 1 | | | $ | — | | | $ | — | |
| Total revenues | 1 | | | — | | | — | |
| Expenses | | | | | |
| Other expenses (1) | 35 | | | 34 | | | 31 | |
| Total expenses | 35 | | | 34 | | | 31 | |
| Income (loss) before equity in earnings of subsidiaries | (34) | | | (34) | | | (31) | |
| Equity in earnings of subsidiaries | 423 | | | 396 | | | 433 | |
| Net income attributable to AGL | 389 | | | 362 | | | 402 | |
| Other comprehensive income (loss) attributable to AGL | (198) | | | 156 | | | 249 | |
| Comprehensive income (loss) attributable to AGL | $ | 191 | | | $ | 518 | | | $ | 651 | |
____________________
(1) Includes expense allocations from subsidiaries.
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Assured Guaranty Ltd. (Parent Company)
Condensed Statements of Cash Flows
(in millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net income attributable to AGL | $ | 389 | | | $ | 362 | | | $ | 402 | |
| Adjustments to reconcile net income to net cash flows provided by operating activities: | | | | | |
| Equity in earnings of subsidiaries | (423) | | | (396) | | | (433) | |
| Cash dividends from subsidiaries | 539 | | | 547 | | | 689 | |
| Other | 22 | | | 19 | | | 21 | |
| Net cash flows provided by (used in) operating activities | 527 | | | 532 | | | 679 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Short-term investments with maturities of over three months: | | | | | |
| Purchases | — | | | (4) | | | — | |
| Maturities and paydowns | 4 | | | — | | | — | |
| Net sales (purchases) of short-term investments with original maturities of less than three months | 41 | | | (3) | | | (90) | |
| Net cash flows provided by (used in) investing activities | 45 | | | (7) | | | (90) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Dividends paid | (66) | | | (69) | | | (74) | |
| Repurchases of common shares | (496) | | | (446) | | | (500) | |
| Other | (10) | | | (10) | | | (15) | |
| Net cash flows provided by (used in) financing activities | (572) | | | (525) | | | (589) | |
| | | | | |
| Increase (decrease) in cash | — | | | — | | | — | |
| Cash at beginning of period | — | | | — | | | — | |
| Cash at end of period | $ | — | | | $ | — | | | $ | — | |
| | | | | |
| Supplemental disclosure of non-cash investing activities: | | | | | |
| Dividend from a subsidiary in the form of fixed-maturity securities | $ | 46 | | | $ | 47 | | | $ | — | |
Basis of Presentation
These condensed financial statements of Assured Guaranty Ltd. (AGL) should be read in conjunction with the Company’s consolidated financial statements and notes thereto. Assured Guaranty Ltd. is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets, as well as asset management services. See Note 1, Business and Basis of Presentation for further information regarding the basis of presentation.
Guarantees of Obligations of Affiliates
AGL fully and unconditionally guarantees all of the U.S. Holding Companies’ debt. See Note 13, Long-Term Debt and Credit Facilities, for additional information.
Credit Facility with Affiliate
On October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. In September 2018, AGL and AGUS amended the revolving credit facility to extend the commitment until October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable interest rate as determined under
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements, Continued
Section 1274(d) of the Code, and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan commitment termination date. No amounts are currently outstanding under the credit facility.
Income Taxes
AGL is not subject to any income, withholding or capital gains taxes under current Bermuda law. In November 2013, AGL became tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. See Note 15, Income Taxes for further information regarding AGL’s income taxes.
