Contracts Accounted for as Credit Derivatives

12 Months Ended

Dec. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Contracts Accounted for as Credit Derivatives

Amounts presented in this note relate only to contracts accounted for as derivatives, which 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.

Accounting Policy

Credit derivatives are recorded at fair value, and changes in fair value are reported in “Fair value gains (losses) on credit derivatives” in the consolidated statement of operations. The fair value of credit derivatives is determined on a contract-by-contract basis and presented as either a credit derivative assets reported in “other assets” or “credit derivative liabilities” in the consolidated balance sheets. See Note 9, Fair Value Measurement, for a discussion on the fair value methodology for credit derivatives.

Credit Derivatives Net Par Outstanding and Fair Value

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 11.1 years and 12.8 years as of December 31, 2023 and December 31, 2022, respectively.

Credit Derivatives (1)


	As of December 31, 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	$	1,149	$	(15)	$	1,175	$	(79)
Non-U.S. public finance	1,522		(20)		1,565		(58)
U.S. structured finance	322		(13)		342		(22)
Non-U.S. structured finance	615		(2)		121		(3)
Total	$	3,608	$	(50)	$	3,203	$	(162)

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(1) Expected loss to be paid was $2 million as of December 31, 2023 and $3 million as of December 31, 2022.

Fair Value Gains (Losses) on Credit Derivatives


	Year Ended December 31,
	2023		2022		2021
	(in millions)
Realized gains (losses) and other settlements	$	2	$	(2)	$	(3)
Net unrealized gains (losses)	112		(9)		(55)
Fair value gains (losses) on credit derivatives	$	114	$	(11)	$	(58)

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
	December 31, 2023	December 31, 2022	December 31, 2021
Five-year CDS spread	66	63	49
One-year CDS spread	23	26	16

Fair Value of Credit Derivative Assets (Liabilities) and Effect of AGC Credit Spread


	As of
	December 31, 2023		December 31, 2022
	(in millions)
Fair value of credit derivatives before effect of AGC credit spread	$	(76)	$	(207)
Plus: Effect of AGC credit spread	26		45
Net fair value of credit derivatives	$	(50)	$	(162)

The fair value of CDS contracts as of December 31, 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.