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Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles | 9 Months Ended
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Sep. 30, 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 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 VIEs’ liabilities, which is reported in other comprehensive income (OCI). As of both September 30, 2023 and December 31, 2022, the Company consolidated 25 structured finance and other FG VIEs. Puerto Rico Trusts With respect to certain insured securities covered by the 2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and/or CVIs that constitute distributions under the 2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as they are paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured 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. On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Company satisfied its obligations under such legacy insured bonds with respect to $108 million net par outstanding as of August 31, 2023, and the custodial trusts released to AGC and AGM New Recovery Bonds and/or CVIs with a fair value totaling $73 million as of August 31, 2023. As of September 30, 2023 and December 31, 2022, respectively, the Company consolidated 24 and 45 custodial trusts established as part of the 2022 Puerto Rico Resolutions discussed in Note 3, Outstanding Exposure, Exposure to Puerto Rico. New Recovery Bonds Reported in FG VIEs’ Assets Available-for-Sale
|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
|  | (dollars in millions)
As of September 30, 2023 |  | $ | 136 |  |  | $ | 10 |  |  | $ | — |  |  | $ | 146 |
As of December 31, 2022 |  | 204 |  |  | 4 |  |  | (4) |  |  | 204 |
As of September 30, 2023, no New Recovery Bonds in the Puerto Rico Trusts were in a gross unrealized loss position. As of December 31, 2022, 14 New Recovery Bonds in the Puerto Rico Trusts were in a gross unrealized loss position totaling $4 million and had a fair value of $110 million, all of which were in a continuous unrealized loss position for less than 12 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 December 31, 2022 were primarily attributable to the change in interest rates, rather than credit quality. The Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, eight securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $3 million. The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of September 30, 2023 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. New Recovery Bonds, Available-for-Sale Reported in FG VIEs’ Assets Distribution by Contractual Maturity As of September 30, 2023
| Amortized Cost |  | Estimated Fair Value
| (in millions)
Due after five years through 10 years | $ | 28 |  |  | $ | 30 |
Due after 10 years | 108 |  |  | 116 |
Total | $ | 136 |  |  | $ | 146 |
Components of FG VIEs’ Assets and Liabilities Net fair value gains and losses on FG VIEs are expected to reverse to zero by the 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
| September 30, 2023 |  | December 31, 2022
| (in millions)
FG VIEs’ assets: |  |  |
U.S. RMBS first lien | $ | 146 |  |  | $ | 167 |
U.S. RMBS second lien | 27 |  |  | 30 |
Puerto Rico Trusts’ assets (includes $146 and $209 at fair value) (1) | 147 |  |  | 212 |
Other | 7 |  |  | 7 |
Total FG VIEs’ assets | $ | 327 |  |  | $ | 416 |
FG VIEs’ liabilities with recourse: |  |  |
U.S. RMBS first lien | $ | 156 |  |  | $ | 176 |
U.S. RMBS second lien | 20 |  |  | 24 |
Puerto Rico Trusts’ liabilities | 347 |  |  | 495 |
Other | 8 |  |  | 7 |
Total FG VIEs’ liabilities with recourse | $ | 531 |  |  | $ | 702 |
FG VIEs’ liabilities without recourse: |  |  |
U.S. RMBS first lien | $ | 11 |  |  | $ | 13 |
Total FG VIEs’ liabilities without recourse | $ | 11 |  |  | $ | 13 |
____________________ (1) Includes $2 million of cash as of December 31, 2022. The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIEs’ assets at FVO) held as of September 30, 2023 that was reported in the condensed consolidated statements of operations for third quarter 2023 and nine months 2023 were gains of $3 million and $1 million, respectively. The change in the ISCR of the FG VIEs’ assets at FVO held as of September 30, 2022 were gains of $15 million and $11 million for third quarter 2022 and nine months 2022, respectively. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield. The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the FVO) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. Selected Information for FG VIEs’ Assets and Liabilities Measured under the FVO
| As of
| September 30, 2023 |  | December 31, 2022
| (in millions)
Excess of unpaid principal over fair value of: |  |  |
FG VIEs’ assets | $ | 266 |  |  | $ | 265 |
FG VIEs’ liabilities with recourse | 51 |  |  | 21 |
FG VIEs’ liabilities without recourse | 16 |  |  | 15 |
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due | 29 |  |  | 34 |
Unpaid principal for FG VIEs’ liabilities with recourse (1) | 582 |  |  | 723 |
____________________ (1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2023 through 2041. CIVs In connection with the Sound Point Transaction and AHP Transaction the Company reevaluated its consolidation conclusion for each CIV and deconsolidated all but three CIVs. As of September 30, 2023, CIVs consist of certain funds managed by Sound Point, that were previously managed by AssuredIM. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities. As a result of the Sound Point Transaction and AHP Transaction, during third quarter 2023 and nine months 2023, the Company deconsolidated CIV assets of $4.7 billion and CIV liabilities of $4.4 billion. The Company recognized a loss on deconsolidation of $16 million, which is reported in “fair value gains (losses) on CIVs”. During nine months 2022, the Company deconsolidated a CLO with assets and liabilities of $417 million. The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the 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, and gains and losses on consolidation and deconsolidation of CIVs are reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates. Number of Consolidated CIVs by Type
|  | As of
CIV Type |  | September 30, 2023 |  | December 31, 2022
Funds |  | 3 |  |  | 8 |
CLOs |  | — |  |  | 10 |
CLO warehouses |  | — |  |  | 4 |
Total number of consolidated CIVs (1) |  | 3 |  |  | 22 |
____________________ (1) As of December 31, 2022, two CIVs were voting interest entities (VOEs). Funds meet the criteria for consolidating a VOE when the Company possesses substantially all of the economics and all of the decision-making authority. Assets and Liabilities of CIVs
| As of
| September 30, 2023 |  | December 31, 2022
| (in millions)
Assets: |  |  |
Fund assets: |  |  |
Cash and cash equivalents | $ | 7 |  |  | $ | 59 |
Fund investments, at fair value |  |  |
Equity securities and warrants | 79 |  |  | 434 |
Structured products | 239 |  |  | 128 |
Corporate securities | — |  |  | 96 |
Other | 5 |  |  | 1 |
CLO and CLO warehouse assets: |  |  |
Cash | — |  |  | 38 |
CLO investments: |  |  |
Loans in CLOs and CLO warehouses, FVO | — |  |  | 4,570 |
Short-term investments, at fair value | — |  |  | 135 |
Due from brokers and counterparties | — |  |  | 32 |
Total assets (1) | $ | 330 |  |  | $ | 5,493 |
Liabilities: |  |  |
CLO obligations, FVO (2) | — |  |  | 4,090 |
Warehouse financing debt, FVO (3) | — |  |  | 313 |
Due to brokers and counterparties | 4 |  |  | 112 |
Other liabilities (4) | — |  |  | 110 |
Total liabilities | $ | 4 |  |  | $ | 4,625 |
____________________ (1) Includes investments in AssuredIM funds and other affiliated entities of $392 million as of December 31, 2022. Includes assets and liabilities of a VOE of $58 million and $1 million, respectively, as of December 31, 2022. (2) As of December 31, 2022, the weighted average maturity of CLO obligations was 6.2 years and the weighted average interest rate of CLO obligations was 5.3%. (3) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.9 years as of December 31, 2022. The weighted average interest rate of warehouse financing debt of CLO warehouses was 4.5% as of December 31, 2022. (4) As of December 31, 2022, includes redeemable noncontrolling interests (NCI). As of September 30, 2023, the CIVs had unfunded commitments to invest of $143 million. As of September 30, 2023 and December 31, 2022, the CIVs included derivative contracts with notional amounts totaling $36 million and $46 million, respectively, and average notional amounts of $41 million and $47 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $7 million for nine months 2022. NCI in CIVs NCI represents the proportion of the consolidated funds not owned by the Company and includes ownership interests of third parties, employees, and former employees. The NCI is non-redeemable and presented on the statement of shareholders’ equity. Other Consolidated VIEs In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $87 million and liabilities of $7 million as of September 30, 2023, and assets of $86 million and liabilities of $12 million as of December 31, 2022, primarily reported in “investments” and “credit derivative liabilities” on the condensed consolidated balance sheets. Non-Consolidated VIEs As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 15 thousand policies monitored as of September 30, 2023, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of September 30, 2023 and December 31, 2022, the Company identified 66 and 85, respectively, policies that contain provisions and experienced events that may trigger consolidation. The Company holds variable interests in non-FG VIEs which are not consolidated, as the Company is not the primary beneficiary. As of September 30, 2023, the Company’s maximum exposure to losses relating to these non-FG VIEs was $251 million, which is limited to the carrying value of these investments of $239 million and other assets of $12 million.

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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 -Topic 810 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//810/tableOfContent + Details
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