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Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles | 6 Months Ended
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Jun. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles | Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles FG VIEs Structured Finance and Other FG VIEs The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction. The insurance subsidiaries are not primarily liable for the debt obligations issued by the structured finance and other FG VIEs (which excludes the Puerto Rico Trusts described below) they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the structured finance and other FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on structured finance and other FG VIEs’ liabilities. As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed no longer to have those protective rights, the VIE is deconsolidated. The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets. The Company has elected the FVO for all assets and all liabilities of the structured finance and other FG VIEs. The change in fair value of all structured finance and other FG VIEs assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIE liabilities, which is reported in other comprehensive income (OCI). As of both June 30, 2022 and December 31, 2021, the Company consolidated 25 structured finance and other FG VIEs, respectively. During six months 2022, one FG VIE was consolidated and one FG VIE was deconsolidated. During six months 2021, one FG VIE was deconsolidated. There were no other consolidations or deconsolidations for the periods presented. Puerto Rico Trusts As of June 30, 2022, the Company consolidated nine custodial trusts established as part of the GO/PBA Plan (Puerto Rico Trusts) discussed in Note 3, Outstanding Exposure, Exposures to Puerto Rico. With respect to certain insured securities covered by the GO/PBA Plan, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, new recovery bonds and CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan. For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts. The assets within the Puerto Rico Trusts are classified as follows: new recovery bonds and certain trust certificates as available-for-sale securities ($34 million fair value, $37 million amortized cost as of June 30, 2022), and CVIs as trading securities ($7 million fair value as of June 30, 2022, $1 million fair value losses on trading securities for both second quarter 2022 and six months 2022). The new recovery bonds, CVIs, and trust certificates have maturity dates ranging from 2023 to 2049. For the measurement of liabilities of the Puerto Rico Trusts, the Company elected the FVO in order to simplify the accounting for these instruments. Investment income on the new recovery bonds, unrealized gains and losses on the CVIs and the change in fair value of the Puerto Rico Trusts’ liabilities, which are all with recourse, are all reported in “fair value gains (losses) on FG VIEs” on the condensed consolidated statement of operations, except for the change in fair value attributable to change in ISCR on the Puerto Rico Trusts’ liabilities, which is reported in OCI. Unrealized gains and losses on the new recovery bonds and trust certificates are reported in OCI. During six months 2022, the consolidation of the nine Puerto Rico Trusts resulted in a $4 million loss on consolidation, which was also reported in “fair value gains (losses) on FG VIEs.” Components of FG VIE Assets and Liabilities Net fair value gains and losses on FG VIEs are expected to reverse to zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered). The table below shows the carrying value of all of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated balance sheets, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities. Consolidated FG VIEs by Type of Collateral
| As of
| June 30, 2022 |  | December 31, 2021
| (in millions)
FG VIEs’ assets: |  |  |
U.S. RMBS first lien | $ | 185 |  |  | $ | 221 |
U.S. RMBS second lien | 38 |  |  | 39 |
Puerto Rico securities | 41 |  |  | — |
Total FG VIEs’ assets | $ | 264 |  |  | $ | 260 |
FG VIEs’ liabilities with recourse: |  |  |
U.S. RMBS first lien | $ | 192 |  |  | $ | 227 |
U.S. RMBS second lien | 30 |  |  | 42 |
Puerto Rico Trust liabilities | 45 |  |  | — |
Total FG VIEs’ liabilities with recourse | $ | 267 |  |  | $ | 269 |
FG VIEs’ liabilities without recourse: |  |  |
U.S. RMBS first lien | $ | 15 |  |  | $ | 20 |
Total FG VIEs’ liabilities without recourse | $ | 15 |  |  | $ | 20 |
The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIE assets at FVO) held as of June 30, 2022 that was reported in the condensed consolidated statements of operations for second quarter 2022 and six months 2022 was a gain of $1 million and a loss of $4 million, respectively. The change in the ISCR of the FG VIEs’ assets at FVO held as of June 30, 2021 was a gain of $7 million and $4 million for second quarter 2021 and six months 2021, respectively. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield. The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the FVO) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. In general, if the insurance subsidiaries’ CDS spread tightens, more value will be assigned to insurance subsidiaries’ credit; however, if the insurance subsidiaries’ CDS spread widens, less value is assigned to the insurance subsidiaries’ credit. Selected Information for FG VIEs’ Assets and Liabilities Measured under the FVO
| As of
| June 30, 2022 |  | December 31, 2021
| (in millions)
Excess of unpaid principal over fair value of: |  |  |
FG VIEs’ assets | $ | 264 |  |  | $ | 255 |
FG VIEs’ liabilities with recourse | 30 |  |  | 12 |
FG VIEs’ liabilities without recourse | 15 |  |  | 15 |
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 43 |  |  | 52 |
Unpaid principal for FG VIEs’ liabilities with recourse (1) | 297 |  |  | 281 |
____________________ (1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2022 through 2038. During second quarter 2022, the Company recorded an out-of-period adjustment totaling $7.6 million in pre-tax income and $6.0 million in net income attributable to AGL. The out-of-period adjustment related to the correction of the fair value of FG VIE. In six months 2022, the out-of-period adjustment was $6.6 million in pre-tax income and $5.2 million in net income attributable to AGL. 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 June 30, 2022 and December 31, 2021. As of both dates, the Company consolidated one CIV that meets the criteria for a voting interest entity, because the Company possesses substantially all of the economics and all of the decision-making of that CIV. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities. The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates. Number of Consolidated CIVs by Type
|  | As of
CIV Type |  | June 30, 2022 |  | December 31, 2021
Funds |  | 9 |  |  | 8 |
CLOs |  | 10 |  |  | 9 |
CLO warehouses |  | 2 |  |  | 3 |
Total number of consolidated CIVs |  | 21 |  |  | 20 |
The table below summarizes the change in the number of consolidated CIVs during each of the periods. During both six months 2022 and six months 2021, two consolidated CLO warehouses were securitized and became CLOs. Roll Forward of Number of Consolidated CIVs
| Six Months
| 2022 |  | 2021
Beginning of year | 20 |  |  | 11 |
Consolidated | 2 |  |  | 5 |
Deconsolidated (1) | (1) |  |  | (1) |
June 30, | 21 |  |  | 15 |
____________________ (1) During six months 2022 the Company deconsolidated a CLO with assets and liabilities of $417 million. Assets and Liabilities of CIVs
| As of
| June 30, 2022 |  | December 31, 2021
| (in millions)
Assets: |  |  |
Fund assets: |  |  |
Cash and cash equivalents | $ | 49 |  |  | $ | 64 |
Fund investments, at fair value |  |  |
Equity securities and warrants | 394 |  |  | 252 |
Obligations of state and political subdivisions | — |  |  | 101 |
Corporate securities | 90 |  |  | 98 |
Structured products | 127 |  |  | 62 |
Due from brokers and counterparties | 6 |  |  | 49 |
Other | — |  |  | 1 |
CLO and CLO warehouse assets: |  |  |
Cash | 76 |  |  | 156 |
CLO investments: |  |  |
Loans in CLOs, FVO | 4,160 |  |  | 3,913 |
Loans in CLO warehouses, FVO | 233 |  |  | 331 |
Short-term investments, at fair value | 230 |  |  | 145 |
Due from brokers and counterparties | 91 |  |  | 99 |
Total assets (1) | $ | 5,456 |  |  | $ | 5,271 |
Liabilities: |  |  |
CLO obligations, FVO (2) | 3,947 |  |  | 3,665 |
Warehouse financing debt, FVO (3) | 157 |  |  | 126 |
Securities sold short, at fair value | — |  |  | 41 |
Due to brokers and counterparties | 424 |  |  | 570 |
Other liabilities | 40 |  |  | 34 |
Total liabilities | $ | 4,568 |  |  | $ | 4,436 |
____________________ (1) Includes investments in AssuredIM Funds and other affiliated entities of $358 million and $223 million as of June 30, 2022 and December 31, 2021, respectively. Includes assets of a voting interest entity as of June 30, 2022 and December 31, 2021 of $60 million and $12 million, respectively. (2) The weighted average maturity of CLO obligations was 6.7 years as of June 30, 2022 and 6.6 years as of December 31, 2021. The weighted average interest rate of CLO obligations was 2.8% as of June 30, 2022 and 1.8% as of December 31, 2021. CLO obligations have stated final maturity dates from 2034 to 2035. (3) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.2 years as of June 30, 2022 and 1.8 years as of December 31, 2021. The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.0% as of June 30, 2022 and 1.1% as of December 31, 2021. Warehouse financing debt will mature at various dates from 2023 to 2024. The Company has an investment structure, where it invests with other co-investors in a municipal bond feeder fund. In this structure, the invested capital of one or more feeder funds purchases ownership interests in another fund, referred to as a master fund. The master fund utilizes this invested capital and, in certain cases, other debt financing, to purchase various classes of assets on behalf of its investors. The master fund’s investment objective is to generate attractive risk adjusted absolute returns by investing in municipal bonds, both investment grade and high-yield, taxable and tax-exempt as well as related investment and derivative products to hedge interest rate risk. The Company consolidates the feeder fund, a VIE. The feeder fund does not consolidate the master fund. Rather, because the feeder fund is an investment company, specialized industry accounting for investment companies requires it to measure its investments (i.e., limited partnership interests) at fair value through net income. The Company has elected to apply the net asset value practical expedient to fair value to measure the feeder’s proportionate share of the net assets of the master fund. The consolidated feeder’s investment in this master fund, totaled $124 million as of June 30, 2022 and is included in the table above in the caption “Equity securities and warrants”. The master fund had gross assets of $155 million and gross liabilities of $31 million, as of June 30, 2022. Noncontrolling Interest in CIVs Noncontrolling interest in CIVs represents the proportion of the consolidated funds not owned by the Company, including third parties, employees, and former employees. The majority of the noncontrolling interest is non-redeemable and presented on the statement of shareholders’ equity. The table below presents the rollforward of redeemable noncontrolling interest in CIVs. Redeemable Noncontrolling Interest in CIVs
| Second Quarter |  | Six Months
| 2022 |  | 2021 |  | 2022 |  | 2021
| (in millions)
Beginning balance | $ | 21 |  |  | $ | 21 |  |  | $ | 22 |  |  | $ | 21 |
Net income (loss) attributable to the redeemable noncontrolling interest | — |  |  | — |  |  | (1) |  |  | — |
Contributions | 21 |  |  | — |  |  | 21 |  |  | — |
Distributions | (21) |  |  | — |  |  | (21) |  |  | — |
June 30, | $ | 21 |  |  | $ | 21 |  |  | $ | 21 |  |  | $ | 21 |
As of June 30, 2022, the CIVs had $481 million commitments to invest. As of June 30, 2022 and December 31, 2021, the CIVs included derivative contracts with notional amounts totaling $53 million and $49 million, respectively, and average notional amounts of $51 million and $34 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $4 million for second quarter 2022, $8 million for six months 2022, and $1 million for six months 2021 and losses of $1 million for second quarter 2021. Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or other Assured Guaranty subsidiaries. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or other Assured Guaranty subsidiaries. As of June 30, 2022, these credit facilities had varying maturities ranging from September 15, 2023 to May 13, 2024 with the aggregate principal amount not exceeding $777 million. The available commitment was based on the amount of equity contributed to the warehouse which was $228 million. As of June 30, 2022, $145 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 100 basis points (bps) to 3-month SOFR plus 130 bps (with a floor on the Euribor rates of zero). The CLO warehouses were in compliance with all financial covenants as of June 30, 2022. As of June 30, 2022, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $110 million jointly and $71 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributed to the funds. As of June 30, 2022, $18 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 June 30, 2022. During second quarter 2022, the Company recorded an out-of-period adjustment totaling $4.4 million in pre-tax income and $3.4 million in net income attributable to AGL. The out-of-period adjustments related an incorrect elimination of the foreign exchange remeasurement on the portion of consolidated CLOs that are owned by other Assured Guaranty entities. In six months 2022, the out-of-period adjustment was $2.1 million in pre-tax income and $1.7 million in net income attributable to AGL. 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 that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $89 million and liabilities of $12 million as of June 30, 2022, and assets of $96 million and liabilities of $11 million as of December 31, 2021, primarily reported in “investments” and “credit derivative liabilities” on the condensed consolidated balance sheets. Non-Consolidated VIEs As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 16 thousand policies monitored as of June 30, 2022, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. With respect to structured finance and other FG VIEs, as of June 30, 2022 and December 31, 2021, the Company identified 61 and 69 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 structured finance and other FG VIEs as of both June 30, 2022 and December 31, 2021. In addition, as of June 30, 2022 the Company consolidated nine Puerto Rico Trusts. The Company’s exposure through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Exposure. The Company manages funds and CLOs that have been determined to be VIEs, in which the Company concluded that it is not the primary beneficiary, because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests, excluding the feeder fund’s investment in the master fund, in these entities are reported in “other invested assets” on the condensed consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $1 million as of both June 30, 2022 and December 31, 2021) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs.

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI https://asc.fasb.org/topic&trid=2197479 + Details
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