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Contracts Accounted for as Credit Derivatives | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Contracts Accounted for as Credit Derivatives | Contracts Accounted for as Credit Derivatives Amounts presented in this note relate only to contracts accounted for as derivatives. The Company’s credit derivatives (contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps. The Company’s credit derivatives are generally governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a CDS may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. In certain credit derivative transactions, the Company also specifically agreed to pay if the obligor were to become bankrupt or if the reference obligation were restructured. Furthermore, in certain credit derivative transactions, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a credit derivative contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions. The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 11.4 years and 12.8 years as of September 30, 2023 and December 31, 2022, respectively. Credit Derivatives (1)
|  | As of September 30, 2023 |  | As of December 31, 2022
Sector |  | Net Par Outstanding |  | Net Fair Value Asset (Liability) |  | Net Par Outstanding |  | Net Fair Value Asset (Liability)
|  | (in millions)
U.S. public finance |  | $ | 1,074 |  |  | $ | (15) |  |  | $ | 1,175 |  |  | $ | (79) |
Non-U.S. public finance |  | 1,478 |  |  | (19) |  |  | 1,565 |  |  | (58) |
U.S. structured finance |  | 327 |  |  | (13) |  |  | 342 |  |  | (22) |
Non-U.S. structured finance |  | 610 |  |  | (2) |  |  | 121 |  |  | (3) |
Total |  | $ | 3,489 |  |  | $ | (49) |  |  | $ | 3,203 |  |  | $ | (162) |
____________________ (1) Expected loss to be paid was $3 million as of both September 30, 2023 and December 31, 2022. Distribution of Credit Derivative Net Par Outstanding by Internal Rating
|  | As of September 30, 2023 |  | As of December 31, 2022
Rating Category |  | Net Par Outstanding |  | % of Total |  | Net Par Outstanding |  | % of Total
|  | (dollars in millions)
AAA |  | $ | 1,255 |  |  | 36.0 | % |  | $ | 1,260 |  |  | 39.3 | %
AA |  | 1,020 |  |  | 29.2 |  |  | 1,064 |  |  | 33.2 |
A |  | 689 |  |  | 19.7 |  |  | 232 |  |  | 7.2 |
BBB |  | 470 |  |  | 13.5 |  |  | 590 |  |  | 18.5 |
BIG |  | 55 |  |  | 1.6 |  |  | 57 |  |  | 1.8 |
Credit derivative net par outstanding |  | $ | 3,489 |  |  | 100.0 | % |  | $ | 3,203 |  |  | 100.0 | %
Fair Value Gains (Losses) on Credit Derivatives
| Third Quarter |  | Nine Months
| 2023 |  | 2022 |  | 2023 |  | 2022
| (in millions)
Realized gains (losses) and other settlements | $ | — |  |  | $ | (1) |  |  | $ | 1 |  |  | $ | (2) |
Net unrealized gains (losses) | 9 |  |  | (47) |  |  | 114 |  |  | (40) |
Fair value gains (losses) on credit derivatives | $ | 9 |  |  | $ | (48) |  |  | $ | 115 |  |  | $ | (42) |
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts generally also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date. CDS Spread on AGC (in basis points)
| As of September 30, 2023 |  | As of December 31, 2022 |  | As of September 30, 2022 |  | As of December 31, 2021
Five-year CDS spread | 98 |  | 63 |  | 70 |  | 49
One-year CDS spread | 41 |  | 26 |  | 28 |  | 16
Fair Value of Credit Derivative Assets (Liabilities) and Effect of AGC Credit Spread
| As of
| September 30, 2023 |  | December 31, 2022
| (in millions)
Fair value of credit derivatives before effect of AGC credit spread | $ | (80) |  |  | $ | (207) |
Plus: Effect of AGC credit spread | 31 |  |  | 45 |
Net fair value of credit derivatives | $ | (49) |  |  | $ | (162) |
The fair value of CDS contracts as of September 30, 2023, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.

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