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ASSURED GUARANTY LTD – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Edgar Glimpses
For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, the following discussion and analysis of the Company's financial condition and results of operations should be read in its entirety with the Company's consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. The following discussion and analysis of the Company's financial condition and results of operations contains forward looking statements that involve risks and uncertainties. See "Forward Looking Statements" for more information. The Company's actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the headings "Risk Factors" and "Forward Looking Statements." Discussion related to the results of operations for the Company's comparison of 2020 results to 2019 results have been omitted in this Form 10-K. The Company's comparison of 2020 results to 2019 results is included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Business The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company's chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company's Corporate division and other activities (including FG VIEs and CIVs) are presented separately. In the Insurance segment, the Company provides credit protection products to theU.S. and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a debt service payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in theU.S. and theU.K. , and also guarantees obligations issued in other countries and regions, includingWestern Europe ,Canada andAustralia . The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience, which are referred to as the specialty insurance and reinsurance business. Premiums are earned over the contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts. In the Asset Management segment, the Company provides investment advisory services, which include the management of CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down.AssuredIM LLC and its investment management affiliates (together withAssuredIM LLC , AssuredIM) have managed structured, public finance and credit investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. The establishment, in the fourth quarter of 2019, of the Asset Management segment diversifies the risk profile and revenue opportunities of the Company. As ofDecember 31, 2021 , AssuredIM had$17.5 billion of AUM, including$1.4 billion that is managed on behalf of the Company'sU.S. Insurance Subsidiaries. Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment. AssuredIM is compensated for its investment advisory services generally through management fees which are based on AUM, and may also earn performance fees calculated as a percentage of net profits or based on an internal rate of return referencing distributions made to investors, in each case, in respect of funds, CLOs and/or accounts which it advises. The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH (theU.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. In 2021, it also included a$175 million pretax ($138 million after-tax) loss on extinguishment of debt. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 8. Financial Statements and Supplementary Data, Note 3, Segment Information. 72 --------------------------------------------------------------------------------
Economic Environment and Impact of COVID-19
The COVID-19 pandemic continues throughout the world, while the production, acceptance, and distribution of vaccines and therapeutics for it are proceeding unevenly across the globe. The emergence of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Consequently, and due to the nature of the Company's business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time. As a consequence of the onset of the COVID-19 pandemic, economic activity in theU.S. and throughout the world slowed significantly in early to mid-2020, but began to recover later in 2020 and, at least in theU.S. , continued to expand in 2021. Real gross domestic product (GDP) increased 5.7% in 2021, in contrast to a decrease of 3.4% in 2020, according to theU.S. Bureau of Economic Analysis (BEA). Additionally, GDP increased at an annual rate of 7.0 percent in the fourth quarter of 2021, according to the second estimate released by the BEA. At the end ofDecember 2021 , theU.S. unemployment rate, seasonally adjusted, stood at 3.9%, lower than where it started the year at 6.7%, and down from a pandemic high of 14.7% inApril 2020 . The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default. The 30-yearAAA MMD rate is a measure of interest rates in the Company's largest financial guaranty insurance market,U.S. public finance. The 30-yearAAA MMD rate started 2021 at 1.39% and remained mostly steady ending the year at 1.49%. The average rate for the year was 1.54%, below the 1.71% average for the prior year and a new historical low. With the onset of the COVID-19 pandemic, theFederal Open Market Committee (FOMC) lowered the target range for the federal funds rate to 0% to 0.25 % inMarch 2020 , and has since kept it there. However, at theFOMC's meeting inJanuary 2022 , theFOMC indicated in 2022 it expects to raise the federal funds rate and taper its asset purchases. The level and direction of interest rates impact the Company in numerous ways. For example, low interest rates may make the Company's credit enhancement products less attractive in the market and reduce the level of premiums it can charge for that product, and, over time, also reduce the amount the Company can earn on its largely fixed-income investment portfolio. Specifically, the level of interest rates on theU.S. municipal bonds the Company enhances influences how high a premium the Company can charge for its public finance financial guaranty insurance product, with lower interest rates generally lowering the premium rates the Company may charge. On the other hand, low interest rates increase the amount of excess spread available to support the distressed RMBS the Company insures. The Company believes an increase in interest rates in 2022, should it occur, could permit it to increase its premium rates on new business. The difference, or credit spread, between the 30-year A-rated general obligation relative to the 30-yearAAA MMD averaged 33 bps in 2021 down from 42 bps in 2020. BBB credit spreads measured on the same basis averaged at 70 bps in 2021, significantly tighter than the 121 bps average in 2020. Both the A and BBB credit spreads are at their narrowest levels in over a decade. The level of credit spreads also influences how high a premium the Company can charge for its financial guaranty insurance product, with tighter credit spreads generally lowering the premium rates the Company may charge. The impact of the COVID-19 pandemic and governmental and private actions taken in response continued to produce a surge in home prices in 2021. According to theNational Association of Realtors , the median existing-home price for all housing types inDecember 2021 was$358,000 , up 15.8% fromDecember 2020 ($309,200 ), as prices rose in each region, marking 118 straight months of year-over-year increases and the longest-running streak on record. The S&P CoreLogic Case-ShillerU.S. National Home Price NSA Index, covering all nineU.S. census divisions, reported an 18.8% annualized gain inNovember 2021 (the latest data available), compared to 19.0% in the previous month. The 10-City Composite annual increase came in at 16.8%, compared to 17.2% in the previous month. The 20 City Composite posted an 18.3% year-over-year gain, compared to 18.5% in the previous month. Home prices in theU.S. impact the performance of the Company's insured RMBS portfolio. Improved home prices generally result in fewer losses or more reimbursements with respect to the Company's distressed insured RMBS risks, and may impact the amount of losses or reimbursements it projects for its distressed legacy RMBS insured portfolio. From shortly after the pandemic reached theU.S. through early 2021, the Company's surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn. Given significant federal funding to state and local governments in 2021 and the performance it observed, the Company's surveillance department has reduced the supplemental procedures. However, it is still monitoring those sectors it identified as most at risk 73 -------------------------------------------------------------------------------- for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments including (i) Mass Transit - Domestic; (ii) Toll Roads and Transportation - International; (iii) Hotel / Motel Occupancy Tax; (iv) Stadiums; (v)UK University Housing - International; (vi)Privatized Student Housing : Domestic; and (vii) Commercial Receivables. For information about how the COVID-19 pandemic has impacted the Company's loss projections, see Item 8, Financial Statements and Supplementary Data, Note 5, Expected Loss to be Paid (Recovered). ThroughFebruary 24, 2022 , the Company has paid less than$12 million in insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19. The Company has already received reimbursement for most of those claims. The Company believes its financial guaranty business model is particularly well-suited to withstand global economic disruptions. If an insured obligor defaults, the Company is required to pay only any shortfall in interest and principal on scheduled payment dates; the Company's policies forbid acceleration of its obligations without its consent. In addition, many of the obligations the Company insures benefit from debt service reserve funds or other funding sources from which interest and principal may be paid during limited periods of stress, providing the obligor with an opportunity to recover. While the Company believes its guaranty may support the market value of an insured obligation in comparison to a similar uninsured obligation, the Company's ultimate loss on a defaulted insured obligation is not a function of that underlying obligation's market price. Rather, the Company's ultimate loss is the sum of all principal and interest payments it makes under its policy less the sum of all reimbursements, subrogation payments and other recoveries it receives from the obligor or any other sources in connection with the obligation. For contracts accounted for as insurance, its expected losses equal the discounted value of all claim payments it projects making less the discounted value of all recoveries it expects to receive, on a probability-weighted basis. See Item 8, Financial Statements and Supplementary Data, Note 5, Expected Loss to be Paid (Recovered). The nature of the financial guaranty business model, which requires the Company to pay only any shortfall in interest and principal on scheduled payment dates, along with the Company's liquidity practices, reduce the need for the Company to sell investment assets in periods of market distress. As ofDecember 31, 2021 , the Company had$1,225 million of short-term investments and$120 million of cash. In addition, the Company's investment portfolio generates cash over time through interest and principal receipts. The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may have an adverse impact on the amount of third-party funds the Company can attract to its asset management products and on the amount of the Company's AUM, which would reduce the amount of management fees earned by the Company. On the other hand, periods of market volatility may increase the attractiveness to investors of investment managers such as AssuredIM, and may provide the Company with opportunities to increase its AUM. In 2021, funded AUM increased. See "- Results of Operations by Segment - Asset Management Segment" below. The Company's ability to raise third-party funds and increase and retain AUM is directly related to the performance of the assets it manages as measured against market averages and the performance of the Company's competitors, and if it performs worse during the COVID-19 pandemic than its competitors, that could impede its ability to raise funds, seek investors and hire and retain professionals, and may also lead to an impairment of goodwill. In the fourth quarter of 2021, the Company performed its goodwill impairment assessment and determined no impairment had occurred. The Company's goodwill impairment assessment is sensitive to the Company's assumptions of discount rates, market multiples, projections of AUM growth, and other factors, which may vary. Over the past several years, certain of the Company's insurance subsidiaries have sought and received permission from their respective regulators to make certain discretionary payments to their holding companies, which has increased the amount of cash available to such holding companies to make investments in the asset management business and, in the case of AGL, to repurchase its common shares. The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may impact the Company's regulatory capital position and the willingness of the insurance subsidiaries' regulators to permit discretionary payments to their holding companies, which may result in the Company investing less in the asset management business or spending less to repurchase its common shares than it had planned. For more information, see Part I, Item 1A, Risk Factors, Operational Risks "- The Company's holding companies' ability to meet their obligations may be constrained." The Company began operating remotely in accordance with its business continuity plan inMarch 2020 , instituting mandatory remote work policies in its offices inBermuda ,U.S. ,U.K. andFrance . ByNovember 2021 , the Company had reopened all of its offices, choosing a hybrid remote and office work model in response to employee feedback and as part of its commitment to providing a safe and healthy workplace for employees and visitors. However, in response to the emergence of the Omicron variant of COVID-19 inDecember 2021 , the Company recommended (and, in compliance with local rules and regulations in certain jurisdictions, required) that employees return to working remotely. Some of its workforce already has returned to the office, and the Company is planning to return to a hybrid work-from-home and work-from-office paradigm for 74 -------------------------------------------------------------------------------- all of its offices by the end ofFebruary 2022 . Whether its employees are working remotely or in a hybrid remote and office work model, the Company continues to provide the services and communications it normally would. For more information, see Part I, Item 1A, Risk Factors, Operational Risks "- The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in the Company's or a vendor's information technology system, or a data privacy breach of the Company's or a vendor's information technology system, could adversely affect the Company's business." Key Business Strategies The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM, the Company has increased its focus on asset management and alternative investments. Currently, the Company is pursuing the following key business strategies in three areas: (1) insurance; (2) asset management and alternative investments; and (3) capital management.
Insurance
The Company seeks to grow the insurance business through new business
production, acquisitions of remaining legacy monoline insurers or reinsurance of
their insured portfolios, and to continue to mitigate losses in its current
insured portfolio.
Growth of the Insured Portfolio
The Company seeks to grow its insurance portfolio through new business production in each of its three markets:U.S. public finance, international infrastructure and global structured finance. The Company believes high-profile defaults by municipal obligors, such asPuerto Rico ,Detroit, Michigan andStockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance:
•encourages retail investors, who typically have fewer resources than the
Company for analyzing municipal bonds, to purchase such bonds;
•enables institutional investors to operate more efficiently; and
•allows smaller, less well-known issuers to gain market access on a more
cost-effective basis.
On the other hand, the persistently low interest rate environment and relatively tightU.S. municipal credit spreads have dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. The Company believes that if interest rates increase somewhat in 2022 demand for bond insurance may improve somewhat. In certain segments of the global infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company's guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company's business opportunities and its risk profile beyondU.S. public finance. The timing of new business production in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period. 75 --------------------------------------------------------------------------------U.S. Municipal Market Data and Bond Insurance Penetration Rates (1) Based on Sale Date Year Ended December 31, 2021 2020 2019 (dollars in billions) Par: New municipal bonds issued$ 456.7 $ 451.8 $ 406.6 Total insured$ 37.5 $ 34.2 $ 23.9 Insured by Assured Guaranty$ 22.6 $ 19.7 $ 14.0 Number of issues: New municipal bonds issued 11,819 11,857 10,590 Total insured 2,198 2,140 1,724 Insured by Assured Guaranty 1,076 982 839 Bond insurance market penetration based on: Par 8.2 % 7.6 % 5.9 % Number of issues 18.6 % 18.0 % 16.3 % Single A par sold 26.6 % 28.3 % 21.4 % Single A transactions sold 56.6 % 54.3 % 54.9 %$25 million and under par sold 21.3 % 20.9 % 18.1 %$25 million and under transactions sold 21.7 % 21.0 % 19.7 %
____________________
(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured byAssured Guaranty , which the Company also considers to be public finance business. The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital. Commutations. The Company entered into a commutation agreement to reassume previously ceded business in 2020 that resulted in a gain of$38 million . There were no commutations in 2021. In the future, the Company may enter into new commutation agreements to reassume portions of its insured business ceded to other reinsurers, but such opportunities are expected to be limited given the small number of unaffiliated reinsurers currently reinsuring the Company.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its
insurance portfolio, the Company employs a number of strategies.
In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company's role in theDetroit, Michigan andStockton, California financial crises, and more recently by the Company's role in negotiating various agreements in connection with the restructuring of obligations of theCommonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of theCommonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company negotiated with the Financial Oversight and Management Board (the FOMB) and other stakeholders over approximately five years and entered into support agreements covering$3.4 billion , or 95% of the Company's insured net par outstanding ofPuerto Rico exposures. All of the Company'sPuerto Rico exposures that were in payment default onDecember 31, 2021 , are covered by the support agreements. The plan of adjustment contemplated by one of those support agreements, covering$1.2 billion , or 34% of the Company's insured net par outstanding ofPuerto Rico exposures, was confirmed onJanuary 18, 2022 . Then, onJanuary 20, 2022 , orders were entered finalizing the consensual modification contemplated by the support agreements for another$168 million outstanding as ofDecember 31, 2021 , of the Company's insuredPuerto Rico exposures. As a consequence,$1.4 billion net par outstanding, or 39% of the Company'sPuerto Rico net par outstanding as ofDecember 31, 2021 , now benefits from court orders for resolution. 76 -------------------------------------------------------------------------------- OnJanuary 18, 2022 , an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of theCommonwealth of Puerto Rico , the Employees Retirement System of the Government of theCommonwealth of Puerto Rico , and thePuerto Rico Public Buildings Authority (GO/PBA Plan) was entered by theUnited States District Court of the District of Puerto Rico acting under Title III of PROMESA (the Title III Court). The GO/PBA Plan restructures approximately$35 billion of debt (including thePuerto Rico General Obligation (GO) and Public Buildings Authority (PBA) bonds insured by the Company) and other claims against the government ofPuerto Rico and certain entities and$50 billion in pension obligations consistent with the terms of the settlement embodied in revised GO and PBA plan support agreement (PSA) entered into by AGM and AGC onFebruary 22, 2021 , with certain other stakeholders, the Commonwealth, and the FOMB (GO/PBA PSA). The FOMB will set the effective date for the GO/PBA Plan (GO/PBA Effective Date), and has announced that it expects the GO/PBA Effective Date to be on or beforeMarch 15, 2022 .
In addition to the GO/PBA PSA, the Company has entered into the support
agreements described below (Support Agreements):
•HTA/CCDA PSA: A PSA with certain other stakeholders, the Commonwealth, and the
FOMB with respect to the
(PRHTA) and the
entered into by AGM and AGC on
•PRIFA PSA: A PSA signed on
Commonwealth, and the FOMB with respect to the
Financing Authority
•PREPA RSA: A restructuring support agreement with thePuerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB with respect to PREPA, entered into by AGM and AGC onMay 3, 2019 . OnJanuary 20, 2022 , theUnited States District Court of the District of Puerto Rico (Federal District Court for Puerto Rico ) entered an order under Title VI of PROMESA modifying the PRCCDA debt consistent with the HTA/CCDA PSA (PRCCDA Modification).The Company expects the effective date of the PRCCDA Modification to be the same date as the GO/PBA Effective Date. Also onJanuary 20, 2022 , theFederal District Court for Puerto Rico entered an order under Title VI of PROMESA modifying the PRIFA debt consistent with the PRIFA PSA (PRIFA Modification). The Company expects the effective date of the PRIFA Modification to be the same date as the GO/PBA Effective Date. Effectiveness of the PRIFA Modification is subject to certain conditions described in the PRIFA order. Each Support Agreement includes a number of conditions and the related debtor's plan of adjustment must be approved by the Title III Court, or the related debt must be modified by court order under Title VI of PROMESA, so there can be no assurance that the consensual resolutions embodied in all of the Support Agreements will be achieved in their current form, or at all. Additionally, the GO/PBA Plan, PRCCDA Modification, PRIFA Modification and any additional plans of adjustment or debt modifications (together with the GO/PBA Plan, PRCCDA Modification and PRIFA Modification, PR Resolutions) may be subject to further legal challenge or the relevant parties may not live up to their obligations under them. Both economic and political developments, including those related to the COVID-19 pandemic, may impact implementation of the PR Resolutions and the amount the Company realizes under the PR Resolutions, as well as the performance of the remainingPuerto Rico exposures. The impact of developments relating toPuerto Rico during any quarter or year could be material to the Company's results of operations and shareholders' equity. Nevertheless, the Company believes these developments mark a milestone in itsPuerto Rico loss mitigation efforts. For more information about developments inPuerto Rico and related recovery litigation being pursued by the Company, see Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure and the Insured Portfolio section below. The Company is and has for several years been working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS. In some instances, the terms of the Company's policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief. 77 --------------------------------------------------------------------------------
Asset Management and Alternative Investments
AssuredIM is a diversified asset manager that serves as investment adviser to CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As ofDecember 31, 2021 , AssuredIM is a top 25 CLO manager by AUM, as published byCreditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending and liquid strategies relating to municipal obligations. Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform. The Company intends to leverage the AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations. The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussion of the metric AUM, see "- Results of Operations by Segment - Asset Management Segment." Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated$750 million of capital to invest in funds managed by AssuredIM plus$550 million of theU.S. Insurance Subsidiaries' invested assets now managed by AssuredIM under an IMA. The Company is using these allocations to: (a) launch new products (CLOs, opportunity funds and liquid strategy funds) on the AssuredIM platform; and (b) enhance the returns of its own investment portfolio. As ofDecember 31, 2021 , AGAS had committed$702 million to AssuredIM Funds, including$244 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, asset-based finance, healthcare structured capital and municipal bonds. Under the IMA with AssuredIM, AGM and AGC have together invested$250 million to municipal obligation strategies and$300 million to CLO strategies. All of these strategies are consistent with the investment strengths of AssuredIM and the Company's plans to continue to grow its investment strategies.
Capital Management
The Company has developed strategies to efficiently manage capital within the
From 2013 throughFebruary 24, 2022 , the Company has repurchased 133.7 million common shares for approximately$4,250 million , representing approximately 69% of the total shares outstanding at the beginning of the repurchase program in 2013. OnFebruary 23, 2022 , the Board authorized the repurchase of an additional$350 million of common shares. Under this and previous authorizations, as ofFebruary 24, 2022 , the Company was authorized to purchase$364 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 8, Financial Statements and Supplementary Data, Note 20, Shareholders' Equity, for additional information about the Company's repurchases of its common shares. 78 --------------------------------------------------------------------------------
Summary of Share Repurchases
Average price
Amount Number of Shares per share
(in millions, except per share data)
2013-2020 $ 3,662 121.508 $ 30.14
2021 496 10.519 47.19
2022 (through February 24, 2022) 92 1.683 54.32
Cumulative repurchases since the beginning of 2013 $ 4,250 133.710 31.78
Accretive Effect of Cumulative Repurchases (1)
Year Ended December 31, As of December 31,
2021 2020 2021 2020
(per share)
Net income (loss) attributable to AGL $ 2.78 $
2.26
Adjusted operating income 3.47
1.73
Shareholders' equity attributable to AGL$ 40.67 $ 33.69 Adjusted operating shareholders' equity 37.87 29.32 Adjusted book value 65.58 51.48 _________________ (1) Represents the estimated accretive effect of cumulative repurchases since the beginning of 2013. Excludes the effect of cancelled shares that the Company received from the Company's former Chief Investment Officer and Head of Asset Management pursuant to the terms of the separation agreement datedAugust 6, 2020 . See Item 8. Financial Statements and Supplementary Data, Note 17, Related Party Transactions. The Company considers the appropriate mix of debt and equity in its capital structure. OnMay 26, 2021 , the Company issued$500 million of 3.15% Senior Notes, due in 2031 for net proceeds of$494 million . OnJuly 9, 2021 , a portion of the proceeds from the issuance of the 3.15% Senior Notes were used to redeem$200 million of AGMH debt as follows: all$100 million of AGMH's 6 7/8% Quarterly Interest Bonds due in 2101, and$100 million of the$230 million of AGMH's 6.25% Notes due in 2102. OnAugust 20, 2021 , the Company issued$400 million of 3.6% Senior Notes, due in 2051 for net proceeds of$395 million . OnSeptember 27, 2021 , all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem$400 million of AGMH and AGUS debt as follows: all$100 million of AGMH's 5.60% Notes due in 2103; the remaining$130 million of AGMH 6.25% Notes due in 2102; and$170 million of the$500 million of AGUS 5% Senior Notes due in 2024. See "- Liquidity and Capital Resources - AGL and itsU.S. Holding Companies" for theU.S. Holding Companies' expected debt service for its long-term debt. In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately$175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.
Proceeds from the debt issuances that were not used to redeem debt were used for
general corporate purposes, including share repurchases.
Since the second quarter of 2017, AGUS has purchased$154 million in principal of AGMH's outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See "- Liquidity and Capital Resources - AGL and itsU.S. Holding Companies", and Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities.
OnApril 1, 2021 , MAC merged with and into AGM, with AGM as the surviving company. Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM. As a result, the Company wrote off the$16 million carrying value of MAC's insurance licenses in the first quarter of 2021. This restructuring of the Company'sU.S. Insurance Subsidiaries simplified the organizational and capital structure, reduced costs, and increased the future dividend capacity of theU.S. Insurance Subsidiaries. 79 --------------------------------------------------------------------------------
Executive Summary
The primary drivers of volatility in the Company's net income include: changes in fair value of credit derivatives, FG VIEs, CIVs, and CCS, in addition to loss and LAE, foreign exchange gains (losses), the level of refundings of insured obligations, and changes in the value of the Company's alternative investments, as well as the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period.
Financial Performance of
Financial results include the results of AssuredIM after the date of acquisition onOctober 1, 2019 . Financial Results Year Ended December 31, 2021 2020 2019 (in millions, except per share amounts) GAAP (1) Net income (loss) attributable to AGL $ 389$ 362 $ 402
Net income (loss) attributable to AGL per diluted share $ 5.23
$ 4.19 $ 4.00 Weighted average diluted shares 74.3 86.2 100.2 Non-GAAP (1) Adjusted operating income (loss) (3) $ 470$ 256 $ 391 Adjusted operating income per diluted share $ 6.32$ 2.97 $ 3.91 Weighted average diluted shares 74.3 86.2 100.2
Gain (loss) related to FG VIE and CIV consolidation
included in adjusted operating income
$ 30$ (12) $ -
Gain (loss) related to FG VIE and CIV consolidation
included in adjusted operating income per share
$ 0.41$ (0.14) $ - Components of total adjusted operating income (loss) Insurance segment $ 722$ 429 $ 512 Asset Management segment (1) (19) (50) (10) Corporate division (263) (111) (111) Other (2) 30 (12) - Adjusted operating income (loss) $ 470$ 256 $ 391 Insurance Segment Gross written premiums (GWP) $ 377$ 454 $ 677 Present value of new business production (PVP) (3) 361 390 569 Gross par written 26,656 23,265 24,353 Asset Management Segment (1) AUM: Inflows - third party $ 2,971$ 1,618 $ 929 Inflows - intercompany 243 1,257 213 80
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As of December 31, 2021 As of December 31, 2020
Amount Per Share Amount Per Share
(in millions, except per share amounts)
Shareholders' equity attributable to AGL $ 6,292
Adjusted operating shareholders' equity (3)
5,991 88.73 6,087 78.49 Adjusted book value (3) 8,823 130.67 8,908 114.87 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders' equity 32 0.47 2 0.03 Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value 23 0.34 (8) (0.10) Common shares outstanding (4) 67.5 77.5
____________________
(1) 2019 amounts include AssuredIM results only for the period fromOctober 1, 2019 , the BlueMountain Acquisition date, throughDecember 31, 2019 . (2) Relates to the effect of consolidating FG VIEs and CIVs. (3) See "-Non-GAAP Financial Measures" for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted inthe United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details. (4) See "- Overview- Key Business Strategies - Capital Management" above for information on common share repurchases. 81 --------------------------------------------------------------------------------
Consolidated Results of Operations
Consolidated Results of Operations
Year Ended December 31,
2021 2020 2019
(in millions)
Revenues:
Net earned premiums $ 414 $ 485 $ 476
Net investment income 269 297 378
Asset management fees 88 89 22
Net realized investment gains (losses) 15 18 22
Fair value gains (losses) on credit derivatives (58) 81 (6)
Fair value gains (losses) on CCS (28) (1) (22)
Fair value gains (losses) on FG VIEs 23 (10) 42
Fair value gains (losses) on CIVs 127 41 (3)
Foreign exchange gains (losses) on remeasurement (23) 39 24
Commutation gains (losses) - 38 1
Other income (loss) 21 38 29
Total revenues 848 1,115 963
Expenses:
Loss and LAE (benefit) (220) 203 93
Interest expense 87 85 89
Loss on extinguishment of debt 175 - -
Amortization of deferred acquisition cost (DAC) 14 16 18
Employee compensation and benefit expenses 230 228 178
Other operating expenses 179 197 125
Total expenses 465 729 503
Income (loss) before provision for income taxes and equity
in earnings of investees
383 386 460 Equity in earnings of investees 94 27 4 Income (loss) before income taxes 477 413 464 Less: Provision (benefit) for income taxes 58 45 63 Net income (loss) 419 368 401 Less: Noncontrolling interests 30 6 (1)
Net income (loss) attributable to
Effective tax rate on net income (loss) 12.2 % 10.9 % 13.7 %
Net income attributable to AGL for 2021 was higher compared with 2020 primarily
due to the following:
•benefit in loss and LAE of$220 million in 2021 compared with expense in loss and LAE of$203 million 2020, which primarily included benefits for bothPuerto Rico andU.S. RMBS exposures in 2021 andPuerto Rico losses in 2020, •higher fair value gains on CIVs of$127 million in 2021 compared with$41 million in 2020, which includes a$31 million gain on consolidation of an AssuredIM fund in 2021 as well as increase in the fair value of the investments in CIVs; and
•higher equity in earnings of investees gains from alternative investments,
including AssuredIM Funds, in 2021 compared with 2020.
These increases were offset in part by:
•the loss on extinguishment of debt of$175 million on a pre-tax basis ($138 million after-tax) related to the redemption of$600 million of long-term debt in 2021, 82 --------------------------------------------------------------------------------
•fair value losses on credit derivatives of
gains of
•lower earned premiums in 2021 compared with 2020.
The Company's effective tax rate reflects the proportion of income recognized by each of the Company's operating subsidiaries, withU.S. subsidiaries generally taxed at theU.S. marginal corporate income tax rate of 21%,U.K. subsidiaries taxed at theU.K. marginal corporate tax rate of 19%, French subsidiaries taxed at the French marginal corporate tax rate of 27.5%, and no taxes for the Company's Bermuda Subsidiaries, unless subject toU.S. tax by election or as aU.S. CFC. The effective tax rate in 2021 was higher than in 2020 due primarily to differences in the portion of income generated by various jurisdictions.
Adjusted Operating Income
Adjusted operating income in 2021 was$470 million , compared with$256 million in 2020. The increase was primarily attributable to the Insurance segment which recognized a benefit related to itsPuerto Rico andU.S RMBS exposures in 2021. The effect of consolidating FG VIEs and CIVs also contributed$30 million in 2021 primarily attributable to a fair value gain on consolidation associated with a newly consolidatedAssuredIM Fund in 2021. The effect of consolidating FG VIEs and CIVs was a loss of$12 million in 2020 primarily attributable to fair value losses associated with FG VIEs. These increases were partially offset by larger losses in the Corporate division associated with the extinguishment of debt. See "- Results of Operations - Reconciliation to GAAP" below.
Book Value and Adjusted Book Value
Shareholders' equity attributable to AGL declined sinceDecember 31, 2020 , as net income was offset by other comprehensive loss, share repurchases and dividends. Adjusted operating shareholders' equity and adjusted book value also declined primarily due to share repurchases, dividends and the loss on extinguishment of debt offset in part, in the case of adjusted book value, by new business development. Shareholder's equity attributable to AGL per share, adjusted operating shareholders' equity per share and adjusted book value per share all reached record highs in 2021 at$93.19 ,$88.73 and$130.67 , respectively. The increase in each of these per share measures, as compared withDecember 31, 2020 , was primarily due to positive loss development and the accretive effect of the share repurchase program, partially offset by the loss on extinguishment of debt recognized in the third quarter of 2021. In the case of adjusted book value per share, net premiums written in the Insurance segment also contributed to the increase compared withDecember 31, 2020 . See "- Overview - Key Business Strategies , Accretive Effect of Cumulative Repurchases" table above. See "- Non-GAAP Financial Measures" below for the reconciliation of shareholders' equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value. Other Matters LIBOR Sunset IBA andFCA first announced in 2017 that the publication of LIBOR would cease at the end of 2021. Many legal documents entered into prior to that time did not include robust fallback language contemplating the permanent suspension of the publication of LIBOR. OnMarch 5, 2021 , IBA andFCA confirmed a representative panel of banks will continue setting 1, 3, 6 and 12-monthU.S. Dollar LIBOR throughJune 2023 , rather thanDecember 31, 2021 as originally announced. The Company believes that the continued publication ofU.S. Dollar LIBOR on the current basis afterJune 2023 is unlikely. The publication of all sterling LIBOR rates ceased onDecember 31, 2021 , as originally announced.
The Company has exposure to LIBOR in the following areas:
i.The Company projects that inJune 2023 it will have approximately$3.1 billion of insured net par outstanding to obligors that the Company is aware have assets, liabilities or hedges that referenceU.S. Dollar LIBOR. Of the$3.1 billion of insured net par, approximately$1.0 billion is currently rated BIG by the Company. The Company also had$278 million of insured net par outstanding atDecember 31, 2021 to obligors that the Company is aware have assets, liabilities or hedges that reference sterling LIBOR. In each case, the transactions are generally governed by documentation entered into prior to the announcement that the publication of LIBOR would cease. These obligors, not the Company, are responsible for any financial cost of the transition away from LIBOR. The 83 -------------------------------------------------------------------------------- Company is impacted if such costs result in payment defaults of obligations the Company insures or increase the amount of losses the Company is required to pay for insured transactions already in payment default.
ii.The Company owned loss mitigation securities with a market value of
approximately
LIBOR, generally governed by documentation entered into prior to the
announcement that the publication of LIBOR would cease. The transition away from
received from such investments.
iii.The Company's subsidiary AGUS has$150 million of debentures outstanding that bear a floating rate interest tied toU.S. Dollar LIBOR. In 2021, the Company paid$4 million of interest on those debentures. In addition, the Company's subsidiary AGMH has$146 million of debentures outstanding that will convert to a floating interest rate tied toU.S. Dollar LIBOR afterDecember 15, 2036 . The Company benefits from$400 million of CCS that pay a rate tied toU.S. Dollar LIBOR. In 2021, the amount the Company paid on the CCS was$10 million . iv.Certain obligations issued by, and certain assets owned by, the Company's CIVs pay interest tied toU.S. Dollar LIBOR. The documents relevant to the CIVs generally were executed after the planned cessation ofU.S. Dollar LIBOR was announced, and contain robust fallback language.U.S. Dollar LIBOR. As part of its insured portfolio surveillance process, the Company's surveillance team evaluates the potential impact of the transition fromU.S. Dollar LIBOR on the Company's insured exposures. The Company is generally in contact with relevant parties to insured transactions most likely to be impacted by the transition fromU.S. Dollar LIBOR. In many instances it is difficult to amend the relevant documentation, so legislation to address the issue would, in the Company's opinion, be very helpful. There has been recent progress on relevant legislation. OnApril 6, 2021 ,New York's governor signed into law legislation that provides, among other things, that any LIBOR based-contracts governed byNew York law that do not have adequate fallback language or replacement rate provisions will, by operation of law, use the Secured Overnight Finance Rate (SOFR) as a benchmark replacement when LIBOR ceases to exist (NY Legacy LIBOR Law). While each exposure is contract-specific, most LIBOR provisions relevant to the Company are governed byNew York law, so the NY Legacy LIBOR Law is a helpful development for those contracts relevant to the Company with less robust fallback language and where parties are unlikely to negotiate a new rate. OnDecember 8, 2021 , theU.S. House of Representatives passed H.R. 4616, the Adjustable Interest Rate (LIBOR) Act of 2021 (the LIBOR Act) which, similar to the NY Legacy LIBOR Law, provides for transition to SOFR (as recommended by theFederal Reserve Board ) for LIBOR-based contracts that do not have adequate fallback language or a replacement rate is not selected by a determining person. The LIBOR Act is now with theU.S. Senate . Enactment of the LIBOR Act would address those portions of the Company's insured portfolio with assets, liabilities or hedges that referenceU.S. Dollar LIBOR and not governed byNew York law, as well as the CCS. The Company expects the LIBOR Act will passed in the first half of 2022.
While most of the parties relevant to the Company's exposure to
LIBOR have not yet expressly committed to a course of action, the NY Legacy
LIBOR Law (and the LIBOR Act if enacted) provide a replacement rate and a safe
harbor from liability as a result of the transition from
Sterling LIBOR. The Company is cooperating with the relevant parties to amend the relevant documents referencing sterling LIBOR in its insured portfolio to instead reference Sterling Overnight Interbank Average Rate (SONIA), and the Company believes such amendments will be completed by year end 2022. In the meantime, theFCA has authorized temporary use of synthetic sterling LIBOR, which approximates what LIBOR might have been.
Income Taxes
The U.S. Internal Revenue Service and Department of the Treasury issued final and proposed regulations inOctober 2020 relating to the tax treatment of PFICs. The final regulations are not expected to have a material impact to the Company's business operation or its shareholders and the proposed regulations are continuing to be evaluated.
Results of Operations
84 --------------------------------------------------------------------------------
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. The inputs into our estimates and assumptions consider the economic implications of COVID-19. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the Consolidated Financial Statements. Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time. The accounting policies that the Company believes are the most dependent on the application of judgment, estimates and assumptions are listed below. See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for the Company's significant accounting policies which includes a reference to the note where further details regarding the significant estimates and assumptions are provided, as well as Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further details regarding sensitivity analysis. •Expected loss to be paid (recovered) •Premium revenue recognition •Fair value of certain assets and liabilities, primarily: ?Investments ?Assets and liabilities of CIVs ?Assets and liabilities of FG VIEs ?Credit derivatives •Recoverability of goodwill and other intangible assets •Credit impairment of financial instruments •Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities) In addition, the valuation of AUM, which is the basis for calculating certain asset management fees, is based on estimates and assumptions. AUM valuations are often performed by independent pricing services based on observable and unobservable inputs. AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, see "- Results of Operations by Segment - Asset Management Segment". As manager and adviser for funds and CLOs, the Company has established policies to govern valuation processes that are reasonably designed to ensure consistency in the application of revenue recognition. Management relies extensively on the data provided by independent pricing services. Valuation processes for AUM are dependent on the nature of the assets. The majority of our AUM is valued based on data from third parties such as independent pricing services. This varies slightly from time to time based upon the underlying composition of the asset class (equity, fixed income, alternative, and liquidity) as well as the actual underlying securities in the portfolio within each asset class.
Results of Operations by Segment
The Company reports its results of operations in two distinct segments,
Insurance and Asset Management, consistent with the manner in which the
Company's CODM reviews the business to assess performance and allocate
resources. The following describes the components of each segment, along with
the Corporate division and Other categories. The Insurance and Asset Management
segments and the Corporate division are presented without giving effect to the
consolidation of FG VIEs and CIVs.
The Company analyzes the operating performance of each segment using each
segment's adjusted operating income as described in Item 8, Financial Statements
and Supplementary Data, Note 3, Segment Information,. Results for each segment
include specifically identifiable expenses as well as allocations of expenses
among legal entities based on time studies and other cost allocation
methodologies based on headcount or other metrics.
85
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Insurance Segment Results
Insurance Segment Results
Year Ended December 31,
2021 2020 2019
(in millions)
Segment revenues
Net earned premiums and credit derivative revenues $ 438 $ 504 $ 511
Net investment income 280 310 383
Commutation gains (losses) - 38 1
Other income (loss) 15 22 22
Total segment revenues 733 874 917
Segment expenses
Loss expense (benefit) (221) 204 86
Amortization of DAC 14 16 18
Employee compensation and benefit expenses 142 143 137
Other operating expenses 98 83 83
Total segment expenses 33 446 324
Equity in earnings of investees 144 61 2
Segment adjusted operating income (loss) before income
taxes
844 489 595 Less: Provision (benefit) for income taxes 122 60 83 Segment adjusted operating income (loss)$ 722 $ 429 $ 512 86
--------------------------------------------------------------------------------
Insurance New Business Production
Gross Written Premiums and New Business Production
Year Ended December 31,
2021 2020 2019
(in millions)
GWP
Public Finance-U.S. $ 231 $ 294 $ 198
Public Finance-non-U.S. 89 142 417
Structured Finance-U.S. 51 18 57
Structured Finance-non-U.S. 6 - 5
Total GWP $ 377 $ 454 $ 677
PVP (1):
Public Finance-U.S. $ 235 $ 292 $ 201
Public Finance-non-U.S. 79 82 308
Structured Finance-U.S. 42 14 53
Structured Finance-non-U.S. 5 2 7
Total PVP $ 361 $ 390 $ 569
Gross Par Written (1):
Public Finance-U.S. $ 23,793 $ 21,198 $ 16,337
Public Finance-non-U.S. 1,117 1,434 6,347
Structured Finance-U.S. 1,316 380 1,581
Structured Finance-non-U.S. 430 253 88
Total gross par written $ 26,656 $ 23,265 $ 24,353
Average rating on new business written A- A- A
____________________
(1) PVP and Gross Par Written in the table above are based on "close date,"
when the transaction settles. See "- Non-GAAP Financial Measures - PVP or
Present Value of New Business Production."
GWP relates to both financial guaranty insurance and specialty insurance and reinsurance contracts. Financial guaranty insurance and reinsurance GWP includes: (1) amounts collected upfront on new business written; (2) the present value of future contractual or expected premiums on new business written (discounted at risk-free rates); and (3) the effects of changes in the estimated lives of certain transactions in the in-force book of business. Specialty insurance and reinsurance GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore are not included in GWP. The non-GAAP financial measure, PVP, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, for all contracts whether in insurance or credit derivative form. See "- Non-GAAP Financial Measures" below. DirectU.S. public finance GWP and PVP decreased in 2021 to$220 million and$224 million , respectively, compared with$294 million and$292 million in direct GWP and PVP, respectively, in 2020, primarily due to reduced average premium rates in 2021 due to tighter credit spreads. The onset of the COVID-19 pandemic in the first half of 2020 generated an increase in demand for insurance (particularly in the secondary market), and attractive pricing opportunities which were not replicated in 2021 as markets stabilized. The Company's direct par written represented 60% of the totalU.S. municipal market insured issuance in 2021, compared with 58% in 2020, and the Company's penetration of all municipal issuance increased to 5.0% in 2021 from 4.4% in 2020. In 2021, non-U.S. public finance GWP and PVP included the restructuring of several existing transactions that resulted in additional GWP and PVP, without an increase in gross par, and several large transactions including a largeU.K. university housing transaction, aU.K. hospital transaction and a renewable energy transaction. Non-U.S public finance GWP and PVP decreased 37% and 4%, respectively. Excluding amounts relating to one large long-dated policy written in 2020, for which 87 -------------------------------------------------------------------------------- GWP includes the present value of all contractual future premiums, while PVP includes the present value of only expected future premiums, non-U.S. public finance GWP and PVP increased 6% and 5%, respectively.
Business activity in the international infrastructure and structured finance
sectors typically has long lead times and therefore may vary from period to
period.
Net Earned Premiums and Credit Derivative Revenues
Premiums are earned over the contractual lives, or in the case of insured
obligations backed by homogeneous pools of assets, the remaining expected lives,
of financial guaranty insurance contracts. The Company periodically estimates
remaining expected lives of its insured obligations backed by homogeneous pools
of assets and makes prospective adjustments for such changes in expected lives.
Scheduled net earned premiums decrease each year unless replaced by a higher
amount of new business, books of business acquired in a business combination or
reassumptions of previously ceded business . See Item 8, Financial Statements
and Supplementary Data, Note 6, Contracts Accounted for as Insurance, Premiums,
for additional information.
Net earned premiums due to accelerations are attributable to changes in the
expected lives of insured obligations driven by: (i) refundings of insured
obligations; or (ii) terminations of insured obligations either through
negotiated agreements or the exercise of the Company's contractual rights to
make claim payments on an accelerated basis.
Refundings occur in the public finance market when municipalities and other
public finance issuers can refinance their debt obligations at lower rates than
they are currently paying. The premiums associated with the insured obligations
of municipalities and other public finance issuers are generally received
upfront when the obligations are issued and insured. When such issuers pay down
insured obligations prior to their originally scheduled maturities, the Company
is no longer on risk for payment defaults, and therefore accelerates the
recognition of the remaining nonrefundable deferred premium revenue. The
amortization of our outstanding book of business along with the previously high
levels of refunding activity has led to a lower volume of refunding
opportunities over the last several years.
Terminations are generally negotiated agreements with beneficiaries resulting
in the extinguishment of the Company's insurance obligation. Terminations are
more common in the structured finance asset class, but may also occur in the
public finance asset class. While each termination may have different terms,
they all result in the expiration of the Company's insurance risk, the
acceleration of the recognition of the associated deferred premium revenue and
the reduction of any remaining premiums receivable.
The Company has not written any new credit derivatives since 2009. Other than
credit derivatives that may be acquired in business combinations and reinsurance
agreements, or as part of loss mitigation strategies, credit derivative exposure
is expected to decline.
88
--------------------------------------------------------------------------------
Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
Year Ended December 31,
2021 2020 2019
(in millions)
Net earned premiums:
Financial guaranty insurance:
Public finance
Scheduled net earned premiums (1) $ 290 $ 292 $ 278
Accelerations:
Refundings 56 123 115
Terminations 1 6 10
Total accelerations 57 129 125
Total public finance 347 421 403
Structured finance
Scheduled net earned premiums (1) 66 67 78
Accelerations 2 - 7
Total structured finance 68 67 85
Specialty insurance and reinsurance 3 2 6
Total net earned premiums 418 490 494
Credit derivative revenues:
Scheduled net earned premiums 13 13 17
Accelerations 7 1 -
Total credit derivative revenues 20 14 17
Total net earned premiums and credit derivative revenues
____________________
(1) Includes accretion of discount.
Net earned premiums and credit derivative revenues decreased in 2021 compared with 2020 primarily due to lower net earned premiums from refundings and terminations. AtDecember 31, 2021 ,$3.8 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.
Net Investment Income and Equity in Earnings of Investees
Net investment income is a function of the yield that the Company earns on
fixed-maturity securities and short-term investments, and the size of such
portfolio. The investment yield is a function of market interest rates at the
time of investment as well as the type, credit quality and maturity of the
securities in this portfolio.
Equity method investments in the Insurance segment include investments AGM, AGC and, until its merger with AGM onApril 1, 2021 , MAC (collectively, theU.S. Insurance Subsidiaries) make in AssuredIM Funds, as well as other alternative investments. The income (loss) on such investments is reported in "equity in earnings of investees" and typically represents the change in NAV of AssuredIM Funds and the Company's share of earnings of its other investees. TheU.S. Insurance Subsidiaries are authorized to invest up to$750 million in AssuredIM Funds. As ofDecember 31, 2021 , theU.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of$702 million , of which$458 million represented net invested capital and$244 million was undrawn. 89 --------------------------------------------------------------------------------
Insurance Segment
Net Investment Income and Equity in Earnings of Investees
Year Ended December 31,
2021 2020 2019
(in millions)
Net investment income
Externally managed $ 202 $ 231 $
272
Loss mitigation securities and other 58 69 115 Managed by AssuredIM (1) 16 8 - Intercompany loans 10 10 5 Investment income 286 318 392 Investment expenses (6) (8) (9) Net investment income$ 280 $ 310 $ 383 Equity in earnings of investees AssuredIM Funds$ 80 $ 42 $
(2)
Other 64 19
4
Equity in earnings of investees$ 144 $ 61 $
2
____________________
(1) Represents interest income on a portfolio of CLOs and municipal bonds
managed by AssuredIM under an IMA.
Net investment income decreased in 2021 compared with 2020 primarily due to lower average balances in the fixed-maturity investment portfolio, lower reinvestment yields and lower income on loss mitigation securities. The overall pre-tax book yield was 2.93% as ofDecember 31, 2021 and 3.25% as ofDecember 31, 2020 , respectively. Excluding the internally managed portfolio and portfolio managed by AssuredIM, pre-tax book yield was 2.92% as ofDecember 31, 2021 , compared with 2.93% as ofDecember 31, 2020 . Equity in earnings of AssuredIM Funds in 2021 was primarily attributable to higher valuations of assets held in: (i) the healthcare fund that opened at the end of 2020; (ii) CLO funds; and (iii) the asset-based fund that was launched in the third quarter of 2021. Healthcare fund performance was driven by improved financial projections for a number of the portfolio companies as well as upward movement in the traded market multiples of comparable public companies. CLO funds' performance was driven by continued tightening of credit spreads. The asset-based fund's performance was driven by improved financial projections and increases in the market multiples of comparable public companies. Equity in earnings of other investments increased in 2021 compared with 2020 primarily due to a large fair value gain on a specific investment in a private equity fund. Equity in earnings of AssuredIM Funds in 2020 mainly consisted of fair value gains in the CLO Funds as a result of trading gains as the market rebounded post the initial pandemic dislocation and tightening of yields, and gains in the healthcare funds (one of which launched in the fourth quarter of 2020) due to improved financial projections and favorable movements in market multiples of comparable public companies. Commutation Gains (Losses)
In connection with the reassumption of previously ceded books of financial
guaranty business, the Company recognized commutation gains of
2020. There were no commutations in 2021.
Other Income (Loss)
Other income (loss) consists of recurring items such as ancillary fees on
financial guaranty policies for commitments and consents, foreign exchange gain
(loss) on remeasurement, and if applicable, other revenue items on financial
guaranty insurance and reinsurance contracts such as loss mitigation recoveries.
Other income decreased in 2021 compared with 2020 due primarily to the recovery
of a previously written off insurance premium in 2020.
90
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The insured portfolio includes policies accounted for under three separate
accounting models depending on the characteristics of the contract and the
Company's control rights. For a discussion of methodologies used in estimating
the expected loss to be paid (recovered) for all contracts, see Item 8,
Financial Statements and Supplementary Data, Note 5, Expected Loss to be Paid
(Recovered). For the accounting policies for measurement and recognition under
GAAP for each type of contract, see the notes listed below in Item 8, Financial
Statements and Supplementary Data.
•Note 6 for contracts accounted for as insurance;
•Note 7 for contracts accounted for as credit derivatives;
•Note 9 for FG VIEs; and
•Note 10 for fair value methodologies for credit derivatives and FG VIEs' assets
and liabilities.
In order to efficiently evaluate and manage the economics of the entire insured
portfolio, management compiles and analyzes expected loss information for all
policies on a consistent basis. The discussion of losses that follows
encompasses expected losses on all contracts in the insured portfolio regardless
of accounting model, unless otherwise specified. Net expected loss to be paid
(recovered) primarily consists of the present value of future: expected claim
and LAE payments; expected recoveries from issuers or excess spread; cessions to
reinsurers; expected recoveries/payables stemming from breaches of
representation and warranties (R&W); and, the effects of other loss mitigation
strategies. Assumptions used in the determination of the net expected loss to be
paid (recovered) such as delinquency, severity, and discount rates and expected
time frames to recovery were consistent by sector regardless of the accounting
model used.
Current risk-free rates are used to discount expected losses at the end of each
reporting period and therefore changes in such rates from period to period
affect the expected loss estimates reported. Changes in risk-free rates used to
discount losses affect economic loss development, and loss and LAE; however, the
effect of changes in discount rates are not indicative of actual credit
impairment or improvement in the period. The following table presents the range
and weighted average discount rates used to discount expected losses
(recoveries).
Risk-Free Rates Used in Expected Loss (Recovery) for
U.S. Dollar Denominated Obligations
As of December 31,
2021 2020 2019
Range 0.00 % - 1.98% 0.0 % - 1.72% 0.00 % - 2.45%
Weighted average 1.02% 0.60% 1.94%
The composition of economic loss development (benefit) by accounting model and
by sector are presented in the tables that follow, and the drivers of economic
loss development (benefit) are discussed below.
Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development
(Benefit)
by Accounting Model
Net Expected Loss to be Paid
(Recovered) Net Economic Loss Development (Benefit)
As of December 31, Year Ended December 31,
Accounting Model 2021 2020 2021 2020 2019
(in millions)
Insurance $ 364 $ 471 $ (281) $ 142 $ 14
FG VIEs 42 59 (20) 1 (29)
Credit derivatives 5 (1) 14 2 14
Total $ 411 $ 529 $ (287) $ 145 $ (1)
Net exposure rated BIG $ 7,440 $ 7,988
91
-------------------------------------------------------------------------------- Net Expected Loss to be Paid (Recovered) andNet Economic Loss Development (Benefit) by Sector Net Expected Loss to be Paid (Recovered)Net Economic Loss Development (Benefit) As ofDecember 31 , Year EndedDecember 31 ,
Sector 2021 2020 2021 2020 2019
(in millions)
U.S. public finance $ 197 $ 305 $ (182) $ 190 $ 224
Non-U.S. public finance 12 36 (22) 13 (9)
Structured finance:
U.S. RMBS 150 148 (100) (71) (234)
Other structured finance 52 40 17 13 18
Structured finance 202 188 (83) (58) (216)
Total $ 411 $ 529 $ (287) $ 145 $ (1)
Effect of changes in the risk-free rates included in net economic
loss development (benefit) $ (33) $ 13 $ (11)
2021 Net Economic Loss Development
Public Finance: Public finance expected loss to be paid primarily related to
U.S. exposures, which had BIG net par outstanding of $5.4 billion as of
December 31, 2021 , compared with $5.4 billion as of December 31, 2020 . The
Company projected that its total net expected loss across its troubled U.S.
public finance exposures as of December 31, 2021 will be $197 million , compared
with $305 million as of December 31, 2020 . The economic benefit on U.S.
exposures in 2021 was $182 million , which was primarily attributable to certain
Puerto Rico exposures. In the fourth quarter of 2021, the Company sold a portion
of its salvage and subrogation recoverable asset associated with certain matured
Puerto Rico GO and PREPA exposures on which the Company had previously paid
claims. This sale resulted in proceeds of $383 million , including $56 million
that was settled in January 2022 . The Company has continued to make such sales,
and received an additional $133 million in proceeds in connection with
additional such sales in 2022 through February 18, 2022 . Also in the fourth
quarter of 2021, the Company increased its assumptions for the value of the
remaining contingent value instruments (CVIs) and recovery bonds to be received
under the GO/PBA Plan and other settlements. During 2021, the Company also
incorporated refinements in certain terms of the Puerto Rico support agreements.
See Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding
Exposure, for details about significant developments that have taken place in
Puerto Rico .
The economic benefit of $22 million for non-U.S. public finance exposures
during 2021 was mainly due to the impact of higher Euro Interbank Offered Rate
(Euribor), the restructuring of certain exposures and an improved performance
outlook for certain road exposures.
U.S. RMBS: The net benefit attributable to U.S. RMBS of $100 million was
mainly related to a $72 million benefit related to higher recoveries on
charged-off second lien loans, a $28 million benefit related to improvement in
transaction performance, a $23 million benefit related to assumed recovery on
certain deferred principal balances in first lien loans, and a benefit of $18
million related to changes in discount rates, partially offset by loss of $41
million related to lower excess spread.
Other Structured Finance: The economic loss development attributable to
structured finance, excluding
attributable to LAE for certain transactions and deterioration of certain
aircraft RVI exposures.
2020
Public Finance: Public finance expected loss to be paid primarily related toU.S. exposures, which had BIG net par outstanding of$5.4 billion as ofDecember 31, 2020 compared with$5.8 billion as ofDecember 31, 2019 . The Company projected that its total net expected loss across its troubledU.S. public finance exposures as ofDecember 31, 2020 would be$305 million , compared with$531 million as ofDecember 31, 2019 . Economic loss development onU.S. exposures in 2020 was$190 million , which was primarily attributable toPuerto Rico exposures.
The economic loss development of approximately
finance exposures during 2020 was mainly due to the impact of lower Euribor.
92 --------------------------------------------------------------------------------U.S. RMBS: The net benefit attributable toU.S. RMBS of$71 million was mainly related to higher excess spread of approximately$88 million on certain transactions supported by large portions of fixed-rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to LIBOR, which decreased in 2020. This was partially offset primarily by the impact of COVID-19-related forbearances.
Other Structured Finance: The economic loss development attributable to
structured finance, excluding
attributable to LAE for certain transactions and deterioration of certain
aircraft RVI exposures.
Insurance Segment Loss Expense (Benefit)
The primary differences between net economic loss development and the amount reported as "loss and LAE (benefit)" in the consolidated statements of operations are that loss and LAE: (1) considers deferred premium revenue in the calculation of loss reserves and the corresponding loss and LAE for financial guaranty insurance contracts; (2) eliminates loss and LAE related to FG VIEs; and (3) does not include estimated losses on credit derivatives. Insurance segment loss expense (benefit) includes loss and LAE (benefit) on financial guaranty insurance contracts without giving effect to eliminations related to consolidation of FG VIEs, and includes losses on credit derivatives. For financial guaranty insurance contracts, each transaction's expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company's projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.
The amount of Insurance segment loss expense (benefit), which includes all
policies regardless of form, is a function of the amount of economic loss
development discussed above and the deferred premium revenue amortization in a
given period, on a contract-by-contract basis.
While expected loss to be paid (recovered) is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company's projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.
The following table presents the Insurance segment loss expense (benefit).
Insurance Segment
Loss Expense (Benefit)
Year Ended December 31,
2021 2020 2019
(in millions)
U.S. public finance $ (146) $ 225 $ 247
Non-U.S. public finance (9) 5 (7)
Structured finance:
U.S. RMBS (84) (36) (176)
Other structured finance 18 10 22
Structured finance (66) (26) (154)
Total Insurance segment loss expense (benefit) $ (221) $ 204 $ 86
93
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The primary components of the Insurance segment loss expense (benefit) were as
follows:
•2021 was a benefit mainly driven by certain
recoveries in
•2020 was a loss mainly driven by an increase in expected loss on certain
Rico
For additional information on the expected timing of net expected losses to be
expensed, see Item 8, Financial Statements and Supplementary Data, Note 6,
Contracts Accounted for as Insurance, Losses.
Other Operating Expenses
The increase in other operating expenses from$83 million in 2020 to$98 million in 2021 was primarily attributable to the write-off of a$16 million intangible asset attributable to MAC insurance licenses. MAC was merged with and into AGM onApril 1, 2021 . See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for additional information.
Financial Strength Ratings
On
to AA+.
Demand for the financial guaranties issued by the Company's insurance
subsidiaries may be impacted by changes in the credit ratings assigned to them
by the rating agencies. The financial strength ratings (or similar ratings)
assigned to AGL's insurance subsidiaries, along with the date of the most recent
rating action (or confirmation) by the rating agency assigning the rating, are
shown in the table below.
A.M. Best Company,
S&P KBRA Moody's Inc.
AA+ (stable)
AGM AA (stable) (7/8/21) (10/20/21) A2 (stable) (8/13/19) -
AA+ (stable)
AGC AA (stable) (7/8/21) (10/20/21) (1) -
AG Re AA (stable) (7/8/21) - - -
AGRO AA (stable) (7/8/21) - - A+ (stable) (7/15/21)
AA+ (stable)
AGUK AA (stable) (7/8/21) (10/20/21) A2 (stable) (8/13/19) -
AA+ (stable)
AGE AA (stable) (7/8/21) (10/20/21) - -
____________________
(1) AGC requested that Moody's withdraw its financial strength ratings of AGC inJanuary 2017 , but Moody's denied that request. Moody's continues to rate AGC A3 (stable). Ratings are subject to continuous rating agency review and revision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL's insurance subsidiaries in the future or cease to rate one or more of AGL's insurance subsidiaries, either voluntarily or at the request of that subsidiary.
For a discussion of the effects of rating actions on the Company beyond
potential effects on the demand for its insurance products, see Item 8,
Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as
Insurance, Reinsurance and "-Liquidity and Capital Resources" section below.
Asset Management Segment Results
The Asset Management segment includes the results of AssuredIM (formerly BlueMountain). The BlueMountain Acquisition occurred onOctober 1, 2019 , therefore 2019 results presented in the tables below include only the results of operations for the fourth quarter of 2019, while 2021 and 2020 results include full years of results. 94 -------------------------------------------------------------------------------- Asset Management Segment Results
Year Ended
2021 2020 2019
(in millions)
Segment revenues
Management fees (1) $ 76 $ 59 $ 18
Performance fees 1 1 4
Other income (loss) 6 6 -
Total segment revenues 83 66 22
Segment expenses
Employee compensation and benefit expenses 67 67 24
Interest expense 1 - -
Other operating expenses (1) (2) 40 61 10
Total segment expenses 108 128 34
Segment adjusted operating income (loss) before income
taxes
(25) (62) (12) Less: Provision (benefit) for income taxes (6) (12) (2) Segment adjusted operating income (loss)$ (19)
_____________________
(1)The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the consolidated statement of operations such reimbursable expenses are shown gross as revenues. (2) Includes amortization of intangible assets of$12 million in 2021,$13 million in 2020 and$3 million in 2019.
Management Fees
Management fees are generated by CLOs, opportunity funds, liquid strategies, and the wind-down funds. CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO Equity that is held directly by AssuredIM Funds. Management fees from opportunity funds and liquid strategies include funds that were launched since the BlueMountain Acquisition in which the Insurance segment'sU.S. Insurance Subsidiaries invest along with two previously established opportunity funds in their harvest periods. The Company also generates fees from legacy hedge and opportunity funds now subject to an orderly wind-down. Management Fees Year Ended December 31, 2021 2020 2019 (in millions) CLOs$ 48 $ 23 $ 3 Opportunity funds and liquid strategies 20 11 2 Wind-down funds 8 25 13 Total management fees$ 76 $ 59 $ 18 CLO fees increased as a result of (i) higher fee-earningCLO AUM over the course of 2021, compared with 2020; and (ii) the deferral of CLO fees in 2020 that did not recur in 2021. CLO fee-earning AUM was$14.3 billion , or 97%, of totalCLO AUM as ofDecember 31, 2021 , compared with$10.2 billion , or 74%, of totalCLO AUM as ofDecember 31, 2020 . The increase in fee-earningCLO AUM was primarily due to the sale to third parties of CLO Equity from legacy funds, and the issuance of new CLOs. As ofDecember 31, 2021 , substantially all of the CLO equity held by legacy funds has been sold to third parties, which ends the fee rebates made back to these funds. In addition, the COVID-19 pandemic and downgrades in loan markets had triggered over-collateralization provisions in CLOs in the second and third quarters of 2020, resulting in the deferral of CLO management fees, which were recovered in the second half of 2020 and the first half of 2021. As ofDecember 31, 2021 , there were no CLOs managed by AssuredIM triggering over-collateralization provisions. Fees from opportunity funds increased primarily due to a full year of management fees earned on the healthcare fund launched at the end of 2020. Fees from the wind-down funds decreased as distributions to investors continued. As ofDecember 31, 2021 , AUM of the wind-down funds was$0.6 billion compared with$1.6 billion as ofDecember 31, 2020 . 95 --------------------------------------------------------------------------------
Expenses
Asset Management segment expenses decreased in 2021 compared to 2020 primarily due to a$13 million impairment of a right-of-use asset associated with the lease on AssuredIM's headquarters in 2020 that did not recur in 2021, and lower placement fees. Expenses primarily consist of employee compensation and benefits, and also include other operating expenses such as rent, professional fees, placement fees, and depreciation. Amortization of finite-lived intangible assets mainly consist of AssuredIM's CLO and investment management contracts and its CLO distribution network as discussed below.
As ofDecember 31, 2021 , the Company had$117 million in goodwill and$50 million in finite-lived intangible assets associated with the BlueMountain Acquisition. In 2021, the results of a qualitative assessment indicated that it was more likely-than-not that the fair value of the reporting unit was greater than its carrying value and therefore no goodwill impairment was recorded. To date, there have been no impairments of goodwill or finite-lived intangible assets. The Company's goodwill impairment assessment is sensitive to the Company's assumptions of discount rates, market multiples, projections of AUM growth, and other factors, which may vary. The Company continues to evaluate developments in market conditions, changes in key personnel and other factors that may impact the Company's ability to raise third-party funds and retain and attract professionals, which may affect the carrying value of, and result in an impairment of, goodwill or intangible assets. Amortization expense associated with the finite-lived intangible assets was$12 million ,$13 million and$3 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
Assets Under Management
The Company uses AUM as a metric to measure progress in its Asset Management segment. Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM. However, the Company believes that AUM is a useful metric for assessing the relative size and scope of our asset management business. The Company uses measures of its AUM in its decision-making process and intends to use a measure of change in AUM in its calculation of certain components of management compensation. Investors also use AUM to evaluate companies that participate in the asset management business. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following: •the amount of aggregate collateral balance and principal cash of AssuredIM's CLOs, including CLO Equity that may be held by AssuredIM Funds. This also includes CLO assets managed byBlueMountain Fuji Management, LLC (BM Fuji), which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and continues to provide personnel and other services to BM Fuji associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and a personnel and services agreement, consistent with past practices; and
•the net asset value of all funds and accounts other than CLOs, plus any
unfunded commitments. Changes in NAV attributable to movements in fund value of
certain private equity funds are reported on a quarter lag.
The Company's calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which AssuredIM affiliates registered with theSEC report "Regulatory Assets Under Management" on Form ADV and Form PF in various ways.
The Company also uses several other measurements of AUM to understand and
measure its AUM in more detail and for various purposes, including its relative
position in the market and its income and income potential:
"Third-party AUM" refers to the assets AssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in AssuredIM Funds. For CLOs, this also includes CLO Equity that may be held by AssuredIM Funds. "Intercompany AUM" refers to the assets AssuredIM manages or advises on behalf of the Company. This includes investments from affiliates ofAssured Guaranty along with general partners' investments of AssuredIM (or its affiliates) into the AssuredIM Funds.
"Funded AUM" refers to assets that have been deployed or invested into the funds
or CLOs.
"Unfunded AUM" refers to unfunded capital commitments from closed-end funds and
CLO warehouse funds.
96 --------------------------------------------------------------------------------
"Fee earning AUM" refers to assets where AssuredIM collects fees and has elected
not to waive or rebate fees to investors.
"Non-fee earning AUM" refers to assets where AssuredIM does not collect fees or
has elected to waive or rebate fees to investors. AssuredIM reserves the right
to waive some or all fees for certain investors, including investors affiliated
with AssuredIM and/or the Company. Further, to the extent that the Company's
wind-down and/or opportunity funds are invested in AssuredIM managed CLOs,
AssuredIM may rebate any management fees and/or performance fees earned from the
CLOs to the extent such fees are attributable to the wind-down and opportunity
funds' holdings of CLOs also managed by AssuredIM.
Roll Forward of Assets Under Management
Year Ended December 31, 2021
Opportunity Liquid
CLOs Funds (1) Strategies Wind-Down Funds Total
(in millions)
AUM, December 31, 2020 $ 13,856 $ 1,486 $ 383 $ 1,623 $ 17,348
Inflows - third party 2,608 363 - - 2,971
Inflows - intercompany 227 16 - - 243
Outflows:
Redemptions - - - - -
Distributions (1,843) (509) - (1,017) (3,369)
Total outflows (1,843) (509) - (1,017) (3,369)
Net flows 992 (130) - (1,017) (155)
Change in value (149) 468 6 (24) 301
AUM, December 31, 2021 $ 14,699 $ 1,824 $ 389 $ 582 $ 17,494
_____________________
(1) Distributions from opportunity funds include $286 million related to the
AssuredIM Funds created prior to BlueMountain Acquisition. As of December 31,
2021 , AUM related to these funds was $175 million .
Year Ended December 31, 2020
Liquid
CLOs Opportunity Funds Strategies Wind-Down Funds Total
(in millions)
AUM, December 31, 2019 $ 12,758 $ 1,023 $ - $ 4,046 $ 17,827
Inflows - third party 837 761 20 - 1,618
Inflows - intercompany 535 372 350 - 1,257
Outflows:
Redemptions - - - - -
Distributions (370) (723) - (2,241) (3,334)
Total outflows (370) (723) - (2,241) (3,334)
Net flows 1,002 410 370 (2,241) (459)
Change in value 96 53 13 (182) (20)
AUM, December 31, 2020 $ 13,856 $ 1,486 $ 383 $ 1,623 $ 17,348
97
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Components of Assets Under Management
Liquid
CLOs Opportunity Funds Strategies Wind-Down Funds Total
(in millions)
As of December 31, 2021 :
Funded AUM $ 14,575 $ 1,297 $ 389 $ 560 $ 16,821
Unfunded AUM 124 527 - 22 673
Fee earning AUM $ 14,252 $ 1,527 $ 389 $ 408 $ 16,576
Non-fee earning AUM 447 297 - 174 918
Intercompany AUM:
Funded AUM $ 541 $ 217 $ 368 $ - $ 1,126
Unfunded AUM 123 121 - - 244
As of December 31, 2020 :
Funded AUM $ 13,809 $ 992 $ 383 $ 1,601 $ 16,785
Unfunded AUM 47 494 - 22 563
Fee earning AUM $ 10,248 $ 1,176 $ 383 $ 1,133 $ 12,940
Non-fee earning AUM 3,608 310 - 490 4,408
Intercompany AUM:
Funded AUM $ 405 $ 126 $ 362 $ - $ 893
Unfunded AUM 40 137 - - 177
CLO AUM includes CLO Equity that is held by various AssuredIM Funds. This CLO
Equity corresponds to the majority of the non-fee earning CLO AUM , as AssuredIM
typically rebates the CLO fees back to AssuredIM Funds.
Opportunity Funds inflows in 2021 is primarily related to the healthcare
strategy fund and the launch of a new asset-based fund in the third quarter of
2021.
Corporate Division Results
Corporate Division Results
Year Ended December 31,
2021 2020 2019
(in millions)
Revenues $ 2 $ 9 $ 3
Expenses
Interest expense 96 95 94
Loss on extinguishment of debt 175 - -
Employee compensation and benefit expenses 21 18 17
Other operating expenses 20 19 22
Total expenses 312 132 133
Equity in earnings of investees - (6) -
Adjusted operating income (loss) before income taxes (310) (129) (130)
Less: Provision (benefit) for income taxes (47) (18) (19)
Adjusted operating income (loss) $ (263)
The Corporate division loss in 2021 increased compared with 2020 primarily due to the loss on extinguishment of debt of$175 million on a pre-tax basis ($138 million after-tax) associated with the redemption of theU.S. Holding Companies debt, which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The loss on 98 -------------------------------------------------------------------------------- extinguishment of debt primarily consists of a$156 million of acceleration of unamortized fair value adjustments that were originally recorded upon the acquisition of AGMH in 2009, and a$19 million make-whole payment associated with the redemption of$170 million of AGUS 5% Senior Notes. See Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities. Corporate division revenues in 2020 included a benefit recognized by the Company in connection with the separation of the former Chief Investment Officer and Head of Asset Management, partially offset by the loss on AGUS' purchase of a portion of the principal amount of AGMH's outstanding Junior Subordinated Debentures. Corporate division employee compensation and benefits expenses are based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other expenses includeBoard of Director expenses, legal fees and other direct or allocated expenses. Corporate division interest expense primarily relates to debt issued by theU.S. Holding Companies, and also includes intersegment interest expense of$10 million in both 2021 and 2020, related primarily to the$250 million AGUS debt issued to theU.S. Insurance Subsidiaries, which was borrowed inOctober 2020 in connection with the BlueMountain Acquisition. See "- Liquidity and Capital Resources - AGL and itsU.S. Holding Companies, Intercompany Loans Payable", for additional information. Equity in earnings of investees was a loss in 2020 due to a write down of AGUS' investment in an investment firm that provides investment banking services in the global infrastructure sector.
Other (Effect of FG VIEs and CIVs)
Other primarily consists of the effect of consolidating FG VIEs and CIVs,
intersegment eliminations, and reclassifications of reimbursable fund expenses
to revenue. See Item 8, Financial Statements and Supplementary Data, Note 3,
Segment Information.
The types of entities the Company consolidates when it is deemed to be the
primary beneficiary primarily include: (1) entities whose debt obligations the
insurance subsidiaries insure; and (2) investment vehicles such as
collateralized financing entities, CLO warehouses and AssuredIM Funds. The
Company eliminates the effects of intercompany transactions between its FG VIEs
and CIVs, and its insurance and asset management subsidiaries, as well as
intercompany transactions between CIVs.
The effect of consolidating FG VIEs (as opposed to accounting for the related
insurance contracts in the Insurance segment), has a significant gross-up effect
on assets, liabilities and cash flow presentation, and includes: (1) the
establishment of the FG VIEs' assets and liabilities and related changes in fair
value on the consolidated financial statements; (2) eliminating the premiums and
losses associated with the financial guaranty insurance contracts between the
insurance subsidiaries and the FG VIEs; and (3) eliminating the investment
balances associated with the insurance subsidiaries' purchases of the debt
obligations of the FG VIEs.
The effect of consolidating CIVs (as opposed to accounting for them as equity
method investments in the Insurance segment) has a significant effect on assets,
liabilities and cash flows, and includes: (1) the establishment of the assets
and liabilities of the CIVs, and related changes in fair value; (2) eliminating
the asset management fees earned by AssuredIM from the CIVs; and (3) eliminating
the equity method investments of the insurance subsidiaries and related equity
in earnings of investees. The economic effect of the Company's ownership
interest in CIVs is presented in the Insurance segment as equity in earnings of
investees, and as separate line items ("assets of CIVs," "liabilities of CIVs,"
and non-controlling interest) on a consolidated basis.
The table below reflects the effect of consolidating FG VIEs and CIVs on the
consolidated statements of operations. The amounts represent: (1) the revenues
and expenses of the FG VIEs and the CIVs; and (2) the amounts eliminated between
consolidated FG VIEs or CIVs and the operating subsidiaries.
99
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Effect of Consolidating FG VIEs and CIVs on the Consolidated Statements of
Operations
Increase (Decrease)
Year Ended December 31,
2021 2020 2019
Effect on Financial Statement Line Item (in
millions)
Fair value gains (losses) on FG VIEs (1)$ 23 $ (10) $ 42 Fair value gains (losses) on CIVs 127 41 (3) Equity in earnings of investees (2) (50) (28) 2 Other (3) (34) (12) (42) Effect on income before tax 66 (9) (1) Less: Tax provision (benefit) 6 (3) - Effect on net income (loss) 60 (6) (1) Less: Effect on noncontrolling interests (4) 30 6 (1) Effect on net income (loss) attributable to AGL$ 30 $ (12) $ - By Type of VIE FG VIEs$ (1) $ (14) $ - CIVs 31 2 - Effect on net income (loss) attributable to AGL$ 30 $ (12) $ -
____________________
(1) Changes in fair value of the FG VIEs' liabilities with recourse that are attributable to factors other than changes in the Company's own credit risk. (2) Represents the elimination of the equity in earnings of investees of AGAS and the other subsidiaries' investments in the consolidated AssuredIM Funds. (3) Includes net earned premiums, net investment income, asset management fees, other income (loss), loss and LAE (benefit) and other operating expenses. (4) Represents the proportion of consolidated AssuredIM Funds' income that is not attributable to AGAS' or any other subsidiaries' ownership interest. The fair value gains on CIVs for 2021 include a$31 million gain on consolidation as described in Item 8. Financial Statements and Supplementary Data, Note 9, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Fair value gains on CIVs also include: (i)$32 million in gains attributable to the asset-based fund launched in the third quarter of 2021 which benefited from increases in resale value of underlying collateral, increased market multiples and other factors; (ii)$35 million in gains attributable to CLO funds which experienced lower than expected credit losses and benefited from tightening credit spreads; and (iii) a$13 million in gains attributable to an existing asset-based fund that also benefited from tightening yields. The fair value gains on CIVs for 2020 were attributable to price appreciation on the investments held by the CIVs across all strategies, primarily CLOs. Fair value gains on FG VIEs for 2021 were primarily due to improvements in the underlying collateral. The fair value losses on FG VIEs for 2020 were primarily attributable to observed tightening in market spreads, offset in part by the deconsolidation of an FG VIE. 100 --------------------------------------------------------------------------------
Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
to Adjusted Operating Income (Loss)
Year Ended December 31,
2021 2020 2019
(in millions)
Net income (loss) attributable to AGL $ 389 $ 362 $ 402
Less pre-tax adjustments:
Realized gains (losses) on investments 15 18 22
Non-credit impairment-related unrealized fair value gains
(losses) on credit derivatives
(64) 65 (10) Fair value gains (losses) on CCS (28) (1) (22)
Foreign exchange gains (losses) on remeasurement of premiums
receivable and loss and LAE reserves
(21) 42 22 Total pre-tax adjustments (98) 124 12 Less tax effect on pre-tax adjustments 17 (18) (1) Adjusted operating income (loss)$ 470
Gain (loss) related to FG VIE and CIV consolidation (net of tax
provision (benefit) of
operating income
$ 30 $ (12) $ -
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains
(losses).
Net Realized Investment Gains (Losses)
Year Ended December 31,
2021 2020 2019
(in millions)
Gross realized gains on sales available-for-sale securities $ 20 $ 27 $ 56
Gross realized losses on sales available-for-sale securities (5) (5) (3)
Net foreign currency gains (losses) 2 6 3
Change in credit impairment and intent to sell (7) (17) (35)
Other net realized gains (losses) 5 7 1
Net realized investment gains (losses) $ 15
Shut-downs in 2020 due to COVID-19 pandemic restrictions contributed to an
increase in the allowance for credit losses in 2020.
Non-Credit Impairment-Related Unrealized Fair Value Gains (Losses) on Credit
Derivatives
Changes in the fair value of credit derivatives occur because of changes in the
Company's own credit rating and credit spreads, collateral credit spreads,
notional amounts, credit ratings of the referenced entities, expected terms,
realized gains (losses) and other settlements, interest rates, and other market
factors. The components of changes in fair value of credit derivatives related
to credit derivative revenues and changes in expected losses are included in
Insurance segment results. Non-economic changes in unrealized fair value gains
and losses on credit derivatives are not included in the Insurance segment
measure of adjusted operating income because they do not represent actual claims
or losses and are expected to reverse to zero as the exposure approaches its
maturity date. Changes in the fair value of the Company's credit derivatives
that do not reflect actual or expected claims or credit losses have no impact on
the Company's statutory claims-paying resources, rating agency capital or
regulatory capital positions. Unrealized gains (losses) on credit derivatives
may fluctuate significantly in future periods.
The impact of changes in credit spreads will vary based upon the volume, tenor,
interest rates, and other market conditions at the time fair values are
determined. In addition, since each transaction has unique collateral and
structural terms, the underlying change in fair value of each transaction may
vary considerably. The fair value of credit derivative contracts also
101
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reflects the change in the Company's own credit cost based on the price to
purchase credit protection on AGC. Due to the relatively low volume and
characteristics of CDS contracts remaining in AGM's portfolio, changes in AGM's
credit spreads do not significantly affect the fair value of these CDS
contracts. The Company determines its own credit risk based on quoted CDS prices
traded on AGC at each balance sheet date. Generally, a widening of credit
spreads of the underlying obligations results in unrealized losses and the
tightening of credit spreads of the underlying obligations results in unrealized
gains. A widening of the CDS prices traded on AGC has an effect of offsetting
unrealized losses that result from widening general market credit spreads, while
a narrowing of the CDS prices traded on AGC has an effect of offsetting
unrealized gains that result from narrowing general market credit spreads.
The valuation of the Company's credit derivative contracts requires the use of
models that contain significant, unobservable inputs, and are classified as
Level 3 in the fair value hierarchy. The models used to determine fair value are
primarily developed internally based on market conventions for similar
transactions that the Company observed in the past. There has been very limited
new issuance activity in this market the since 2009 and, as of December 31,
2021 , market prices for the Company's credit derivative contracts were generally
not available. Inputs to the estimate of fair value include various market
indices, credit spreads, the Company's own credit spread, and estimated
contractual payments. See Item 8, Financial Statements and Supplementary Data,
Note 10, Fair Value Measurement, for additional information.
During 2021, non-credit impairment-related unrealized fair value losses were
generated primarily as a result of the decreased cost to buy protection on AGC,
as the market cost of AGC's credit protection decreased during the period. For
those CDS transactions that were pricing at or above their floor levels, when
the cost of purchasing CDS protection on AGC, which management refers to as the
CDS spread on AGC, decreased, the implied spreads that the Company would expect
to receive on these transactions increased. Some of the unrealized fair value
losses were partially offset by price improvement in certain underlying
collateral and the termination of certain CDS transactions.
During 2020, non-credit impairment-related unrealized fair value gains were
generated primarily as a result of the increased cost to buy protection on AGC,
as the market cost of AGC's credit protection increased during the period. Some
of the unrealized fair value gains from the increased cost to buy protection on
AGC was limited by certain transactions reaching their floor levels. As of
December 31, 2020 , approximately 51% of the fair value of CDS contracts was
related to transactions that had reached their floors, which consisted of two
transactions with $2.4 billion in net par outstanding.
Fair Value Gains (Losses) on CCS
Fair value losses on CCS in 2021 were primarily driven by tightened market spreads during the year. Fair value losses on CCS in 2020 were primarily due to a steep reduction in LIBOR, which was partially offset by widened market spreads. Fair value gains (losses) of CCS are heavily affected by, and in part fluctuates with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.
Foreign Exchange Gain (Loss) on Remeasurement
Foreign exchange gains and losses in all periods primarily relate to remeasurement of long-dated premiums receivables, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and euro relative to theU.S. dollar.
Non-GAAP Financial Measures
The Company discloses both: (a) financial measures determined in accordance with GAAP; and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company. The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates ofAssured Guaranty's financial results in their research reports onAssured Guaranty and for investors, analysts and the financial news media to evaluateAssured Guaranty's financial results. GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include: •FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and •CIVs in which certain subsidiaries invest and which are managed by AssuredIM. 102 -------------------------------------------------------------------------------- The Company provides the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluatingAssured Guaranty's financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment. Management and the Board of Directors use non-GAAP financial measures further adjusted to remove the effect of VIE consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company's results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The core financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders' equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) growth in adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; (4) PVP, and (5) gross third-party assets raised. Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders' equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures for valuing AGL's current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL's common shares. Management also believes that many of the Company's fixed income investors also use adjusted operating shareholders' equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company's capital adequacy. Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation enables investors and analysts to evaluate the Company's financial results in comparison with the consensus analyst estimates distributed publicly by financial databases. The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below. Adjusted Operating Income Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of realized gains (losses) on the Company's investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company's discretion and influenced by market opportunities, as well as the Company's tax and capital profile. 2) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company's credit spreads, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of fair value gains (losses) on the Company's CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period's foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize. 103 -------------------------------------------------------------------------------- 5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
See "- Results of Operations - Reconciliation to GAAP", for a reconciliation of
net income (loss) attributable to AGL to adjusted operating income (loss).
Adjusted Operating Shareholders' Equity and Adjusted Book Value
Management believes that adjusted operating shareholders' equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.
Adjusted operating shareholders' equity is defined as shareholders' equity
attributable to AGL, as reported under GAAP, adjusted for the following:
1) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. 2) Elimination of fair value gains (losses) on the Company's CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of unrealized gains (losses) on the Company's investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. Management uses adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company's in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders' equity, as defined above, further adjusted for the following: 1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.
2) Addition of the net present value of estimated net future revenue. See
below.
3) Addition of the deferred premium revenue on financial guaranty contracts in
excess of expected loss to be expensed, net of reinsurance. This amount
represents the present value of the expected future net earned premiums, net of
the present value of expected losses to be expensed, which are not reflected in
GAAP equity.
4) Elimination of the tax effects related to the above adjustments, which are
determined by applying the statutory tax rate in each of the jurisdictions that
generate these adjustments.
The unearned premiums and revenues included in adjusted book value will be
earned in future periods, but actual earnings may differ materially from the
estimated amounts used in determining current adjusted book value due to changes
in foreign exchange rates, prepayment speeds, terminations, credit defaults and
other factors.
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Reconciliation of Shareholders' Equity Attributable to AGL
to Adjusted Operating Shareholders' Equity and Adjusted Book Value
As of December 31, 2021 As of December 31, 2020
After-Tax Per Share After-Tax Per Share
(dollars in millions, except share amounts)
Shareholders' equity attributable to AGL $ 6,292
Less pre-tax adjustments:
Non-credit impairment-related unrealized fair value
gains (losses) on credit derivatives
(54) (0.80) 9 0.12 Fair value gains (losses) on CCS 23 0.34 52 0.66 Unrealized gain (loss) on investment portfolio excluding foreign exchange effect 404 5.99 611 7.89 Less taxes (72) (1.07) (116) (1.50) Adjusted operating shareholders' equity 5,991 88.73 6,087 78.49 Pre-tax adjustments: Less: Deferred acquisition costs 131 1.95 119 1.54 Plus: Net present value of estimated net future revenue 160 2.37 182 2.35 Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed 3,402 50.40 3,355 43.27 Plus taxes (599) (8.88) (597) (7.70) Adjusted book value$ 8,823 $ 130.67 $ 8,908 $ 114.87
Gain (loss) related to FG VIE and CIV consolidation
included in:
Adjusted operating shareholders' equity (net of tax
provision of
$ 32$ 0.47 $ 2$ 0.03 Adjusted book value (net of tax provision (benefit) of$3 and$(2) ) 23 0.34 (8) (0.10)
Net Present Value of Estimated Net Future Revenue
Management believes that this amount is a useful measure because it enables an evaluation of the value of the present value of estimated net future revenue for contracts other than financial guaranty insurance contracts (such as specialty insurance and reinsurance contracts and credit derivatives). This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure.
PVP or Present Value of New Business Production
Management believes that PVP is a useful measure because it enables the
evaluation of the value of new business production for the Company by taking
into account the value of estimated future installment premiums on all new
contracts underwritten in a reporting period as well as additional installment
premium on existing contracts (which may result from supplements or fees or from
the issuer not calling an insured obligation the Company projected would be
called), whether in insurance or credit derivative contract form, which
management believes GAAP gross written premiums and changes in fair value of
credit derivatives do not adequately measure. PVP in respect of contracts
written in a specified period is defined as gross upfront and installment
premiums received and the present value of gross estimated future installment
premiums.
Future installment premiums are discounted at the approximate average pre-tax
book yield of fixed-maturity securities purchased during the prior calendar
year, other than loss mitigation securities. The discount rate is recalculated
annually and
105
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updated as necessary. Under GAAP, financial guaranty installment premiums are
discounted at a risk-free rate. Additionally, under GAAP, management records
future installment premiums on financial guaranty insurance contracts covering
non-homogeneous pools of assets based on the contractual term of the
transaction, whereas for PVP purposes, management records an estimate of the
future installment premiums the Company expects to receive, which may be based
upon a shorter period of time than the contractual term of the transaction.
Actual installment premiums may differ from those estimated in the Company's PVP
calculation due to factors including, but not limited to, changes in foreign
exchange rates, prepayment speeds, terminations, credit defaults, or other
factors that affect par outstanding or the ultimate maturity of an obligation.
Reconciliation of GWP to PVP
Year Ended December 31, 2021
Public Finance Structured Finance
U.S. Non - U.S. U.S. Non - U.S. Total
(in millions)
GWP $ 231 $ 89 $ 51 $ 6 $ 377
Less: Installment GWP and
other GAAP adjustments (1) 43 65 44 6 158 Upfront GWP 188 24 7 - 219 Plus: Installment premium PVP 47 55 35 5 142 PVP$ 235 $ 79 $ 42 $ 5$ 361 Year Ended December 31, 2020 Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP$ 294 $ 142 $ 18 $ -$ 454 Less: Installment GWP and other GAAP adjustments (1) 33 141 17 - 191 Upfront GWP 261 1 1 - 263 Plus: Installment premium PVP 31 81 13 2 127 PVP$ 292 $ 82 $ 14 $ 2$ 390 Year Ended December 31, 2019 Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP$ 198 $ 417 $ 57 $ 5$ 677 Less: Installment GWP and other GAAP adjustments (1) (3) 417 55 - 469 Upfront GWP 201 - 2 5 208 Plus: Installment premium PVP - 308 51 2 361 PVP$ 201 $ 308 $ 53 $ 7$ 569 _____________ (1) Includes present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions, and other GAAP adjustments.
Insured Portfolio
Financial Guaranty Exposure
The following tables present information in respect of the financial guaranty
insured portfolio to supplement the disclosures and discussion provided in Item
8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure.
The following table presents the financial guaranty portfolio by sector, net of
cessions to reinsurers. It includes all financial guaranty contracts outstanding
as of the dates presented, regardless of the form written (i.e., credit
derivative form or traditional financial guaranty insurance form) or the
applicable accounting model (i.e., insurance, derivative or FG VIE
consolidation), along with each sector's average rating.
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Financial Guaranty Portfolio
Net Par Outstanding and Average Internal Rating by Sector
As of December 31, 2021 As of December 31, 2020
Net Par Average Net Par Average
Sector Outstanding Rating Outstanding Rating
(dollars in millions)
Public finance:
U.S. public finance:
General obligation $ 72,896 A- $ 72,268 A-
Tax backed 35,726 A- 34,800 A-
Municipal utilities 25,556 A- 25,275 A-
Transportation 17,241 BBB+ 15,179 BBB+
Healthcare 9,588 BBB+ 8,691 BBB+
Higher education 6,927 A- 6,127 A-
Infrastructure finance 6,329 A- 5,843 A-
Housing revenue 1,000 BBB- 1,149 BBB
Investor-owned utilities 611 A- 644 A-
Renewable energy 193 A- 204 A-
Other public finance 1,152 A- 1,417 A-
Total U.S. public finance 177,219 A- 171,597 A-
Non-U.S public finance:
Regulated utilities 18,814 BBB+ 19,370 BBB+
Infrastructure finance 16,475 BBB 17,819 BBB
Sovereign and sub-sovereign 10,886 A+ 11,682 A+
Renewable energy 2,398 A- 2,708 A-
Pooled infrastructure 1,372 AAA 1,449 AAA
Total non-U.S. public finance 49,945 BBB+ 53,028 A-
Total public finance 227,164 A- 224,625 A-
Structured finance:
U.S. structured finance:
Life insurance transactions 3,431 AA- 2,581 AA-
RMBS 2,391 BB+ 2,990 BBB-
Financial products 770 AA- 820 AA-
Consumer receivables 583 A+ 768 A-
Pooled corporate obligations 534 AA+ 1,193 AA
Other structured finance 665 BBB+ 600 A-
Total U.S. structured finance 8,374 A 8,952 A
Non-U.S. structured finance:
Pooled corporate obligations 351 AAA - -
RMBS 325 A 357 A
Other structured finance 178 AA 219 A+
Total non-U.S structured finance 854 AA 576 A
Total structured finance 9,228 A 9,528 A
Total net par outstanding $ 236,392 A- $ 234,153 A-
Second-to-pay insured par outstanding represents transactions the Company has
insured that are already insured by another financial guaranty insurer and where
the Company's obligation to pay under its insurance of such transactions arises
only if both the obligor on the underlying insured obligation and the primary
financial guaranty insurer default. The Company underwrites such transactions
based on the underlying insured obligation without regard to the primary
financial guaranty insurer and internally rates the transaction the higher of
the rating of the underlying obligation and the rating of the primary financial
guarantor. The second-to-pay insured par outstanding as of December 31, 2021 and
2020 was $4.9 billion and $5.6 billion , respectively. The par on second-to-pay
exposure where the ratings of the primary financial guaranty insurer and
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underlying insured transaction were BIG was
The tables below show the Company's ten largest
structured finance and non-
authorities and public corporations, as of
Ten Largest U.S. Public Finance Exposures by Revenue Source
As of December 31, 2021
Percent of Total U.S.
Net Par Public Finance Net
Outstanding Par Outstanding Rating
(dollars in millions)
New Jersey (State of) $ 3,686 2.1 % BBB
Pennsylvania (Commonwealth of) 1,782 1.0 A-
New York Metropolitan Transportation Authority 1,752 1.0 A-
Illinois (State of) 1,456 0.8 BBB-
Puerto Rico Highways & Transportation Authority 1,256 0.7 CCC
Guarantees of the Commonwealth
1,235 0.7 CCCFoothill/Eastern Transportation Corridor Agency , California 1,206 0.7 BBB North Texas Tollway Authority 1,185 0.7 A
0.6 BBB+ CommonSpirit Health, Illinois 940 0.5 A-
Total of top ten
8.8 %
Ten Largest U.S. Structured Finance Exposures
As of December 31, 2021
Percent of Total U.S.
Net Par Structured Finance
Outstanding Net Par Outstanding Rating
(dollars in millions)
Private US Insurance Securitization $ 1,100 13.1 % AA
Private US Insurance Securitization 762 9.1 AA-
Private US Insurance Securitization 384 4.6 AA-
Private US Insurance Securitization 378 4.5 AA-
Private US Insurance Securitization 314 3.8 AA-
Private US Insurance Securitization 313 3.7 A
SLM Student Loan Trust 2007-A 271 3.3 AA
Soundview 2007-WMC1 148 1.8 CCC
Option One 2007-FXD2 136 1.6 CCC
Private US Insurance Securitization 134 1.6 AA
Total of top ten
47.1 %
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Ten Largest Non-U.S. Exposures
As of December 31, 2021
Percent of Total
Net Par Non-U.S. Net Par
Country Outstanding Outstanding Rating
(dollars in millions)
Southern Water Services Limited United Kingdom $ 2,377 4.7 % BBB
Southern Gas Networks PLC United Kingdom 1,871 3.7 BBB
Thames Water Utilities Finance Plc United Kingdom 1,829 3.6 BBB
Quebec Province Canada 1,786 3.5 A+
Dwr Cymru Financing Limited United Kingdom 1,726 3.4 A-
Anglian Water Services Financing PLC United Kingdom 1,580 3.1 A-
National Grid Gas PLC United Kingdom 1,401 2.8 BBB+
Channel Link Enterprises Finance PLC France, United Kingdom 1,239 2.4 BBB
British Broadcasting Corporation (BBC) United Kingdom 1,231 2.4 A+
Societe des Autoroutes du Nord et de
l'est de la France S.A. France 1,206 2.4 BBB+
Total of top ten non-U.S. exposures $ 16,246 32.0 %
Financial Guaranty Portfolio by Issue Size
The Company seeks broad coverage of the market by insuring and reinsuring small
and large issues alike. The following tables set forth the distribution of the
Company's portfolio by original size of the Company's exposure.
Public Finance Portfolio by Issue Size
As of December 31, 2021
% of Public
Finance
Number of Net Par Net Par
Original Par Amount Per Issue Issues Outstanding Outstanding
(dollars in
millions)
Less than$10 million 11,227$ 30,959 13.6 %$10 through$50 million 3,576 61,453 27.1$50 through$100 million 606 34,993 15.4$100 million to$200 million 324 36,068 15.9$200 million or greater 229 63,691 28.0 Total 15,962$ 227,164 100.0 % Structured Finance Portfolio by Issue Size As of December 31, 2021 % of Structured Finance Number of Net Par Net Par Original Par Amount Per Issue Issues Outstanding Outstanding (dollars in millions) Less than$10 million 115 $ 84 0.9 %$10 through$50 million 149 1,088 11.8$50 through$100 million 43 993 10.8$100 million to$200 million 58 1,968 21.3$200 million or greater 85 5,095 55.2 Total 450$ 9,228 100.0 % Exposure toPuerto Rico The Company had insured exposure to general obligation bonds of theCommonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating$3.6 billion net par outstanding as ofDecember 31, 2021 , all of which was rated BIG. Beginning onJanuary 1, 2016 , a number ofPuerto Rico 109 -------------------------------------------------------------------------------- exposures have defaulted on bond payments, and the Company has now paid claims on all of itsPuerto Rico exposures except theMunicipal Finance Agency (MFA), thePuerto Rico Aqueduct and Sewer Authority (PRASA) and theUniversity of Puerto Rico (U of PR). The following tables present information in respect of thePuerto Rico exposures to supplement the disclosures and discussions provided in "-Liquidity and Capital Resources-Insurance Subsidiaries, Financial Guaranty Policies" below and Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure. Exposure to Puerto Rico by Company As of December 31, 2021 Net Par Outstanding Total Net Par Gross Par AGM AGC AG Re Eliminations (1) Outstanding Outstanding (in millions) Puerto Rico Exposures Subject to a Plan or Support Agreement Commonwealth of Puerto Rico - GO$ 574 $ 170 $ 353 $ -$ 1,097 $ 1,135 PBA 2 122 - (2) 122 122 Total - GO/PBA Plan 576 292 353 (2) 1,219 1,257 PRHTA (Transportation revenue) 233 467 178 (79) 799 799 PRHTA (Highway revenue) 381 51 25 - 457 457 PRCCDA (2) - 152 - - 152 152 Total - HTA/CCDA PSA 614 670 203 (79) 1,408 1,408 PREPA 469 69 210 - 748 759 Puerto Rico Infrastructure Financing Authority (PRIFA) (2) - 15 1 - 16 16 Total Subject to a Plan or Support Agreement 1,659 1,046 767
(81) 3,391 3,440 Other Puerto Rico Exposures MFA 126 16 37 - 179 187 PRASA and U of PR - 2 - - 2 2 Total Other Puerto Rico Exposures 126 18 37 - 181 189 Total exposure to Puerto Rico$ 1,785 $ 1,064 $ 804 $
(81)
____________________
(1) Net par outstanding eliminations relate to second-to-pay policies under which anAssured Guaranty insurance subsidiary guarantees an obligation already insured by anotherAssured Guaranty insurance subsidiary. (2) As of the date of this filing, an order has been entered under Title VI of PROMESA modifying this debt, consistent with the relevant Support Agreement. The following tables show the scheduled amortization of the general obligation bonds ofPuerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of debt service when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only pay the shortfall between the debt service due in any given period and the amount paid by the obligors. 110 -------------------------------------------------------------------------------- Amortization Schedule ofNet Par ofPuerto Rico As ofDecember 31, 2021
Scheduled Net Par Amortization
2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 2024 2025 2026 2027 -2031 2032 -2036 2037 -2041 2042 Total
(in millions)
Puerto Rico
Exposures Subject
to a Plan or
Support Agreement
Commonwealth of
Puerto Rico - GO $ - $ - $ 37 $ - $ 14 $ 73 $ 68 $ 35 $ 277 $ 488 $ 105 $ - $ 1,097
PBA - - - - 7 - 6 11 43 55 - - 122
Total - GO/PBA
Plan - - 37 - 21 73 74 46 320 543 105 - 1,219
PRHTA
(Transportation
revenue) - - 28 - 33 4 29 24 165 310 201 5 799
PRHTA (Highway
revenue) - - 40 - 32 32 34 1 78 240 - - 457
PRCCDA (1) - - - - - - - - 19 133 - - 152
Total - HTA/CCDA
PSA - - 68 - 65 36 63 25 262 683 201 5 1,408
PREPA - - 28 - 95 93 68 106 332 26 - - 748
PRIFA (1) - - - - 2 - - - - - 14 - 16
Total Subject to
a Plan or Support
Agreement - - 133 - 183 202 205 177 914 1,252 320 5 3,391
Other Puerto Rico
Exposures
MFA - - 43 - 23 19 18 37 39 - - - 179
PRASA and U of PR - - - - - 1 - - - 1 - - 2
Total Other
Puerto Rico
Exposures - - 43 - 23 20 18 37 39 1 - - 181
Total $ - $ - $ 176 $ - $ 206 $ 222 $ 223 $ 214 $ 953 $ 1,253 $ 320 $ 5 $ 3,572
Amortization Schedule of Net Debt Service of Puerto Rico
As of December 31, 2021
Scheduled
Net Debt Service Amortization
2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 2024
2025 2026 2027 -2031 2032 -2036 2037 -2041 2042 Total
(in millions)Puerto Rico Exposures Subject to a Plan or Support Agreement Commonwealth of Puerto Rico - GO$ 29 $ -$ 66 $ -$ 70 $ 128 $ 119 $ 82 $ 474 $ 594 $ 111 $ -$ 1,673 PBA 3 - 3 - 13 6 13 17 58 63 - - 176 Total - GO/PBA Plan 32 - 69 - 83 134 132 99 532 657 111 - 1,849 PRHTA (Transportation revenue) 21 - 48 - 73 42 67 61 322 423 237 5 1,299 PRHTA (Highway revenue) 12 - 52 - 54 53 53 18 159 278 - - 679 PRCCDA 3 - 4 - 7 7 7 7 50 152 - - 237 Total - HTA/CCDA PSA 36 - 104 - 134 102 127 86 531 853 237 5 2,215 PREPA 15 2 43 3 129 121 91 126 382 29 - - 941 PRIFA - - - - 3 1 1 1 4 3 16 - 29 Total Subject to a Plan or Support Agreement 83 2 216 3 349 358 351 312 1,449 1,542 364 5 5,034 Other Puerto Rico Exposures MFA 5 - 48 - 29 24 22 41 45 - - - 214 PRASA and U of PR - - - - - 1 - - - 1 - - 2 Total Other Puerto Rico Exposures 5 - 48 - 29 25 22 41 45 1 - - 216 Total$ 88 $ 2 $ 264 $ 3 $ 378 $ 383 $ 373 $ 353 $ 1,494 $ 1,543 $ 364 $ 5 $ 5,250
Financial Guaranty Exposure to
The following table presents information in respect of the
to supplement the disclosures and discussion provided in Item 8, Financial
Statements and Supplementary Data, Note 4, Outstanding Exposure, and Note 5,
111 -------------------------------------------------------------------------------- Expected Loss to be Paid (Recovered).U.S. RMBS exposures represent 1.0% of the total net par outstanding, and BIGU.S. RMBS represent 17.2% of total BIG net par outstanding as ofDecember 31, 2021 . Distribution ofU.S. RMBS by Year Insured and Type of Exposure as of
December 31, 2021
Prime Alt-A Option Subprime Second Total Net Par
Year insured: First Lien First Lien ARMs First Lien Lien Outstanding
(in millions)
2004 and prior $ 12 $ 11 $ - $ 400 $ 22 $ 445
2005 27 143 18 194 75 457
2006 30 29 1 72 135 267
2007 - 232 18 754 184 1,188
2008 - - - 34 - 34
Total exposures $ 69 $ 415 $ 37 $ 1,454 $ 416 $ 2,391
Exposures rated BIG $ 46 $ 238 $ 17 $ 822 $ 142 $ 1,265
Liquidity and Capital Resources
AGL and its
AGL directly owns (i) AGRe, an insurance company domiciled inBermuda , and (ii) AGUS, aU.S. Holding Company with public debt. AGUS directly owns: (i) AGC, an insurance company domiciled inMaryland ; and (ii) AGMH, aU.S. Holding Company with public debt outstanding. AGMH directly owns AGM, an insurance subsidiary domiciled inNew York . AGUS and AGMH are collectively referred to as theU.S. Holding Companies. Sources and Uses of Funds The liquidity of AGL and itsU.S. Holding Companies is largely dependent on dividends from their operating subsidiaries (see Insurance Subsidiaries, Distributions from Insurance Subsidiaries below for a description of dividend restrictions) and their access to external financing. The operating liquidity requirements of AGL and theU.S. Holding Companies include:
•principal and interest on debt issued by AGUS and AGMH;
•dividends on AGL's common shares; and
•the payment of operating expenses.
AGL and its
•make capital investments in their operating subsidiaries;
•fund acquisitions of new businesses;
•purchase or redeem the Company's outstanding debt; or
•repurchase AGL's common shares pursuant to AGL's share repurchase
authorization.
In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See "- Overview- Key Business Strategies, Capital Management" above for information on common share repurchases.
Long-Term Debt Obligations
The Company has outstanding long-term debt issued by theU.S. Holding Companies. See Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities, and Guarantor andU.S. Holding Companies' Summarized Financial Information, below. 112 -------------------------------------------------------------------------------- U.S. Holding Companies Long-Term Debt and Intercompany Loans As of December 31, 2021 2020 (in millions) Effective Interest Rate Final Maturity Principal Amount AGUS - long-term debt 7% Senior Notes 6.40% 2034$ 200 $ 200 5% Senior Notes 5.00% 2024 330 500 3.15% Senior Notes 3.15% 2031 500 - 3.6% Senior Notes 3.60% 2051 400 - Series A Enhanced Junior Subordinated Debentures 3 month LIBOR +2.38% 2066 150 150 AGUS long-term debt 1,580 850 AGUS - intercompany loans from insurance subsidiaries AGC/AGM/MAC (1) 3.50% 2030 250 250 AGRO 6 month LIBOR +3.00% 2023 20 30 AGUS intercompany loans 270 280 Total AGUS 1,850 1,130 AGMH 67/8% Quarterly Interest Bonds 6.88% 2101 - 100 6.25% Notes 6.25% 2102 - 230 5.6% Notes 5.60% 2103 - 100 Junior Subordinated Debentures 6.40% 2066 300 300 Total AGMH 300 730 AGMH's long-term debt purchased by AGUS (2) (154) (154) U.S. Holding Company debt$ 1,996 $ 1,706 ____________________ (1) See "-Overview-Key Business Strategies,Municipal Assurance Corp. Merger". (2) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS. Interest Paid onU.S. Holding Companies' Long-Term Debt and Intercompany Loans Year Ended December 31, 2021 2020 2019 (in millions) AGUS - long-term debt$ 50 $ 44 $ 46 AGUS - intercompany loans 10 10 3 Total AGUS 60 54 49 AGMH - long-term debt 40 46 46 AGMH's long-term debt purchased by AGUS (10) (9) (8) Total interest paid$ 90 $ 91 $ 87 OnMay 26, 2021 , AGUS issued$500 million in 3.15% Senior Notes. OnJuly 9, 2021 , a portion of the proceeds of the debt issuance was used to redeem$200 million in AGMH debt. OnAugust 20, 2021 , AGUS issued$400 million in 3.6% Senior Notes, and onSeptember 27, 2021 , the proceeds of the debt issuance were used to redeem$230 million in AGMH debt and$170 million in AGUS debt. See Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities.
The Series A Enhanced Junior Subordinated Debentures pay interest based on
LIBOR. If the AGMH Junior Subordinated Debentures are outstanding after
15, 2036
interest at one-month LIBOR plus 2.215%. The continuation of LIBOR on the
current basis will not be guaranteed after
113 --------------------------------------------------------------------------------June 2023 . See the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Operational Risks in Part 1, Item 1A, Risk Factors. U.S. Holding Companies Expected Debt Service of Long-Term Debt As of December 31, 2021 Year AGUS AGMH Eliminations (1) Total (in millions) 2022$ 76 $ 19 $ (20)$ 75 2023 97 19 (40) 76 2024 397 19 (19) 397 2025 109 19 (68) 60 2026 107 19 (66) 60 2027-2046 1,446 384 (356) 1,474 2047-2066 722 684 (350) 1,056 Total$ 2,954 $ 1,163 $ (919)$ 3,198
____________________
(1) Includes eliminations of intercompany loans payable and AGMH's debt
purchased by AGUS.
As of December 31, 2020
Year AGUS AGMH Eliminations (1) Total
(in millions)
2021 $ 53 $ 46 $ (20) $ 79
2022 53 46 (20) 79
2023 83 46 (50) 79
2024 540 46 (19) 567
2025 77 46 (68) 55
2026 76 46 (66) 56
2027-2046 585 921 (356) 1,150
2047-2066 256 1,220 (350) 1,126
2067-2086 - 537 - 537
Thereafter - 854 - 854
Total $ 1,723 $ 3,808 $ (949) $ 4,582
____________________
(1) Includes eliminations of intercompany loans payable and AGMH's debt
purchased by AGUS.
From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, onOctober 25, 2013 , AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding$225 million in the aggregate. The commitment under the revolving credit facility terminates onOctober 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility.
Intercompany Loans Payable
OnOctober 1, 2019 , theU.S. Insurance Subsidiaries made 10-year, 3.5% interest rate intercompany loans to AGUS, aggregating$250 million , to fund the BlueMountain Acquisition and the related capital contributions. Interest is payable annually in arrears on each anniversary of the note, and commenced onOctober 1, 2020 . Interest accrues daily and is computed on a basis of a 360-day year fromOctober 1, 2019 until the date on which the principal amount is paid in full. AGUS will pay 20% of the original principal amount of each note on the sixth, seventh, eighth, and ninth anniversaries. The remaining 20% of the original principal amount and all accrued and unpaid interest will be paid on the maturity date. AGUS has the right to prepay the principal amount of the notes in whole or in part at any time, or from time to time, without payment of any premium 114 --------------------------------------------------------------------------------
or penalty. See Item 8, Financial Statements and Supplementary Data, Note 2,
Business Combinations, for additional information.
In addition, in 2012 AGUS borrowed$90 million from its affiliate AGRO to fund the acquisition of MAC. In 2018, the maturity date was extended toNovember 2023 . During each of 2021, 2020 and 2019, AGUS repaid$10 million in outstanding principal as well as accrued and unpaid interest. As ofDecember 31, 2021 ,$20 million remained outstanding.
Capital Contributions to AssuredIM
The Company contributed
contributed an additional
Guarantor and
AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the$1,430 million aggregate principal amount of notes issued by theU.S. Holding Companies, and the$450 million aggregate principal amount of junior subordinated debentures issued by theU.S. Holding Companies, and the intercompany loans. The following tables include summarized financial information for AGL and theU.S. Holding Companies, excluding their investments in subsidiaries. As of December 31, 2021 AGL U.S. Holding Companies (in millions) Assets Fixed-maturity securities (1) $ 91 $ 5 Short-term investments, other invested assets and cash 97 266 Receivables from affiliates (2) 41 - Receivable from U.S. Holding Companies 81 - Other assets 5 33 Liabilities Long-term debt - 1,671 Loans payable to affiliates - 270 Payable to affiliates (2) 10 29 Payable to AGL - 81 Other liabilities 7 97 ____________________
(1) As of
Holding Companies' fixed-maturity securities (excluding AGUS' investment in
AGMH's debt) were 6.6 years and 5.0 years, respectively.
(2) Represents receivable and payables with non-guarantor subsidiaries.
Year Ended
AGL U.S. Holding Companies
(in millions)
Revenues $ 1 $ 1
Expenses
Interest expense - 96
Loss on extinguishment of debt - 175
Other expenses 35 6
Income (loss) before provision for income taxes and equity in
earnings of investees
(34) (276)
Equity in earnings of investees - -
Net income (loss) (34) (223)
115
-------------------------------------------------------------------------------- The following table presents significant cash flow items for AGL and theU.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities. AGL and U.S. Holding Companies Significant Cash Flow Items Year Ended December 31, 2021 U.S. Holding AGL Companies (in millions) Dividends received from subsidiaries $ 539 $ 391 Interest on intercompany loans - (10) Interest paid (1) - (80) Investments in subsidiaries - (21) Return of capital from subsidiaries - 9 Dividends paid to AGL - (435) Repayment of intercompany loans - (10) Dividends paid (66) - Repurchases of common shares (2) (496) - Issuance of long-term debt, net of issuance costs - 889 Redemptions of debt, including make-whole payment - (619)
____________________
(1) See "Long-Term Debt Obligations" above for interest paid by subsidiary. (2) See Item 8, Financial Statements and Supplementary Data, Note 20, Shareholders' Equity, for additional information about share repurchases and authorizations. Generally, dividends paid by aU.S. company to aBermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in theU.K. , it became subject to the tax rules applicable to companies resident in theU.K. , including the benefits afforded by theU.K.'s tax treaties. The income tax treaty between theU.K. and theU.S. reduces or eliminates theU.S. withholding tax on certainU.S. sourced investment income (to 5% or 0%), including dividends fromU.S. subsidiaries toU.K. resident persons entitled to the benefits of the treaty.
For more information, see also Item 8. Financial Statements and Supplementary
Data, Note 13, Long-Term Debt and Credit Facilities.
External Financing
From time to time, AGL and its subsidiaries have sought external debt or
equity financing in order to meet their obligations. External sources of
financing may or may not be available to the Company, and if available, the cost
of such financing may not be acceptable to the Company.
Insurance Subsidiaries
The Company has several insurance subsidiaries. TheU.S. Insurance Subsidiaries consist of AGM and AGC. AGM owns: (i) AGUK, an insurance subsidiary domiciled in theU.K ; and (ii)AGE SA , an insurance company domiciled inFrance . AGUK and AGE are collectively referred to as the European Insurance Subsidiaries. AG Re is an insurance company domiciled inBermuda , which owns AGRO, an insurance subsidiary, also domiciled inBermuda .
Sources and Uses of Funds
Liquidity of the insurance subsidiaries is primarily used to pay for:
•operating expenses,
•claims on the insured portfolio,
•dividends or other distributions to AGL, AGUS and/or AGMH, as applicable,
•reinsurance premiums,
•principal of and, interest on, surplus notes, where applicable, and
116
--------------------------------------------------------------------------------
•capital investments in their own subsidiaries, where appropriate.
Management believes that the insurance subsidiaries' liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios, although the Company has elected to enter into the secured short-term loan facility with a major financial institution, as described below, to provide short-term liquidity for the payment of a portion of the approximately$1.4 billion of insurance claims it anticipates making in connection with the resolution of certainPuerto Rico exposures, and may enter into similar arrangements in connection with future resolutions of otherPuerto Rico exposures. The Company generally targets a balance of its most liquid assets including cash and short-term securities,U.S. Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost.
Beyond the next twelve months, the ability of the operating subsidiaries to
declare and pay dividends may be influenced by a variety of factors, including
market conditions, general economic conditions, and, in the case of the
Company's insurance subsidiaries, insurance regulations and rating agency
capital requirements.
Financial Guaranty Policies
Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation's original payment schedule, unless the Company accelerates such payment schedule, at its sole option. Premiums received on financial guaranty contracts are paid either upfront or in installments over the life of the insured obligations. Payments made in settlement of the Company's obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. While it appears to the Company that significant federal funding in 2021 may have mitigated the financial stress from direct and indirect consequences of COVID-19 for most obligors and assets underlying obligations guaranteed by the Company, the pandemic may still result in further increases in claims and loss reserves. The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it, and the effectiveness and acceptance of vaccines and therapeutics for it, remain unknown, so the Company cannot predict the ultimate size of any increases in claims that may result from the pandemic. In addition, as ofDecember 31, 2021 , the Company has financial guaranty exposure to the general obligation bonds ofPuerto Rico and various obligations of its related authorities and public corporations aggregating$3.6 billion net par outstanding, all of which is rated BIG. As set forth in Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure,$3.4 billion , or 95% of the Company's insured net par outstanding ofPuerto Rico exposures is subject to support agreements, including$1.4 billion net par outstanding ofPuerto Rico exposures covered by a plan of adjustment or one of the debt modification orders that the Company expects to become effective onMarch 15, 2022 (Effective Date). The Company anticipates making substantial claim payments in connection with the possible resolution of most of its$3.4 billion ofPuerto Rico exposures subject to a support agreement, beginning with the gross claim payments of approximately$1.4 billion it expects to make in connection with the$1.4 billion insured net par outstanding it expects to be resolved on the Effective Date, and is taking this into account in projecting its liquidity needs. The Company expects to receive substantial amounts of cash, new debt and CVI on or about the Effective Date pursuant to the relevant plan of adjustment and debt modification orders, but also expects to provide the funding for the related approximately$1.4 billion of gross claim payments prior to receiving such cash, new debt and CVI. While the Company has the capacity to generate sufficient liquidity internally to fund the full amount of such approximately$1.4 billion of gross claim payments (and has already accumulated a substantial amount of liquidity), onFebruary 3, 2022 it entered into a secured short-term loan facility with a major financial institution to partially fund such gross claim payments. The short-term loan facility permits the Company to borrow up to$550 million for up to thirty days and up to$150 million for up to six months in connection with the anticipated gross claim payments around the Effective Date. The one-month component will bear interest at 1.10% per annum and the six-month component will bear a floating interest rate equal to the forward-looking term SOFR for a tenor of one month provided byCME Group Benchmark Administration Limited , plus 1.10% per annum. The Company also will pay a structuring fee on the amounts borrowed under the facility. The Company 117 -------------------------------------------------------------------------------- expects to borrow between$400 million and$500 million under the short-term loan facility, and expects to repay such amounts primarily with cash it expects to receive on or about the Effective Date and/or cash it receives from the disposition of new debt and CVI it expects to receive on or about the Effective Date. The Company may choose to enter similar short term secured borrowing arrangements in connection with the potential resolutions ofPuerto Rico exposures remaining outstanding after the Effective Date. There have not been any drawings under this facility. The following table presents estimated probability weighted expected cash outflows under direct and assumed financial guaranty contracts, whether accounted for as insurance or credit derivatives, including claim payments under contracts in consolidated FG VIEs, as ofDecember 31, 2021 . This amount is not reduced for cessions under reinsurance contracts or recoveries attributable to loss mitigation securities. This amount includes any benefit anticipated from excess spread or other recoveries within the contracts (including the substantial amounts of cash, new debt and CVI the Company expects to receive on or about the Effective Date) but does not reflect any benefit for recoveries under breaches of R&W. This amount also excludes estimated recoveries related to past claims paid for policies in the public finance sector. Estimated Expected Claim Payments (Undiscounted) As of December 31, 2021 (in millions) Less than 1 year (1) $ 453 1-3 years 206 3-5 years 46 More than 5 years 1,281 Total $ 1,986
____________________
(1) Includes outflows related to the settlement ofPuerto Rico as discussed above, as well as expected claim payments for other insured BIG transactions, net of future recoveries. In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such assubway cars. The tax-exempt entity then leases the asset back from its new owner. If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds. Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately$463 million as ofDecember 31, 2021 . To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As ofDecember 31, 2021 , approximately$1.9 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM. The terms of the Company's CDS contracts generally are modified from standard CDS contract forms approved byInternational Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled "pay-as-you-go" basis and to replicate the terms of a traditional financial guaranty insurance policy. The documentation for certain CDS were negotiated to require the Company to also pay if the obligor becomes bankrupt or if the reference obligation were restructured. Furthermore, some CDS documentation requires the Company 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 Company may be required to make a cash termination payment to its swap 118 -------------------------------------------------------------------------------- counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a "pay-as-you-go" basis.
Distributions from Insurance Subsidiaries
The Company anticipates that, for the next twelve months, amounts paid by AGL's direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies' liquidity. The insurance subsidiaries' ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Item 8, Financial Statements and Supplementary Data, Note 16, Insurance Company Regulatory Requirements.
Dividend restrictions for the
Insurance Subsidiaries are as follows:
•The maximum amount available during 2022 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately$305 million , of which approximately$96 million is available for distribution in the first quarter of 2022. •The maximum amount available during 2022 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately$207 million , of which approximately$126 million is available for distribution in the first quarter of 2022. •Based on the applicable law and regulations, in 2022 AG Re (a subsidiary of AGL) has the capacity to: (i) make capital distributions in an aggregate amount up to$129 million without the prior approval of the Authority; and (ii) declare and pay dividends in an aggregate amount up to approximately$236 million as ofDecember 31, 2021 . Such dividend capacity is further limited by: (i) the actual amount of AG Re's unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately$165 million as ofDecember 31, 2021 ; and (ii) the amount of statutory surplus, which, as ofDecember 31, 2021 , was$86 million . •Based on the applicable law and regulations, in 2022 AGRO (an indirect subsidiary of AGRe) has the capacity to: (i) make capital distributions in an aggregate amount up to$21 million without the prior approval of the Authority; and (ii) declare and pay dividends in an aggregate amount up to approximately$106 million as ofDecember 31, 2021 . Such dividend capacity is further limited by: (i) the actual amount of AGRO's unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately$421 million as ofDecember 31, 2021 ; and (ii) the amount of statutory surplus, which, as ofDecember 31, 2021 , was$288 million . Distributions from / Contributions to Insurance Company Subsidiaries
Year Ended December 31,
2021 2020 2019
(in millions)
Dividends paid by AGC to AGUS$ 94 $
166
Dividends paid by AGM to AGMH 291
267 220
Dividends paid by AG Re to AGL (1) 150
150 275
Repurchase of common stock by AGC from AGUS -
- 100
Dividends from AGUK to AGM (2) -
124 -
Contributions from AGM to AGE (2) -
(123) -
____________________
(1) The 2021 and 2020 amounts included fixed-maturity securities with a fair
value of
(2) In 2020, the dividend paid to AGM from AGUK was contributed to AGE.
Ratings Impact on Financial Guaranty Business
A downgrade of one of AGL's insurance subsidiaries may result in increased
claims under financial guaranties issued by the Company if counterparties
exercise contractual rights triggered by the downgrade against insured obligors,
and the
119 -------------------------------------------------------------------------------- insured obligors are unable to pay. See Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance for a discussion of the impact of the Company's ratings on (i) obligations of municipal obligors under interest rate swaps, (ii) variable rate demand obligations (VRDOs) for which a bank has agreed to provide a liquidity facility, (iii) AGMH's former financial products business, and (iv) business assumed from ceding companies.
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of$200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing$50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated inAssured Guaranty's financial statements. The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock. Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on theAGM Committed Preferred Trust Securities (CPS) is one-month LIBOR plus 200 bps. LIBOR may be discontinued. See "- Executive Summary - Other Matters - LIBOR Sunset" above and the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Operational Risks in Part I, Item 1A, Risk Factors.
Investment Portfolio
The Company's principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income. Approximately 72% of the total investment portfolio is managed by external parties. Each of the three external investment managers must maintain a minimum average rating of A+/A1/A+ by S&P,Moody's andFitch Ratings Inc. , respectively. Changes in interest rates affect the value of the Company's fixed-maturity portfolio. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company's portfolio of fixed-maturity securities primarily consists of high-quality, liquid instruments. Other invested assets include other alternative investments. For more information about the Investment Portfolio and a detailed description of the Company's valuation of investments, see Item 8, Financial Statements and Supplementary Data, Note 10, Fair Value Measurement and Note 8, Investments and Cash. Investment Portfolio Carrying Value As of December 31, 2021 2020 (in millions) Fixed-maturity securities$ 8,202 $ 8,773 Short-term investments 1,225 851 Other invested assets 181 214 Total$ 9,608 $ 9,838 The Company's fixed-maturity securities had a duration of 4.7 years as of bothDecember 31, 2021 andDecember 31, 2020 . Generally, the Company's fixed-maturity securities are designated as available-for-sale. 120 --------------------------------------------------------------------------------
Fixed-Maturity Securities By Contractual Maturity
The amortized cost and estimated fair value of the Company's available-for-sale
fixed-maturity securities, by contractual maturity, 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.
Distribution of Fixed-Maturity Securities by Contractual Maturity
As of December 31, 2021
Amortized Estimated
Cost Fair Value
(in millions)
Due within one year $ 224 $ 229
Due after one year through five years 1,816 1,896
Due after five years through 10 years 1,711 1,802
Due after 10 years 3,285 3,492
Mortgage-backed securities:
RMBS 454 437
CMBS 332 346
Total $ 7,822 $ 8,202
Fixed-Maturity Securities By Rating
The following table summarizes the ratings distributions of the Company's
investment portfolio as of
reflect the lower of Moody's and S&P classifications, except for bonds purchased
for loss mitigation or other risk management strategies, which use
Guaranty's
Distribution of Fixed-Maturity Securities by Rating
As of December 31,
Rating 2021 2020
AAA 14.6 % 15.5 %
AA 38.2 38.3
A 25.1 25.4
BBB 13.7 12.0
BIG (1) 7.5 8.1
Not rated 0.9 0.7
Total 100.0 % 100.0 %
____________________
(1) Includes primarily loss mitigation and other risk management assets. See Item 8, Financial Statements and Supplementary Data, Note 8, Investments and Cash, for additional information.
Portfolio of Obligations of State and Political Subdivisions
The Company's fixed-maturity investment portfolio includes issuances by a wide number of municipal authorities across theU.S. and its territories. The following table presents the components of the Company's$3,191 million (fair value) of obligations of state and political subdivisions included in the Company's available-for-sale fixed-maturity portfolio as ofDecember 31, 2021 . 121 -------------------------------------------------------------------------------- Fair Value of Available-for-Sale Fixed-Maturity Portfolio of Obligations of State and Political Subdivisions As of December 31, 2021 (1) State Local Average General General
Total Fair Amortized Credit
State Obligation Obligation Revenue Bonds Value Cost Rating
(in millions)
California $ 66 $ 73 $ 357 $ 496 $ 436 A
New York 4 42 361 407 378 AA
Texas 19 85 274 378 350 AA
Washington 49 61 105 215 201 AA
Florida - 4 194 198 187 A
Illinois 14 45 108 167 153 A+
Massachusetts 71 - 91 162 147 AA
Pennsylvania 36 6 85 127 116 A+
Washington DC 30 - 49 79 74 AA
Colorado - 24 54 78 73 AA-
All others 79 130 675 884 830 AA-
Total $ 368 $ 470 $ 2,353 $ 3,191 $ 2,945 AA-
____________________
(1) Excludes $469 million as of December 31, 2021 of pre-refunded bonds, at
fair value. The credit ratings are based on the underlying ratings and do not
include any benefit from bond insurance.
The revenue bond portfolio primarily consists of essential service revenue bonds
issued by transportation authorities, utilities, and universities.
Revenue Bonds
Sources of Funds
As of December 31, 2021
Amortized
Type Cost Fair Value
(in millions)
Tax revenue $ 589 $ 654
Transportation 570 616
Utilities 467 503
Education 284 310
Healthcare 176 192
All others 84 78
Total $ 2,170 $ 2,353
Other Investments
Other invested assets reported on the consolidated balance sheet primarily
consist of investments in renewable and clean energy and private equity funds
managed by a third party.
The Insurance segment reports AGAS's percentage ownership of AssuredIM Funds' as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As ofDecember 31, 2021 , all of the funds in which AGAS invests are consolidated in the Company's consolidated financial statements. As ofDecember 31, 2020 , all of funds in which AGAS invested were consolidated in the Company's consolidated financial statements, except for a healthcare fund with a NAV of$91 million that did not meet the criteria for consolidation. The amounts in the table below represent the fair value of AGAS's interests in the AssuredIM Funds, or NAV. See Part I, Item 1. Business, Asset Management, Products for a description of the fund strategies. See also Commitments below. 122 -------------------------------------------------------------------------------- Fair Value of AGAS's Interest in AssuredIM Funds by Strategy
As of December 31,
Strategy 2021 2020
(in millions)
CLOs $ 228 $ 100
Municipal bonds 107 105
Healthcare 115 97
Asset-based 93 43
Total $ 543 $ 345
Restricted Assets
Based on fair value, investments and other assets that are either held in
trust for the benefit of third-party ceding insurers in accordance with
statutory requirements, placed on deposit to fulfill state licensing
requirements, or otherwise pledged or restricted totaled $243 million and $262
million , as of December 31, 2021 and December 31, 2020 , respectively. The
investment portfolio also contains securities that are held in trust by certain
AGL subsidiaries or otherwise restricted for the benefit of other AGL
subsidiaries in accordance with statutory and regulatory requirements in the
amount of $1,231 million and $1,511 million , based on fair value as of
December 31, 2021 and December 31, 2020 , respectively.
Commitments
The Company is authorized to invest up to$750 million in AssuredIM Funds. As ofDecember 31, 2021 , the Insurance segment had total commitments to AssuredIM Funds of$702 million , of which$458 million represented net invested capital and$244 million was undrawn.
The Company also had unfunded commitments of
related to certain of the Company's other alternative investments.
AssuredIM
Sources and Uses of Funds
AssuredIM's sources of liquidity are: (1) cash from operations, including
management and performance fees (which are unpredictable as to amount and
timing); and (2) capital contributions from AGUS (
2021 and 2020, respectively, had been contributed to supplement cash from
operations). As of
short-term investments.
AssuredIM's liquidity needs primarily include: (1) paying operating expenses including compensation; (2) paying dividends or other distributions to AGUS; and (3) capital to support growth and expansion of the asset management business. In 2021 and 2020, AssuredIM distributed$8.8 million to AGUS to fund AGUS's interest payments on its intercompany debt to theU.S. Insurance Subsidiaries. That debt was incurred inOctober 2019 to fund the BlueMountain Acquisition. See "- AGL andU.S. Holding Companies - Intercompany Loans Payable" above for additional information.
The Company contributed
contributed an additional
Lease Obligations
The Company has entered into several lease agreements for office space in
various lease terms. See Item 8, Financial Statements and Supplementary Data,
Note 18, Leases, for a table of minimum lease obligations and other lease
commitments.
FG VIEs and CIVs
The Company manages its liquidity needs by evaluating cash flows without the effect of consolidating FG VIEs and CIVs; however, the Company's consolidated financial statements reflect the financial position ofAssured Guaranty including 123 --------------------------------------------------------------------------------
the effect of consolidating FG VIEs and CIVs. The primary sources and uses of
cash at
•FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting its insured debt obligations, and the primary uses of cash are the payment of principal and interest due on the insured debt obligations. The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs 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 FG VIEs. •CIVs. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses). 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.
See Item 8, Financial Statements and Supplementary Data, Note 9, Financial
Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for
additional information.
Credit Facilities of CIVs Certain of the Company's CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs 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 the Company. 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 the Company. As ofDecember 31, 2021 , these credit facilities had varying maturities ranging fromJune 3, 2023 toOctober 20, 2023 with the aggregate principal amount not exceeding$1.0 billion . The available commitment was based on the amount of equity contributed to the warehouse which was$205 million . As ofDecember 31, 2021 ,$103 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 100 bps to 3-month LIBOR plus 100 bps (with a floor on the LIBOR/Euribor rates of zero). The CLO warehouses were in compliance with all financial covenants as ofDecember 31, 2021 . As ofDecember 31, 2021 , a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date ofDecember 29, 2023 with the aggregate principal amount not to exceed$80 million jointly and$53 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributed to the funds. As of the date of consolidation,$16 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 ofDecember 31, 2021 . As ofDecember 31, 2020 , €20 million (or$25 million ) and €1 million (or$1 million ) had been drawn under a BlueMountain EUR 2021-1CLO DAC (EUR 2021-1) credit facility datedAugust 26, 2020 by EUR 2021-1 and AssuredIM, respectively. During the first quarter of 2021, EUR 2021-1 and AssuredIM repaid the borrowings under this credit facility.
Consolidated Cash Flow Summary
The summarized consolidated statements of cash flows in the table below
presents the cash flow effect for the aggregate of the Insurance and Asset
Management business and holding companies, separately from the aggregate effect
of FG VIEs and CIVs.
124
--------------------------------------------------------------------------------
Summarized Consolidated Cash Flows
Year Ended December 31,
2021 2020 2019
(in millions)
Net cash flows provided by (used in) operating activities,
before effect of FG VIEs and CIVs consolidation
$ 420 $ 67 $ (255) Effect of FG VIEs and CIVs consolidation (1) (2,357) (920) (254)
Net cash flows provided by (used in) operating activities (1,937)
(853) (509)
Net cash flows provided by (used in) investing activities,
before effect of FG VIEs and CIVs consolidation
(156) 478 1,055 Acquisitions, net of cash acquired - - (145) Effect of FG VIEs and CIVs consolidation (1) 179 310 259 Net cash flows provided by (used in) investing activities 23 788 1,169
Net cash flows provided by (used in) financing activities,
before effect of FG VIEs and CIVs consolidation
Dividends paid
(66) (69) (74) Repurchases of common shares (496) (446) (500) Issuance of long-term debt, net of issuance costs 889 - -
Redemptions and purchases of debt, including make-whole
payment
(619) (21) (3) Other (12) (11) (16) Effect of FG VIEs and CIVs consolidation (1) 2,264 730 9
Net cash flows provided by (used in) financing activities
(2)
1,960 183 (584) Effect of exchange rate changes (2) (3) 3
Increase (decrease) in cash and cash equivalents and
restricted cash
44 115 79
Cash and cash equivalents and restricted cash at beginning
of period
298 183 104 Cash and cash equivalents and restricted cash at the end of the period$ 342 $ 298 $ 183 ____________________ (1) This includes the effects of consolidating FG VIEs and, beginning October 1, 2019, the CIVs. (2) Claims paid on consolidated FG VIEs are presented in the consolidated statements of cash flows as a component of paydowns on FG VIEs' liabilities in financing activities as opposed to operating activities. Cash flows from operations, excluding the effect of consolidating FG VIEs and CIVs, was an inflow of$420 million in 2021 and an inflow of$67 million in 2020. The increase in cash inflows during 2021 was primarily due to proceeds from sales of the Company's salvage and subrogation recoverable asset associated with certain matured Puerto Rico GO and PREPA exposures on which the Company had previously paid claims, and lower claims payments compared to the prior period, which were partially offset by higher taxes paid, lower gross premiums received and cash received from a commutation during 2020 that did not recur in 2021. Cash flows from operations attributable to the effect of FG VIE and CIV consolidation was an outflow in 2021 and 2020. The consolidated statements of cash flows presents the investing activities of the consolidated AssuredIM Funds and CLOs are cash flows from operations. The increase in outflows in 2021 compared with 2020 is mainly due to a net increase in investment purchases. Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs' assets. The decrease in investing cash inflows during 2021 was mainly attributable to purchases of short-term investments in anticipation of the 2022 liquidity needs. See "- Insurance Subsidiaries - Financial Guaranty Policies" above for the discussion of the short-term loan facility. Financing activities primarily consist of cash flows of consolidated CIVs and FG VIEs, as well as the financing cash flows of AGL and theU.S. Holding Companies. The CIVs' financing cash flows mainly include issuances and repayments of CLOs and CLO warehouse financing debt. This increased CIV cash flow activity was primarily attributable to CLOs and CLO warehouses that were consolidated in 2021. The proceeds from CLO issuances and CLO warehouse borrowings are used to fund the purchases of loans. FG VIEs' cash flows relate to the paydowns of FG VIEs' liabilities. See Item 8. Financial Statements and Supplementary Data, Note 9, Financial Guaranty Variable Interest Entities andConsolidated Investment Vehicles. AGL and theU.S. Holding Companies' financing activities included share repurchases, dividends, and the issuance 125 --------------------------------------------------------------------------------
and extinguishment of debt (see Item 8, Financial Statements and Supplementary
Data, Note 13, Long-Term Debt and Credit Facilities).
FromJanuary 1, 2022 throughFebruary 24, 2022 , the Company repurchased an additional 1.7 million common shares. As of February 24, 2022, the Company was authorized to repurchase $364 million of its common shares. For more information about the Company's share repurchases and authorizations, see Item 8, Financial Statements and Supplementary Data, Note 20, Shareholders' Equity.
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