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Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles | 3 Months Ended
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Mar. 31, 2023
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 to no longer have those protective rights, the VIE is deconsolidated. The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets. The Company has elected the FVO for all assets and all liabilities of the structured finance and other FG VIEs. The change in fair value of all structured finance and other FG VIEs assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIE liabilities, which is reported in other comprehensive income (OCI). As of both March 31, 2023 and December 31, 2022, the Company consolidated 25 structured finance and other FG VIEs. Puerto Rico Trusts As of March 31, 2023 and December 31, 2022, the Company consolidated 45 custodial trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) discussed in Note 3, Outstanding Exposure, Exposure to Puerto Rico. With respect to certain insured securities covered by the 2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and/or CVIs that constitute distributions under the 2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as each is paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given its power to collapse these trusts. The assets within the Puerto Rico Trusts are classified as follows: New Recovery Bonds as available-for-sale securities ($211 million fair value, $204 million amortized cost as of March 31, 2023 and $204 million fair value, $204 million amortized cost as of December 31, 2022) and CVIs as trading securities ($5 million fair value as of both March 31, 2023 and December 31, 2022). As of March 31, 2023, the available-for-sale securities had gross unrealized gains of $10 million and gross unrealized losses of $3 million. Twelve securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $3 million and had a fair value of $21 million. All of these securities were in a continuous unrealized loss position for more than 12 months. As of December 31, 2022, the available-for-sale securities had gross unrealized gains of $4 million and gross unrealized losses of $4 million. Fourteen securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $4 million and had a fair value of $110 million. All of these securities were in a continuous unrealized loss position for less than 12 months. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of March 31, 2023 and December 31, 2022 were primarily attributable to the change in interest rates, rather than credit quality. As of March 31, 2023 and December 31, 2022, the Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of March 31, 2023 and December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, six and eight securities, respectively, had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $2 million and $3 million as of March 31, 2023 and December 31, 2022, respectively. The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of March 31, 2023 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. New Recovery Bonds in FG VIEs’ Assets Distribution by Contractual Maturity As of March 31, 2023
| Amortized Cost |  | Estimated Fair Value
| (in millions)
Due within one year | $ | 1 |  |  | $ | 1 |
Due after one year through five years | 6 |  |  | 6 |
Due after five years through 10 years | 42 |  |  | 43 |
Due after 10 years | 155 |  |  | 161 |
Total | $ | 204 |  |  | $ | 211 |
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 contracts. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered). The table below shows the carrying value of FG VIEs’ assets and liabilities segregated by type of collateral. Consolidated FG VIEs by Type of Collateral
| As of
| March 31, 2023 |  | December 31, 2022
| (in millions)
FG VIEs’ assets: |  |  |
U.S. RMBS first lien | $ | 161 |  |  | $ | 167 |
U.S. RMBS second lien | 30 |  |  | 30 |
Puerto Rico Trusts’ assets (includes $215 and $209 at fair value) (1) | 217 |  |  | 212 |
Other | 7 |  |  | 7 |
Total FG VIEs’ assets | $ | 415 |  |  | $ | 416 |
FG VIEs’ liabilities with recourse: |  |  |
U.S. RMBS first lien | $ | 173 |  |  | $ | 176 |
U.S. RMBS second lien | 24 |  |  | 24 |
Puerto Rico Trusts’ liabilities | 487 |  |  | 495 |
Other | 8 |  |  | 7 |
Total FG VIEs’ liabilities with recourse | $ | 692 |  |  | $ | 702 |
FG VIEs’ liabilities without recourse: |  |  |
U.S. RMBS first lien | $ | 12 |  |  | $ | 13 |
Total FG VIEs’ liabilities without recourse | $ | 12 |  |  | $ | 13 |
____________________ (1) Includes $2 million of cash as of December 31, 2022. The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIEs’ assets at FVO) held as of March 31, 2023 that was reported in the condensed consolidated statements of operations for first quarter 2023 was a loss of $1 million. The change in the ISCR of the FG VIEs’ assets at FVO held as of March 31, 2022 was a loss of $5 million for first quarter 2022. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield. The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the FVO) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. Selected Information for FG VIEs’ Assets and Liabilities Measured under the FVO
| As of
| March 31, 2023 |  | December 31, 2022
| (in millions)
Excess of unpaid principal over fair value of: |  |  |
FG VIEs’ assets | $ | 264 |  |  | $ | 265 |
FG VIEs’ liabilities with recourse | 23 |  |  | 21 |
FG VIEs’ liabilities without recourse | 16 |  |  | 15 |
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 32 |  |  | 34 |
Unpaid principal for FG VIEs’ liabilities with recourse (1) | 715 |  |  | 723 |
____________________ (1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2023 through 2041. CIVs CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses for which the Company is the primary beneficiary or has a controlling interest. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities. The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates. Number of Consolidated CIVs by Type
|  | As of
CIV Type |  | March 31, 2023 |  | December 31, 2022
Funds (1) |  | 7 |  |  | 8 |
CLOs |  | 10 |  |  | 10 |
CLO warehouses |  | 4 |  |  | 4 |
Total number of consolidated CIVs (1) |  | 21 |  |  | 22 |
____________________ (1) One fund was deconsolidated in first quarter 2023. (2) As of March 31, 2023, one CIV was a voting interest entity, and as of December 31, 2022, two CIVs were voting interest entities. Certain funds meet the criteria for a voting interest entity because the Company possesses substantially all of the economics and all of the decision-making authority. During both first quarter 2023 and first quarter 2022 no consolidated CLO warehouses became CLOs. Assets and Liabilities of CIVs
| As of
| March 31, 2023 |  | December 31, 2022
| (in millions)
Assets: |  |  |
Fund assets: |  |  |
Cash and cash equivalents (4) | $ | (50) |  |  | $ | 59 |
Fund investments, at fair value |  |  |
Equity securities and warrants | 339 |  |  | 434 |
Corporate securities | 93 |  |  | 96 |
Structured products | 94 |  |  | 128 |
Due from brokers and counterparties | 1 |  |  | — |
Other | 1 |  |  | 1 |
CLO and CLO warehouse assets: |  |  |
Cash | 37 |  |  | 38 |
CLO investments: |  |  |
Loans in CLOs, FVO | 4,270 |  |  | 4,202 |
Loans in CLO warehouses, FVO | 177 |  |  | 368 |
Short-term investments, at fair value | 94 |  |  | 135 |
Due from brokers and counterparties | 62 |  |  | 32 |
Total assets (1) | $ | 5,118 |  |  | $ | 5,493 |
Liabilities: |  |  |
CLO obligations, FVO (2) | 4,155 |  |  | 4,090 |
Warehouse financing debt, FVO (3) | 169 |  |  | 313 |
Due to brokers and counterparties | 75 |  |  | 112 |
Other liabilities | 59 |  |  | 110 |
Total liabilities | $ | 4,458 |  |  | $ | 4,625 |
____________________ (1) Includes investments in AssuredIM Funds and other affiliated entities of $260 million and $392 million as of March 31, 2023 and December 31, 2022, respectively. Includes assets of a voting interest entity as of March 31, 2023 of $38 million, and assets and liabilities of voting interest entities of $58 million and $1 million, respectively, as of December 31, 2022. (2) The weighted average maturity of CLO obligations was 5.9 years as of March 31, 2023 and 6.2 years as of December 31, 2022. The weighted average interest rate of CLO obligations was 6.1% as of March 31, 2023 and 5.3% as of December 31, 2022. CLO obligations have stated final maturity dates from 2034 to 2035. (3) The weighted average maturity of warehouse financing debt of CLO warehouses was 0.5 years as of March 31, 2023 and 1.9 years as of December 31, 2022. The weighted average interest rate of warehouse financing debt of CLO warehouses was 5.0% as of March 31, 2023 and 4.5% as of December 31, 2022. Warehouse financing debt will mature at various dates from 2023 to 2031. (4) Negative cash as of March 31, 2023 is due to reporting the distribution of certain cash by an AssuredIM Fund to AGAS in the current period, while reporting the receipt of cash as a result of an investment sale by an AssuredIM Fund on a lag. The “equity securities and warrants” category in the table above includes $127 million as of December 31, 2022 related to a consolidated feeder’s investment in a municipal master fund that was unwound in January 2023 based on the December 31, 2022 valuation. On January 31, 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund. As of December 31, 2022, other liabilities in the table above include redeemable NCI. These liabilities were settled in first quarter 2023. As of March 31, 2023, the CIVs had unfunded commitments to invest $453 million. As of March 31, 2023 and December 31, 2022, the CIVs included derivative contracts with notional amounts totaling $39 million and $46 million, respectively, and average notional amounts of $43 million and $47 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $4 million in first quarter 2022. Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or other Assured Guaranty subsidiaries. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or other Assured Guaranty subsidiaries. As of March 31, 2023, these credit facilities had varying maturities ranging from 2023 to 2031 with the aggregate principal amount not exceeding $1.6 billion. The available commitments were based on the amount of equity contributed to the warehouses which was $252 million. As of March 31, 2023, $138 million was drawn under credit facilities with interest rates ranging from 3-month Term SOFR plus 150 basis points (bps) to 3-month Euro InterBank Offered Rate (Euribor) plus 250 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of March 31, 2023. As of March 31, 2023, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $110 million jointly and $71 million individually for the consolidated healthcare fund. The available commitment was based on the capital committed to the funds. As of March 31, 2023, $28 million was drawn by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime floor of 3%). The fund was in compliance with all financial covenants as of March 31, 2023. Noncontrolling Interest in CIVs NCI represents the proportion of the consolidated funds not owned by the Company and includes ownership interests of third parties, employees, and former employees. The NCI is non-redeemable and presented on the statement of shareholders’ equity. Other Consolidated VIEs In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the 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 $10 million as of March 31, 2023, and assets of $86 million and liabilities of $12 million as of December 31, 2022, primarily reported in “investments” and “credit derivative liabilities” on the condensed consolidated balance sheets. Non-Consolidated VIEs As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 15 thousand policies monitored as of March 31, 2023, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of March 31, 2023 and December 31, 2022, the Company identified 86 and 85 policies, respectively, that contain provisions and experienced events that may trigger consolidation. See above for information on VIEs that were consolidated based on management’s assessment of these potential triggers or events. The Company manages funds and CLOs that have been determined to be VIEs in which the Company concluded that it is not the primary beneficiary because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests in these entities are reported in “other invested assets” on the condensed consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $1 million as of both March 31, 2023 and December 31, 2022) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs.

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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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